Lending Briefing: Embedded lending with Finastra
- Embedded lending is growing as a market, and large banking providers like Finastra are developing BaaS solutions to start pooling together banks and merchants in order to bring more lending options to consumers.
- Elsewhere, we look at CashApp's new milestone, and how fintech lenders might be finding it hard to sell their loan books in a high interest rate environment.
Embedded finance is growing in popularity, aiming to attract companies in any industry that are looking to implement financing solutions to their business.
Lending is and will continue to be a huge part of the embedded economy – it's all about customers being able to access financing when they are making a purchase, whether they're buying a hot tub or need to fix a faulty pipe in their home.
Embedded lending is point-of-sale financing, but it's not buy now, pay later (BNPL). It allows access to traditional regulated lending products offered by financial institutions.
This is exactly what Finastra is doing with its new embedded consumer lending solution.
For consumers, it's providing more options and an alternative to BNPL, which is often not applicable to high value purchases. For merchants, it allows them to give their customers access to numerous lenders and their specific products. And for financial institutions, it's access to a marketplace of distributors and merchants to distribute their banking products.
To get a better sense of what this all means and the strategy behind it, I spoke to Angus Ross, chief growth and revenue officer, embedded finance at Finastra. So if you're still unsure about what embedded lending means, we've got the answers right here.
How would you define embedded lending?
Angus Ross: We define embedded finance from the perspective of the end consumer and the points of context they are interacting with which banks don’t own. These points of context include retail brands (e.g. Amazon), ERPs (e.g. Microsoft, SAP), merchant acquirers (e.g. Block, Elavon) etc.
Embedded Finance is the evolution of Open Banking and Banking as a Service (BaaS), which both focused on unbundling banking products and making them available to non-bank channels (i.e. supply of banking products). Embedded finance takes this a step further by focusing on the end customer and consumption point (i.e. demand for banking products).
The relatively short two-year history of BaaS and Embedded Finance is important, because what you've seen in the market in the last few years will inform what you see in the next two. BNPL, low value, consumer-led financing was just the tip of the iceberg. Everyone thinks if you're going to offer lending at a point of sale, it's just Buy Now Pay Later – it's not.
Finastra’s embedded consumer lending offering is a regulated banking product, with all the responsible lending attributes and a regulated institution that sits behind it, offering lending to an end consumer in a relevant point of context. It shows you the evolution from low value BNPL to a higher value, more regulated, rigorous product, and this will evolve into having multiple financial providers offering a lending product in a point of context, so the end consumer has choice.
We refer to ourselves as the orchestrator of open finance. We’re fortunate to serve 8,500 banking customers globally, but we cannot offer one consumer 8,500 offers at their point of sale. Connecting both sides of the network – many retail embedders and many financial services providers – and bringing all of them together in a democratized sense is what we see our role to be, ultimately for the benefit of the end consumer.
How do you think about merchants in this context? What type of merchants would be currently ideal for this type of a partnership?
Angus Ross: The easiest way I think about this is to start with specific merchants' end consumers.
If I'm a consumer and I've just had a big storm come through, and I've received a quote for $20,000 to have my windows replaced and need financing, I would normally go to my bank or look at what's available on my credit card.
If I'm a local contracting company or repair company, and I usually service $15,000 - $20,000 plus quotes, having the ability to offer my end consumer financing with my quote, and making it really easy for them – offering lending in moments that matter – would be a logical value added service to make as a merchant. The key here is “value added in the mind of the consumer”.
On the embedder or “customer demand” side, we're targeting the aggregators that have all of those end merchants. For example, we announced a few months ago our relationship with Microsoft, to embed unsecured business lending into their Microsoft Dynamics 365 ecosystem. Now, it's early days, and the way that we approach this is to test and scale what resonates with end consumers in the form of minimum viable products.
This is no different than what we saw a few years ago when Square, now Block, offered financing to its merchant network because they had all of the transactions from their point of sale solution; so they knew what a cafe could afford if they wanted to finance a new coffee machine. They just added lending on top of that merchant payment network.
Similarly, Stripe offers financing to Shopify merchants on top of their Shopify payments ecosystem; and PayPal offers revenue-based lending to their merchants based on cash flow transactions they manage. Block, Stripe and PayPal have what I call captive merchants. They all offer capital or financing to their existing customers because they have data on those customers, which means they can make relevant offers.
And in most circumstances, they're making these funding decisions on their own balance sheet. That's not a hard ping to a credit bureau, and that's not necessarily a bad thing, as long as it's responsible lending, and it's fair, relevant and reasonable to the end consumer. I think that's fantastic.
How would the user experience work for an embedded loan?
Angus Ross: At the moment, if you look across the different participants, it's relatively clunky, and all the technology participants are looking to streamline that.
What happens if you want to apply for a credit card or unsecured loan? You go to your bank and fill out a multiple page form. Banks have tried to streamline the process in their digital channels, though the process is still lengthy and time consuming. Failure for embedded finance is to lift and shift that experience into new channels banks don’t own. Customers want an experience consistent with the contextual channel they are in. Look at how Apple launched the Apple Card with Goldman Sachs several years ago: it was consistent with the Apple experience and relevant to their end customers.
Our earliest enablement of embedded consumer lending is a button on an ERP that says, 'We think you'd be interested in a loan, click here'. When you click, you fill out five or six fields of information that get sent to a bank who decisions that and comes back in real time and says, 'Yes, you've been approved'.
It's still a clunky process. None of us want that. What we want is a proactive process that says, in your point of context, in your current situation, you've been pre-approved for financing, because of all the information that we have on you. Click here to accept it. So it should be proactive from the customer experience – not in a way that's spamming, but in a very relevant and proactive manner.
If you look at companies that offer revenue-based financing, they're using data that they already have on the customer to make very personalized offers.
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