Embedded lending integrates lending services into third-party non-financial platforms. This technology allows digital platforms like e-commerce and mobile applications to offer credit to their customers directly without them leaving the app.
By doing this, embedded lending eliminates the need to apply for a loan from a bank or any other financial institution. This solves the problem of delayed loan approval, which is often the case with banks. The process of a loan application, verification, approval, and repayment is all done digitally. Embedded lending makes consumer credit more accessible, especially to the unbanked population.
This is one of the fastest-growing technologies in fintech. The global embedded lending market is expected to grow at a CAGR of 27.5%, from $51.9 in 2022 to $1999 billion. This article looks at the top 4 applications of embedded lending.
1. Buy Now Pay Later (BNPL)
Buy now, pay later (BNPL) is a payment solution that allows you to purchase a product but pays later, usually in instalments that do not accrue interest. It’s one of the most popular applications of embedded lending, making up to 3% of the total expenditure of e-commerce platforms as of 2023.
According to Straits Research, about 360 million people globally use BNPL. The number is expected to triple to about 900 million in 2027. BNLP’s current market value is $132 billion, and it is expected to grow at a compound annual growth rate of 20 -40% by the decade’s end.
This payment plan is available in most major retailers and e-commerce platforms, such as Klarna, Walmart, Shopify, OZON, and Amazon. The payment option is embedded in the checkout page of these platforms. When you choose the Buy Now Pay Later option, your total purchase is divided into equal installments. The first installment is required as you check out, and the rest is paid over weeks or months, depending on your purchase and the provider.
The payment is deducted from your bank account, debit or credit card, or any other payment solution you have. Most BNPL lenders offer autopay, meaning the money is deducted automatically until complete payment.
2. Merchant Cash Advance (MCA)
A merchant cash advance is an alternative type of business financing that advances a large sum of money to your business based on future debit and credit payments. This type of embedded lending is suitable for small businesses looking to cover short-term expenses or running low on cash flow.
When you take MCA, the lender is simply purchasing your future sales. The sales your business generates in the future are used to offset the advance plus the borrowing fee. Since the merchant cash advance isn’t a loan, it doesn’t charge an interest rate. Instead, it charges a factor rate. The amount you borrow is multiplied by the factor rate to get the total amount you pay the financing company. MCA often charges top dollar in the borrowing fee with the factor rate running from 1.1 to 1.5.
Repayments were traditionally made daily or weekly, and the lender subtracted a percentage of your total debit and credit sales until the entire advanced amount was settled. The repayment period depends on your sales. The higher the sales, the shorter the period.
Alternatively, you can arrange with the financing company to subtract a fixed amount from your business bank account, whether daily or weekly, regardless of your sales. This fixed repayment amount is based on your business’s estimated monthly revenue. This repayment plan allows you to calculate how long it will take to settle the merchant cash advance.
MCAs are often approved based on a business’s sales history. Therefore, their eligibility guidelines are loose compared to those for regular loans. This allows businesses with bad credit to get financing and remain afloat.
3. Credit to FMCG Merchants
Fast-moving consumer goods are products that sell quickly but at a low price. Despite their high demand, their low-profit margin limits the business’s working capital.
As such, unless the business has access to credit, it will have low stock, unmet demands, and logistics Inefficiencies, which will affect the business’s profitability and, consequently, the distributor and manufacturer’s business. That is why manufacturers and distributors have opted to loan the retailers credit products.
Through embedded lending, FMCG merchants access small, tailored credits that banks can’t underwrite. This keeps the business running, helps it grow, and helps manufacturers and distributors push more goods. The financers determine the retailer’s credibility by checking the retailer’s payment history.
4. Logistic Platforms
Transportation companies like Uber provide drivers with loans based on their performance history and rating.
Embedded lending is also used for truckers or fleet owners. The trucking business has high fluctuating demands, which could create a cash flow problem. Embedded lending provides a solution by offering credit to truck drivers through digital platforms. This funding goes a long way in helping truck and fleet owners maintain their vehicles, finance fueling, buy new vehicles, and take insurance.
Wrapping it Up!
By embedding credit services to non-financial platforms, embedded lending is making credit more accessible to consumers. For example, small businesses can be financed through Merchant Cash Advance. Customers can also buy products on credit through Buy Now Pay Later, and there are enhanced relations between significant industry players. For example, aggregator apps like Uber offer drivers loans based on performance.
This technology has revolutionized the financial industry, and as technology advances, embedded lending will likely be integrated more into everyday life. Companies that embrace this technology sooner will have a competitive advantage in the market.