Embedded Lending - Use Cases, Advantages and Challenges

Chitwan Kaur   /    Content Specialist    /    2021-08-20

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One of the applications of Embedded Finance, Embedded Lending, is the seamless integration of credit products into traditionally non-financial platforms. Embedded Lending, or Embedded Credit, allows digital platforms to offer credit to their customers within the merchant's app, without redirecting them to a third-party portal.

Embedded Credit infrastructure companies offer full stack lending solutions inclusive of know-your-customer (KYC), underwriting software, partner banks and customer servicing. Such integration helps merchants save on expensive infrastructure and provide a seamless lending experience with just a few clicks.

Key Players

Embedded Lending cannot be made possible without the involvement of digital platforms, lenders and an Embedded Finance infrastructure company.

Digital platforms

These are the non-financial companies on whose digital platforms Embedded Lending tools would be integrated. These platforms directly interact with the customer through their website or mobile application. They can offer credit services provided by lenders to targeted customers on their platforms.

Lenders

Financial institutions like NBFCs, banks and small finance banks provide the credit products that are embedded on digital platforms. Their resources are imperative to assess borrower's credit risk and manage and process loan requests.

Embedded Finance infrastructure companies

Embedded finance companies develop the software that enables integration of Embedded Lending into digital platforms. They create APIs and SDKs that bridge merchant platforms with lenders. SDKs help bring functionalities promptly and easily onto a merchant’s mobile application.

Use cases

Thanks to its seamlessness and flexibility, embedded lending has found takers in a number of contexts. It is increasingly being adopted in the following use cases -

Khata apps

MSMEs and SMEs can avail of business loans on these apps. Khata apps use their platform data to approve of such loans. This makes businesses more reliable to customers, also giving a boost to customer retention and acquisition.

B2B e-commerce

Buy-now, pay-later (BNPL) is becoming the fastest-growing payment method and is expected to make up 3% of the total expenditure on e-commerce by 2023. BNPL allows small businesses to avail of short-term credit at checkout. They can purchase products as per their convenience and pay for them at a later point.

Aggregators

Transportation or ride-sharing companies such as Uber can provide loans to drivers based on their ratings and performance histories. Other aggregator companies such as Zomato or Swiggy can offer working capital loans or vehicle loans to their partners.

Benefits

The use of credit cannot be overlooked by businesses, even though getting loans can be tough for small business concerns. Embedded Lending has opened a new realm of possibilities for small businesses by digitising the process of disbursing credit.

For seller platforms

Boosts business metrics: E-commerce businesses can tackle unfavourable consumer behaviour that leads to low conversion rates and cart abandonment. This usually occurs because consumers are hard-pressed for cash. By providing credit within the app itself, online platforms can increase their revenues. They can achieve higher average order value (AOV), customer lifetime value (CLTV) and customer retention.

Wider consumer base: For lenders, associating with online portals helps expand their customer base and make use of the distribution capabilities of the business in question. This also helps gain access to data surrounding consumer behaviour that can be used by the business as well as the lender.

Increases revenue: The merchant hosting the Embedded Lending plug-in can earn commissions from each loan that is disbursed through their platform. Such a usage-based revenue model can help platforms grow their per user revenue by 5x.

Read more about how Embedded Finance enables retail-tech platforms to grow their revenue by 5x.

For end customers

Solution to cash flow problems: By offering credit at the point of demand creation, Embedded Lending solves the problem of cash flow. It allows businesses to carry out operations uninterrupted by delays in supply, and lets them repay the loans as per a flexible schedule.

Access to better credit services: The end-customer can avail of a cheaper loan that can be secured without hassle and repaid in a flexible manner. The lending solutions offered under Embedded Credit are also tailored to meet individual requirements.

Challenges

Embedded Lending provides solutions to a number of problems faced by traditional loan processing methods. Here are some shortcomings and how Embedded Credit addresses them-

Long TAT for loan approval

In India, data surrounding borrowers' creditworthiness is often insufficient. This leads to longer wait periods before approval and raises the cost of underwriting. Embedded Lending ensures that alternative data is used to underwrite borrowers more efficiently.

Costly disbursal of loans

Disbursing small digital loans is very expensive for banks, which makes a large number of small-ticket loan seekers ineligible in the eyes of lenders. With Embedded Lending, overheads are eliminated and the process of lending becomes shorter, also bringing down the cost of processing the loan.

Lack of accessibility

Borrowers often find it difficult to search for different credit products, compare and select the one that suits them best. With Embedded Lending, borrowers can access the right 'in-context' credit product for them. Moreover, lenders and digital platforms come together to leverage data to tailor credit products suited for the specific needs of end-customers.

Takeaway

The goal of Embedded Lending is to provide end-customers with easy, convenient and affordable loans in a seamless fashion. However, Embedded Lending goes beyond this. It enables lenders and merchants to forge symbiotic relationships that help the former expand their customer base and the latter benefit in a number of ways - from creating an alternative revenue source to enhancing their business metrics.