Embedded Finance Is Changing How Businesses and Customers Do Business

Financing Automation & AI

Embedded finance is on the rise as more consumers and businesses make payments, secure loans, and mitigate financial risk at a physical distance from traditional brick-and-mortar hubs like banks and credit unions.

Examples of this futuristic present include:

  • A slew of carmakers (among them Volkswagen, Honda, Ford, GM, BMW, and Daimler) are adding in-vehicle payment services that let drivers and passengers buy gas, pay tolls, and secure parking spots without leaving their vehicles
  • Mastercard is working with electronic-device maker Xiaomi to devise a smartwatch that enables fast and almost effortless payments
  • Ride-share apps Lyft and Uber compete to enable their drivers to request payment up to five times a day. For Uber drivers, these payments are free of charge provided they cash out to an Uber GoBank debit card
  • At some cashier-less Amazon stores, customers simply waltz in, scan an app, shop to their hearts’ content, and waltz out again with the goods, knowing their payment will be deducted automatically

Though a number of forces are fueling the rise of financial technology behind such innovations — including the coronavirus pandemic, and a new vogue for using “buy now, pay later” financing at retail outlets — these three stand out as the most fundamental enablers.

1. Little-to-no embedded lending industry entry barriers  

Software-as-a-service, a subset of cloud computing, is an important concept for an understanding of embedded finance. It refers to the concept of calling on software components across a network to perform specific tasks. In addition to making things easier for buyers, this approach is generally characterized by low barriers to entry, little (or no) cost to implement, and substantial scalability.

2. Interoperability – API-enabled integration is getting easier by the day   

The rise of embedded finance owes a lot to application-programming interfaces — APIs for short. These software intermediaries are what let applications work together — like an embedded financing API linked to the software at the heart of a company’s operations software. And, if you can operate a phone app, you can run an API.

3. Artificial intelligence applied to instant real-life business decisions

AI uses computing to simulate human intelligence for tasks like speech recognition, internet searches, self-driving cars, and deep analysis of would-be borrowers using traditional as well as alternative inputs.

Reflecting on these advantages, TurnKey Lender, a pioneer of the embedded-lending industry, foresees most companies and associations enabling transactions everywhere and anywhere as they compete to win and keep customers and derive more value from each relationship.

“Accenture reports that 47% of US enterprises are either offering or getting set to offer embedded finance,” says Elena Ionenko, TurnKey Lender’s co-founder and head of operations. “In other words, embedded fintech is already changing the competitive landscape, with 88% organizations with embedded tech saying they have succeeded in boosting engagement levels with existing customers, and 85% saying they’ve added customers as a direct result of providing one or more financial service, according to the consultancy.”

Other studies support the view that embedded tech is shaking up the competitive landscape. Silicon Valley venture giant Andreessen Horowitz says companies with embedded-finance offerings can increase sales up to fivefold per customer. Lightyear Capital, another early-stage funder, says embedded finance stands to add $230 billion in extra revenue for US companies by 2025, up from around $23 billion in 2020.

Sophisticated underwriting at the turn of a key

On the consumer side, one-fifth of the 6,300 people surveyed by Capgemini SE this past summer have already taken out BNPL loans, and 60% say they’ll do so within two years. And, as embedded-finance players like Klarna and Afterpay grow into multimillion-dollar companies, point-of-sale financing has already “diverted as much as $10 billion in annual revenue away from banks,according to Yahoo Finance, citing recent research by the consulting firm McKinsey.

Now, as embedded finance grows in popularity, retailers, healthcare providers, energy suppliers, advertisers, and other organizations that are keen to make buying easier for their customers are enjoying more opportunities for fusing financial services with bedrock offerings.

“That’s a big reason proponents of embedded finance see every company as a potential fintech,” says Ionenko. “It’s like someone predicting in 1994 that most organizations would have websites by 2005. It seemed unthinkable, but it happened because the technology was there to back it up. We’re in an analogous phase where capability and demand are working in tandem to support embedded finance.”

Adds Ionenko: “Even companies with limited on-staff expertise can automate all processes through the life of a loan and unleash the power of artificial intelligence for credit scoring that blends traditional inputs such as credit-bureau score with alternative data around spending habits, and balances the need for easy access for customers with the house’s need to avoid undue risk when it extends credit.”

Case study: The US Black Chambers

To amplify its support of black-owned businesses and the communities by bringing more speed, accuracy, and fairness to its lending programs, The US Black Chambers, Inc., selected TurnKey Lender in 2020.

“We chose TurnKey Lender for its end-to-end Unified Lending Solution, which has all the functionality needed to manage our loans from application through repayment,” according to Alisa Joseph, Board Director of the U.S. Black Chambers. “It’s a true turnkey solution that will enable us to increase our loan portfolio for years to come.

The ULM platform Joseph mentions features application processing, risk assessment, decisioning, loan origination, underwriting, servicing, collection, reporting, archiving, and compliance. It can pre-qualify credit applicants in around two minutes.

Nearly a quarter of our clients are nonprofits, and we’re working with other community-development financial institutions that are eager to automate their lending and track results,” says TurnKey Lender’s Ionenko. “While many cite the pandemic as a catalyst, all view the embedded-finance upgrades they’re making as table stakes for long-term viability.”

Healthcare businesses are also top candidates for in-house financing options, especially for procedures that aren’t covered by healthcare insurance. For many patients, cloud-based financing is the difference between short-term fixes (perhaps undertaken because it’s all they believe they can afford immediately) and complete treatments they can pay off over time in installments.

Change that benefits everyone involved 

Intuitive white-label solutions like those on offer at TurnKey Lender empower medical and dental practices to provide financing to patients without banks or other outside lenders siphoning off fees and blurring the patients’ conception of who they’re doing business with.

State-of-the-art embedded-lending technology processes loans at scale at every stage, from pre-approval to settlement, and it’s flexible enough to initiate loans at any point of sale, from e-commerce portals and store registrations in business environments as diverse as checkout counters, equipment showrooms, doctor’s offices, warehouses, and manufacturing plants.

“The result is an independent lending platform that’s capable of delivering and maintaining bank-grade functionality while making customers more valuable,” says Ionenko, echoing Andreesen Horowitz’s smart-money take on embedded finance.

“We’re witnessing a society-wide change in behavior that’s improving how individuals and organizations use financial technology and accelerating the adoption of embedded financial services,” says Ionenko. “These underlying services deliver on the promise of a fairer, less stressful customer experience that benefits the companies that offer them.”

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