Embedded Lending and the Irresistible Logic of Next-Gen Fintech

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“Offering installment payment plans to your customers through embedded lending ‘is the best single decision some companies can make,” says Dmitry Voronenko, CEO of lending software maker TurnKey Lender.

What if there were a way to win a substantial, and recurring, chunk of new business? What if this method further required no additional marketing, no rebranding, no strategy do-overs, no cost cutting, and no new products? And, what if, in addition to sending more income your way, it resulted in greater customer loyalty and obvious competitive advantages?

You would probably want to know what could possibly achieve such results with so little internal disruption. The answer, in a phrase, is an emerging wrinkle on fintech called “embedded lending.” 

Embedded lending is powered by software that integrates with the systems software companies already use to synchronize and track their operations. Best-of-breed embedded lending is robust enough to process loans through entire their life cycles from approval to settlement, and flexible enough to initiate lending at any point of sale, from e-commerce portals and in-store registers to car lots and doctors’ offices.

Offering installment payment plans to your customers through embedded lending “is the best single decision some companies can make,” says Dmitry Voronenko, CEO of lending software maker TurnKey Lender. “They can see sales increases in the neighborhood of 30% to 50%, vastly improved buyer engagement as a result, and more repeat business.”

Fintech Is Making Finance More of a Service, Less of a Product

For Alex Lazarow, a venture capitalist with Cathay Innovations, fintech is coming into its own as a core financial enabler across many industries. For analogy in the lending sphere, he points to embedded financing solutions on offer at e-commerce giants like Amazon and Shopify. Outside lending, other analysts highlight the de facto banking relationships ride-share apps Uber and Lyft have with their drivers. 

As a result of this “horizontalization,” fintech has stopped being an independent vertical, Lazarow writes in a Forbes opinion piece. In turn, this has sparked talk in investing circles of “‘banking as a service,’” where  fintechs “provide the full tool-set required to enable others to offer their own personalized financial products and services,” he adds.

Supporting Lazarow’s take, Matthew Harris, a partner at Bain Capital Ventures, calls fintech “the newest layer in the technology stack,” buttressed and enabled by established layers. In this paradigm, the stack might look like this.

  • Fintech for embedded financial services
  • Mobile for universality
  • Cloud computing for intelligence
  • Internet for connectivity

“There won’t be ‘fintech’ companies as such,” Harris writes in another Forbes article. “Over time, many or even most technology companies will need to incorporate embedded financial services in order to win in their segments.”

Embedded Lending Raises the Possibility of Zero-CAC

A primary benefit to businesses that use embedded financial services is the ability to expand on customer relationships they’ve already built — leading to cross-sell opportunities in addition to revenue from finance charges. 

In turn, these sales opportunities can be honed by data-rich inputs, which the embedded tech’s machine learning and artificial intelligence can turn into “smarter” cross-sell prompts supported by dynamic pre-qualifications. The result, according to Harris, is “massive risk reduction” for companies.

Among early examples of embedded credit providers are payroll-advance lenders. Absolute pioneers in this segment, like Dave, originally drummed up customers through marketing channels — the hard way, in other words. Second-wave players like Gusto, a payroll-services outsourcer, attract “payday” borrowers who, as employees of companies it works for, are already customers. 

In this context, having embedded lending capabilities means the Gustos of the world — that is, any company that already interacts with customers in a setting where finance is in play — can provide a lucrative new services at a customer acquisition cost of zero.

Embedded Lending: a Keurig Machine for In-House Financing

In this light, it’s easy to see a world where in-store and e-commerce sales are enabled by lending software integrated with each company’s system software. This applies equally to realms where financing is a common feature today, like the car business, and to areas on-the-spot financing is rarer, such as middle-market retail and healthcare.

TurnKey Lender’s Voronenko provides a striking analogy. He says a company that partners with a third-party lender to provide credit to its customers is like the guy who always buys his coffee.

“You go to the cafe everyday and you ask the barista for a coffee, and you’re very happy to pay five bucks for it,” says Voronenko. “And then one day you realize the only thing your barista does is press a button — one button — out of the machine comes the coffee, perfect every time. And then you notice he uses coffee beans from the nearest supermarket.”

Working with TurnKey Lender means you stop going to the cafe and “you buy the same coffee machine, and you can have your coffee whenever you want for 50 cents a cup,” according to Voronenko. “Companies that view lending as such a tough undertaking that it’s necessary to partner with a bank are missing out on the power and savings inherent in embedded fintech.”

Harris echoes this view from a “smart money” perspective. He says he and other venture backers are turning their “attention to investing in companies that use financial technology as an ingredient versus a primary business model.”

Adds Voronenko: “Embedded lending means any company that can connect to the cloud can get access to a vast and secure infrastructure for lending, and immediately start financing its customers. It’s literally a matter of turning a key, and you’re a lender.”

To learn more about TurnKey Lender and how to get started with embedded lending, reach out here.

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