Embedded lending’s many considerations

Embedded consumer lending offers many benefits over BNPL. Working with a BaaS provider like Finastra allows banks to control their roadmap in an increasingly bust sector.

Finastra’s lead client partner for embedded finance and BaaS, Venu Appana, said there is opportunity for financial institutions of all sizes, embedders, and merchants. That is due to several factors, beginning with the amount of data that is now available and able to be interpreted. Customers are demanding more experiences. Open finance further expands the possibilities.

Important differences between embedded lending and BNPL

BNPL is undeniably popular, but it raises the question of whether it is the right fit for market participants. Often, it isn’t.

“Embedded lending is in a place where it is more of a strategic fit for the banks, the ecosystem players, and the consumer,” Appana began.

BNPL works best in retail, with small amounts and simple terms. As the space evolved, interest-free and interest-bearing models with late fees arrived. Especially with newer consumer protections, customers have improved transparency, which has been a key to its success.

Appana sees embedded lending differently. Facilitating larger sums for expenses like home improvements or medical expenses is a different value proposition for banks.

“Banks are very interested in using their deposits opportunistically,” Appana explained. We have seen the cost of funding go up; deposits are hard to get. How do you deploy these deposits profitably in terms of loans? That’s the core banking philosophy… and embedded lending comes into that space, where now the banks can lend to customers who need these kinds of loans.”

Embedded lending lets banks reach consumers who might not be their customers. Finastra is the orchestrator, working with those institutions, merchants and merchant partners. Through hundreds of conversations with banks, top-tier and small, Appana knows what they are looking for and how to deliver it.

Those conversations are filled with questions. What customer experience is the bank looking for? What consumer segment do they want to attract? Do they have the proper credit profile?

Customer considerations: Their journey, your acquisition costs

BNPL and embedded lending differ for many reasons, beginning with who owns the customer. With BNPL, the front-end provider does, while with embedded lending, the loan is on the bank’s system.

Venu Appana said embedded lending is an inexpensive customer acquisition method.

It’s an inexpensive way to acquire customers, much less than the $200-$500 they might spend on an ad campaign. There are many cross-selling opportunities, and how to attract those people is part of the design discussions.

What is the senior leadership looking for strategically? The response affects their tech stack. For example, many banks seek ways to re-purpose existing systems.

Each bank’s customer journey is specific, affecting its customization process and how it integrates into its credit decisioning systems.

“That’s where Finastra provides the power of orchestration,” Appana explained. “We have adapted to different ways to connect to banks and to provide that credit decisioning. Then, depending on the loan size, different documents must be generated. How do you create those documents? How do you onboard that loan? What is the customer segment they’re going after? What is the vertical?”

More key embedded lending considerations

The conversations continue. What are the legal and compliance implications? Will every ecosystem participant earn sufficient revenue? Will the bank build it in-house, outsource it, or mix and match?

What is the desired in-store experience? Which payment rail is preferred?

As macroeconomic conditions change, banks continuously evaluate options. As Finastra combines the elements, the bank can test and adjust. There is flexibility to alter the path if necessary. 

Should everyone be an embedded lender?

Should everyone be an embedded finance provider? Appana said it depends on where you are. If your brand offers smaller-ticket items, is there any difference from BNPL? Are you seeking consumers with stronger credit? 

If so, they are open to larger amounts, which must be considered differently. Different guardrails must be included. That is crucial because one of the bank’s best assets is being a trusted, compliant entity.

Secured embedded lending and open finance: New opportunities

Appana sees exciting opportunities on the horizon, beginning with secured embedded lending. Finastra is working on some options.

Others are simple yet impactful. Open finance yields the data required for customization and personalization. How can providers use artificial intelligence to provide that granular relevance?

As you think through this, the opportunities grow.

“Open finance leads to open banking,” Appana concluded. “Open finance leads to an open economy, and there are tremendous opportunities to monetize and provide the right services.”

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  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.