As predicted, embedded finance — where non-banks such as retailers, capital-equipment providers, and community-development organizations provide financial services — is having the year of its life in 2021. And, far from holding it back, the coronavirus pandemic has been a catalyst for this surge.
Non-bank embedded financial services — principally lending, payments, and insurance — is expected to account for $230 billion in yearly sales by 2025, almost a tenfold increase from $22.5 billion in 2020, according to Lightyear Capital.
The coronavirus pandemic, now seemingly in retreat in the US, “initially cast a shadow across the global economy,” says Elena Ionenko, co-founder and operations chief of TurnKey Lender, a pioneer in the lending-technology arena. “Some of its economic manifestations — such as workplace displacement, supply-chain disruptions, and a litany of distancing measures — at first slowed business, burdened healthcare infrastructure, and raised the specter of a deep and lasting recession,”
Hope rises from the ashes
But, after a resounding shudder in March 2020, stock markets have been on the rise. The S&P 500 saw a 16% gain in 2020, and the large-cap proxy is up that much again to date in 2021. While that’s no counterweight to a death toll of at least 3.9 million, it’s a better financial outcome — probably linked to several tranches of economic stimulus aimed especially at businesses and the unemployed — than most expected.
The pandemic itself has also kicked embedded finance into gear. After all, what’s more conducive to social distancing than online, software-enabled lending, insurance, and payments? But the rise of embedded finance was in evidence well before Covid-19 showed up, propelled by these six factors.
- Digitalization — converting business processes to digital technologies instead of paper and manual-input spreadsheets — allows companies to extend financial services to clients more efficiently, and without requiring the participation of financial institutions. This can make such services cheaper to provide and easier to adapt to the needs of the company and its clients.
- With McKinsey expecting global banking services to garner about 14% less annually by 2024 than in 2020, financial companies are on the hunt for new revenue streams. In this light, catching a ride on the embedded-finance bandwagon and outsourcing its internal financial tech — say, around lending — to companies that want to offer such services in their own right makes a lot of intuitive sense.
- But non-banks are also proving disruptive to financial-service provision. Big brands like Apple, Alibaba, Amazon, and Walmart help cement the view that non-banks can seize market share from old-line banks by providing financial services to mass-market consumers. At the same time, third-party niche apps like Toast (restaurants), Shopmonkey (auto service stations), and Squire (barbershops) are driving home the essential point that non-banks are emerging as major players in finance for small businesses, not just consumers.
- Meanwhile, the fact that consumers trust fintechs as much or more than banks — with 42% of US household financial-decision makers claiming to use at least one non-bank fintech app — is a major contributor to the trends described above.
- Another trend in evidence before Covid-19: the rise of “buy now, pay later,” or BNPL, technology for consumer purchases. That said, the public-health crisis has definitely accelerated this trend. By the 12-month mark in the pandemic, Indian fintech Capital Float had added 1.8 million customers “by embedding an ‘instant credit’ option across e-commerce, travel and ed-tech platforms,” according to Simpl, another South Asian fintech.
- The rise of artificial intelligence. Instead of relying exclusively on loan-application forms, credit-bureau scores, and gut instincts, AI makes lending operations at once more inclusive and less risky by incorporating behavioral markers derived from permission-based inputs such as spending habits and ability to pay other bills. The result? The clearest and most balanced view of would-be customers ever devised.
There are other forces at work to elevate embedded finance. As more consumers and businesses embrace non-traditional financial-service providers, the growing popularity of BNPL, coupled with technological advances, has put embedded lending on the fast track by enabling businesses that might not otherwise have considered the possibility to handle financing entirely in-house with help from white-label lending-tech makers.
Lending software can be integrated with the system software that most companies already use to synchronize their operations. In a real sense, this integration is part of a revolution in technology that aims to help companies provide financial services, faster and cheaper than ever before.
Speed, scale, and more valuable customers
In this paradigm, best-of-breed embedded-lending technology can process loans at scale at every operational stage, from approval to settlement, and 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 a lending platform that’s independent of banks, capable of delivering and maintaining bank-grade functionality, and prioritizes making customers more valuable and valued.
How much more valuable? About five times more, says venture-capital firm Andreesen Horowitz. This value boost is realized by means of heightened buyer engagement and more return traffic. Embedded lending can also help enterprises unlock “new verticals where previously the total addressable market for software was too small and/or the cost of acquiring customers was too high,” according to Andreesen Horowitz.
As a result, the non-bank embedded-lending market will command about $7.2 trillion by 2030, according to a report by Informa. That’s twice as big as the combined mid-2020 credit ledgers of the world’s 30 biggest banks and insurers.
“We’re seeing a shift in behavior that’s affecting not only how individuals and organizations interact with vendors, but how everyone involved is embracing embedded financial services,” says TurnKey Lender’s Ionenko. Why? “Because these underlying services are delivering on a promise of a fairer and less stressful customer experience that also benefits the companies that provide them.”