In the last few years, the embedded finance market has grown into a global $43bn industry and is expected to reach 7 trillion market value within the next 10 years or sooner.
At TurnKey Lender our team has been pioneering the embedded finance revolution for years, promoting the idea that any business can be a FinTech and offer credit products to their clients in-house without outsourcing customer data, relations, and profits to a middleman in the form of a bank or an alternative 3rd party lender.
In the last year the embedded lending trend has been taking over the business world. Its adoption is boosted by the forced digitalization of millions of businesses on the lookout for new ways to convert clients, retain them and ultimately make money and stay profitable in the digital-first economy.
In this article, we will give a quick introduction to the world of embedded finance for newcomers and anyone starting to consider adding an in-house buy-now-pay-later option, implementing credit lines, or other model of consumer credit to their operations.
But first, wanted to check if you (or your staff) would like this white paper with a guide to offering pay later financing to your customers in-house and at scale.
What is embedded lending and why should your business care about specialty finance options?
Embedded lending is an approach in which a non-financial business implements in-house customer financing into their operations. This leads to them becoming a specialty lender, someone whose main business does not come from extending credit but who nonetheless offers it and uses it not only as a monetization tool, but mainly to grow their business and reach wider consumer groups.
As a business owner, allowing your clients to pay for your products or services in multiple installments is only natural and what consumers expect today. But in the 20th century, banks and other specialty lenders effectively monopolized credit as the world was quickly globalizing and credit decisioning had gotten a lot more complex. This hurdle had been too hard to overcome for a non-professional lender up until recently.
The current state of financial technology and ready-made loan origination systems allows any type of business (be it retailer, insurance provider, telecom, clinic, auto dealer, manufacturer, etc.) to offer in-house financing to their clients directly removing the need for using third parties providers.
For a business, embedded finance or e-lending is the new trend which may get even bigger than e-commerce and with solutions like TurnKey Lender it can be even easier to launch and run than an online shop.
At the same time, the customer can enjoy a consistent user experience, build an ongoing relationship with your business, and allows the client to easily build their credit history. Embedded lending comes from the idea that credit should not be viewed as a separate product provided by a different business, it can be natively embedded into the operations of the business.
The only challenge is that in the digital age, you need an intuitive, flexible, and powerful solution to handle originating the finance, making automated credit decisions, charging payments from the client on your schedule and processing data for reporting and analytics.
The goal of embedded finance with modern software platforms is to create a seamless experience for the borrower so they do not feel or even realize that they engage with a separate platform when they apply for buy now pay later or other credit products with your business.
In short, embedded lending allows a business to:
- Grow conversion rates and revenue on high-value goods and services.
- Increase the average order size and expand customer reach.
- Improve customer experience and eliminate middlemen from receiving your customers data.
- Make your products more affordable with little-to-no overhead.
- Enhance your business with B2C or B2B lending programs that do more for your customers.
Lending Models Most Commonly Used When Embedding Finance Into A Business
Today any business that sells products or services which may be hard for clients to pay for upfront can and should consider implementing embedded lending.
Of course, embedded finance comes with a certain overhead, so you do need customers of a certain size to make sure the return on investment is worth it. But with innovative digital software like TurnKey Lender’s, most specialty finance providers don’t need dedicated lending staff and the learning curve is low. You can see the featured customers of TurnKey Lender and case studies here.
Some of the most popular models for embedding finance into a business include:
- Buy Now Pay Later – Buy Now Pay Later (BNPL) is quickly becoming the go-to model for businesses offering high value and luxury goods, gym equipment, car parts and services, medical products and services, home improvement products, outdoor adventure supplies and much more. It simply allows online shops to let their customers buy products and pay later in installments.
- Equipment and asset leasing – manufacturing and providers or equipment can lease expensive products for your business, such as machinery, vehicles or computers. With an equipment lease, the equipment isn’t yours to keep once the leasing term is over. Leasing can be secured by collateral or unsecured – depending on your business model.
- Merchant cash advance – in an MCA model, a borrower repays a percentage of their sales daily or weekly until their full debt is repaid. To achieve that, TurnKey Lender tightly integrates with e-commerce platforms. With us, merchants instead of manually uploading invoices, which can be slow and open to fraud, we can monitor their transaction activity, automatically calculate and execute repayments.
- Trade financing – trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce. Used in supply chains, trade finance is an umbrella term meaning it covers many financial products that companies utilize to make trade transactions feasible.
- Factoring and invoice finance – An invoice factor purchases the accounts receivables you’re owed and takes over-collecting from your clients. With invoice factoring, the lender will pay you a percentage of the total outstanding invoice amount upfront.
These are just some of the model’s businesses commonly use, but on a high level, embedded finance is just allowing a client (B2C or B2B) to get a product or service at once and pay you back over time. And the terms that work for you depend on the business logic you prefer and that will work best in your industry.
Embedded finance emplementation options
At a high level, there are 2 choices when it comes to a way of implementing and running an embedded lending operation.
1.Delegating credit to a lender – Either a bank or buy-now-pay-later providers such as Klarna or Affirm allow business owners to use their checkout options without any need to manage lending program and its terms which means no control over a client’s data and no added profit to your business. Lenders then instantly repay the business owner and handle collections and relations with your clients on their end.
2. Implementing a lending program in-house – A custom lending solution is too complex a project and there is no need to take on such an expense as the modern lending platforms provide enough flexibility, configuration freedom and scalability to handle pretty much any kind of business requirements. For example, TurnKey Lender offers AI-powered end-to-end automation of embedded finance and hundreds of businesses in 50+ countries use it to digitize credit.
Capabilities of Embedded Finance Platforms
Some of the r capabilities for embedded credit providers include:
- End-to-end embedded finance processes automation that can be up and running within days.
- Built-in decision engine powered by AI for instant and accurate credit decisions.
- Vendor management module for work with stores and merchants.
- Configurable finance application process ties into the customer’s journey on your website.
- Different versions of the solution are tailored to the key business domains (I.e., retail, auto, medical).
- Fully white-label system you can tailor to your design and color-scheme in a matter of minutes.
- Automation of origination, servicing, and collection to digitize every step of the embedded finance process.
- TurnKey Lender provides a WooCommerce checkout plugin to enable quick and easy integration of online stores with our platform.
Here’s an example of how your embedded financing process can look like with TurnKey Lender:
Final Insights
Embedded finance is on an undeniable rise and each day new businesses like yours will join this trend which will generate over $200 billion by 2025. This article is a quick introduction to embedded lending. If you are interesting in seeing how this will work for your business, don’t hesitate to reach out. . And if you’re looking to keep learning about the topic, here are some helpful articles for you to do some further research: