Embedded lending is beginning to disrupt the financial services industry. It enables digital platforms to offer financial services, such as loans, without sending their customers off the platform to access them. It's dramatically changing how businesses interact with customers and monetise engagement, how those customers manage financial transactions and which institutions participate in consumer lending.

Embedded lending is an indicator of broader shifts in digital finance. The global embedded finance market is expected to reach nearly US$385 billion by 2029, rising at a compound annual growth rate of 30%. What defines a financial service provider is also changing, and the ripple effects are felt by traditional lenders, businesses and customers across various industries. Below, we'll cover how embedded lending works and explore its wide-ranging implications.

What's in this article?

• What is embedded lending?
  
• How does embedded lending work?
  
• Examples of embedded lending
  
• What are the implications of embedded lending?
  

What is embedded lending?

Embedded lending is the direct integration of lending services into non-financial platforms or applications. Instead of exiting the platform to access credit offerings, customers can use these services within the platform.

This approach relies on the data and customer engagement within the host platform, and it often employs application programming interfaces (APIs) for quick data interchange and service delivery. This integrated style of offering loans or credit has gained traction across various verticals, such as e-commerce, ride-sharing and software-as-a-service (SaaS), among others. The goal is to offer immediate, contextualised financing solutions without sending customers elsewhere.

How does embedded lending work?

Embedded lending works by integrating lending features directly into existing non-financial platforms via APIs. Once a customer opts for a loan, the system assesses their creditworthiness almost instantaneously. Algorithms pull data from multiple sources, including credit scores and customer behaviour within the platform, to make a quick lending decision.

Following approval, funds are transferred to the customer or allocated for a specific use within the platform, such as purchasing goods or services. The platform offers convenient repayment methods, often debiting directly from linked accounts. This immediacy and contextual relevance makes financial solutions readily available when and where the customer needs them.

Examples of embedded lending

Embedded lending can be integrated into a range of scenarios thanks to its flexibility. And thanks to banking APIs, more types of businesses are introducing unique embedded lending options that are customised to the financing needs of their target customers.

The ways in which companies are using embedded lending is likely to shift as the market evolves. With that in mind, here are some of the places that embedded lending has appeared recently:

• Retail e-commerce platforms: within online shopping interfaces, customers can opt for instant loans to finance their purchases. This turns a simple shopping-basket checkout into a multi-service financial transaction.

• Ride-sharing services: when customers use apps, such as Uber or Lyft, they can sometimes finance the cost of their ride, paying it back over time. This opens up ride-sharing to those who might not be able to afford it otherwise.

• Online marketplaces for freelancers: platforms connecting freelancers with gigs can offer short-term loans based on expected earnings. This helps freelancers to manage income gaps between contracts.

• Health care portals: some online health care platforms allow patients to finance treatments or procedures instantly, easing the burden of up-front costs.

• Educational platforms: online education providers often partner with lenders to offer student loans directly within the registration process, making it easier for students to commit to courses or degree programmes.

• Property platforms: websites that list homes for sale can offer pre-approved mortgage loans, shortening the time between house-hunting and purchase.

• Travel and booking websites: these platforms often provide loans for holiday packages, flights or hotel bookings – sometimes directly at the point of purchase.

• Subscription services: whether it's for premium content, software suites or even gym memberships, some subscription platforms offer financing options directly within the sign-up process.

• Automotive sales platforms: online car sales businesses may include financing options within their website, allowing customers to secure car loans as they shop.

• Agriculture tech: some platforms targeting farmers offer loans for equipment or seeds, allowing farmers to finance what they need and repay the loan after harvest.

• Energy sector: companies offering solar panels, for instance, can provide financing options within the sales process, encouraging more customers to make the switch to renewable energy.

What are the implications of embedded lending?

Embedded lending is transforming how financial services overlap with non-financial sectors, such as e-commerce and SaaS, creating a more integrated experience for customers. But while this model increases convenience and efficiency, there are considerations related to data privacy, security and financial responsibility.

Here's a brief overview of the key implications for all parties involved in embedded lending, including non-financial businesses, lenders and customers.

Non-financial businesses

• Increased customer engagement
  Offering lending services within the platform can boost customer activity. Customers are likely to use the platform more often with multiple features in one place.

• Revenue diversification
  Introducing financial services, such as loans, adds another income stream. Fees from loan origination or revenue sharing with lenders can increase the overall financial health of the business.

• Data utilisation
  Lending partners can use the platform's existing data to inform lending decisions. This reciprocal relationship benefits both the platform and the lending partner, optimising the lending process for better outcomes.

• New business avenues
  Adding lending services might lead a non-financial business into new sectors and offer increasingly varied services.

Lenders

• Expanded customer base
  Lenders gain access to a pool of potential borrowers who are already using the non-financial platform. This is a less risky prospect for lending, as these customers are known entities.

• Data-driven decisions
  Lenders can benefit from rich data sets that are available through the non-financial platform, increasing the accuracy of credit assessments and potentially reducing default rates.

• Privacy and security concerns
  Lenders need to consider the implications of handling sensitive financial data within a third-party environment. Data breaches or misuse are constant threats that must be managed.

Customers

• Convenience
  The option to access credit without leaving the familiar environment of an existing platform simplifies the lending process. Customers can get what they need with fewer steps required.

• Overborrowing risk
  The ease of borrowing may lead some customers to take out more loans than they can comfortably repay. Customer education and transparent terms can help to mitigate this issue.

• Data privacy
  Customers should be aware that their behaviour within the platform could influence their creditworthiness. Knowledge of how personal data informs loan decisions can be key for customers to understand.

Embedded lending generates benefits for the multiple parties involved. For businesses that are not traditionally in the finance sector, embedded lending opens up new revenue opportunities, as well as new avenues for customer engagement. For traditional lenders, they are gaining access to a data-rich pool of new potential borrowers, but they also are inheriting the risks associated with data handling on third-party platforms. And while customers can enjoy easy access to financing, they should remain cautious about over-borrowing and making financial decisions that could lead to a cycle of debt. As embedded lending continues to grow, all parties will need to consider these interconnected implications carefully.