Today’s digital economy has been transformed by the increasing importance of seamless, customer-centric financial solutions.
And innovations like embedded lending have placed small and medium-sized businesses (SMBs) at the center of this transformation, revolutionizing the financial services ecosystem.
In the new financial services world, small businesses have more influence than ever before in the development and delivery of financial products, making the digital commerce environment deterministic rather than reactive. Instead of choosing to accept certain payment methods out of fear of missing out on customer business (FOMO) or trying to keep up with larger peers and competitors, small businesses can now design each step of the commerce experience to achieve the ultimate outcome they want.
After all, early innovators like Square, Shopify, Stripe, Affirm, and Klarna have revitalized merchant aggregation as a business model, and embedded lending, where credit tools and borrowing capabilities are integrated directly into the purchasing process or payment platform environment, is not only reshaping end-user behavior but also propelling small businesses to the forefront of the financial industry.
Read more: Embedded Finance and BaaS: From Marketing Talk to Banking Foundation
Unlocking embedded financing opportunities
Embedded lending models, traditionally represented by buy now, pay later (BNPL) options, have become extremely popular in the e-commerce space. By offering lending options directly within their platform, small businesses can provide a seamless purchasing process that eliminates the need for customers to seek out external credit solutions. This integration not only simplifies the shopping experience, but also significantly increases the chances of conversion.
By helping customers finance their purchases, SMEs can access a wider customer base, including those who may not have the liquidity to pay up front. This increased reach translates into higher sales revenue and larger average deal sizes.
“At the end of the day, lending programs need to be an extension of the business and help retailers grow their business,” Chris Guido, head of TD-owned brands, sponsorships and emerging opportunities for TD Retail Card Services, told PYMNTS.
“It allows us to reach new customers that we couldn’t reach before and gives them more options to make a more efficient transaction,” Chad Evans, vice president of merchandising at AVB Marketing, told PYMNTS.
SMBs are no longer passive participants in the embedded lending ecosystem; they are actively shaping the financial products they offer to their customers. By partnering with FinTech companies, businesses can customize lending solutions that meet their customers’ specific needs. This level of control allows businesses to differentiate in a competitive marketplace and offer unique lending options that cater to their customer base.
Access to valuable customer data enables SMEs to offer more personalized lending options. By analyzing purchasing behavior and financial profiles, businesses can adopt a data-driven approach to improve customer experience and increase the chances of loan approval, benefiting both the business and the customer.
And the market is responding with new solutions: Payments provider Rainforest raised $20 million in June to expand its embedded payment services, while Gynger raised another $20 million the same month in a Series A funding round led by PayPal Ventures to support its own embedded finance platform.
See also: Small businesses emerge as prime candidates for embedded lending products
Embedded financing has great potential for SMEs
According to PYMNTS Intelligence, 37% of small businesses have expressed strong interest in switching to a provider that offers embedded lending options. But while small businesses have strong interest in offering embedded lending to their customers, the same intelligence also shows that one of the biggest opportunities for lenders may actually be those same small businesses.
That’s because while lenders around the world offer embedded financing, data shows that typical lenders serving small businesses aren’t fully utilizing its potential.
A PYMNTS Intelligence report commissioned by Visa and designed and conducted by PYMNTS Intelligence, ” Embedded Lending: From a Lender’s Perspective ,” found that lenders’ lack of interest in offering embedded lending options is not aligned with consumer and small business interest in switching to providers that offer it.
“Among lenders that serve consumers, 22% are highly interested in offering new embedded lending products over the next two years,” PYMNTS wrote, “and an additional 27% are somewhat interested. A similar pattern is seen for lenders that lend to small businesses, with 22% expressing high interest and 29% expressing moderate interest.”
“80% of lenders offer embedded lending products to consumers,” Arvind Ronta, global head of BNPL and embedded finance at Visa, told PYMNTS, “but there are significant gaps in how these lenders deliver embedded lending products to small businesses.”
result?
“Any significant unmet need represents an opportunity for lenders to attract and retain SME clients,” said Ronta, noting that Big Six lenders are broadly missing an opportunity to not only address a significant market need, but also to capture the huge potential of the SME market.
In her June 24 op-ed, “Why the Connected Economy Isn’t,” PYMNTS CEO Karen Webster wrote, “Creating experiences that connect disparate digital activities within new connected ecosystems is a work in progress. Making the physical world a contextual part of the digital experience remains largely unexplored. So much of the digital transformation to date has been digital, but not transformational. This is one of the greatest opportunities innovators and business leaders can leverage as they shape their strategies for the rest of this decade and beyond.”
Embedded lending is one of many frontiers of innovation driving the digital economy forward.
BNPL, digital payments, digital transformation, e-commerce, embedded finance, embedded lending, fintech, lending, loans, news, PYMNTS News, retail, small business
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