How Embedded Finance is Disrupting Traditional Financial Services…and What Banks Can Do About It

Embedded financial services offer the promise of speed, convenience, and trust to customers in a way that banks and other lenders struggle to deliver on. Here’s what traditional lenders can do to keep up.

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Jon Fry
March 4, 2022

No matter what kind of business you’re running, investing in fast and effective customer service remains a practical way to beat out the competition. For the longest time within the lending industry, a lack of alternative options unfortunately kept financial institutions from prioritizing on-demand customer service. Embedded lending is finally changing the landscape and enabling SMBs to apply for and access capital faster than ever — with or without traditional lenders’ help.

As far as ease of use, speed, quality, and convenience, customers are taking notice of the widening gap between leading online brands like Amazon or Google and traditional financial institutions. Embedded experiences are only exacerbating this growing divide. That’s because traditional financial institutions remain ill-equipped to serve customers and their unique needs as seamlessly as SaaS companies can through embedded lending. 

This development should not necessarily ring alarm bells for lenders, but serve as an opportunity to embrace innovation. As fast capital becomes increasingly available to SMBs through their trusted SaaS providers, traditional financial institutions need to either partner up with Fintechs and SaaS companies or innovate on their own in order to keep up with this growing trend. 

Making Sense of Embedded Lending’s Popularity 

Embedded finance is all around us, whether you know it or not. Embedded finance is the type of transaction a customer conducts without even realizing it — without any disruptions to their customer experience. Companies like Uber, Amazon, and Apple all leverage embedded finance in innovative ways to create more impactful customer engagements. Today’s consumers are using embedded financial platforms to catch a ride, buy large items, and fill in cash-flow gaps — and often they don’t even know it. 

Thanks to embedded finance, financial transactions that used to be the main focus of customer experiences are moving into the background — ushering in an era of more meaningful transactions. This is the whole point of embedded lending: creating a seamless customer experience centered around ease-of use, convenience, and efficiency to enable other non-financial experiences. 

The benefits of embedded finance are clear. Embedded lending just takes them a step further. Embedded lending’s invisibility occurs through contextual placements within a product or platform SMBs already use and trust. Because of embedded experiences, SMBs can get easier access to capital from lenders that actually specialize in their given industry. The upshot: not only does embedded lending increase the speed of underwriting, but it increases the chance of approval, too.

The Chance for Banks to Grow with Embedded Lending

All of this seemingly puts banks at a disadvantage when it comes to increasing their reach and identifying more and more qualified, high-intent SMBs seeking capital. But banks still have some options to capitalize on this innovative trend before it’s too late, such as:

  • Embracing “Banking-as-a-Service” — Banks can capitalize on the ability for embedded lending to open up new distribution channels across their product lines. Banks can not only protect their services but grow their core products, like payments and loans, by finding new distribution opportunities through embedded lending partners. Lenders can embrace “banking-as-a-service” and power banking services in the background by integrating into the tech stack of non-financial services companies offering embedded experiences. 
Lenders that take advantage of this strategy generate sustained growth because platforms like Lendflow bring these untapped distribution opportunities into the fold. Banks can now easily reach qualified, high-intent SMBs seeking capital through embedded experiences. Even better, their applications occur at a point of need — which increases their qualification and conversion likelihood.
  • Doubling-Down on Traditional Distribution Channels — Another viable strategy is for banks to double down on providing better financial services and financial advice through traditional channels. Banks possess the inherent advantage of not only supplying products and services, but also providing ongoing advice as a trusted financial partner. By incorporating additional data points such as payroll and cash flow data, social scoring, etc. into their underwriting processes, banks can leverage their unique position to develop more personalized products, improve customer experience, and better support customers.
Embedded lending platforms like Lendflow aggregate and normalize data to help banks improve their credit decisioning workflows and innovate cookie-cutter underwriting models. With Lendflow’s credit decisioning engine, financial institutions can properly tailor products to serve underserved niche industries by applying embedded lenders’ automated credit decisioning processes and additional data.
  • Reverse Engineering on Digital Banking Platforms — Banks can also replicate this approach by embedding fintech products into their existing mobile app or digital banking platforms. Consider a bank that decides to provide shopping access through their online portals. In a case like this, a customer may apply for a car loan through the digital bank portal. The bank can then connect that customer to a local car dealership with whom they have a partnership  — and potentially maintain revenue share arrangements with — to complete the transaction.

Lenders’ Crossroads Choice

The effective invisibility of embedded financial services poses the biggest threat — or opportunity — to traditional lenders and fintechs, depending on how it’s harnessed. The convenience and ease of access of embedded financial products through platforms customers already know and trust will continue to challenge traditional financial services providers for better or worse. 

Yet embedded lending doesn’t have to be a threat for banks and other traditional financial institutions. Banks should instead think of embedded lending as an opportunity to innovate product lines and expand their reach to identify underserved SMBs in highly profitable industries. 

Embedded lending opens a new world of underwriting possibilities because it relies on smarter data use. A platform like Lendflow pulls data from multiple 3rd party sources so lenders can quickly determine whether or not a customer is qualified. With better data and smarter data use, fewer qualified customers get turned away. Lendflow saves lenders time, cuts down underwriting costs, and increases conversion rates.

Contact us today to learn more about how your financial institution can innovate with Lendflow. 

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