Embedded Lending Puts SMBs at Center of Financial Services Landscape

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The growing importance of seamless, customer-centric financial solutions has transformed today’s digital economy.

And innovations like embedded lending have revolutionized the financial services ecosystem by increasingly placing small and medium-sized businesses (SMBs) at the center of this transformative shift.

In the new, emerging financial services landscape, SMBs are now wielding unprecedented influence over the development and delivery of financial products — making the digital commerce landscape more deterministic rather than reactive. Instead of choosing to accept certain forms of payment due to a fear of missing out (FOMO) on customer business, or playing catch-up to their larger peers and competitors, SMBs are now finding themselves able to design each step of the commerce experience to deliver the outcome they ultimately desire.

After all, early innovators like Square, Shopify, Stripe, Affirm, Klarna and many more have been revitalizing merchant aggregation as a business model. Embedded lending, whereby credit tools and borrowing capabilities are integrated directly into a purchasing process or payment platform environment, is not only reshaping end-user behavior, but also elevating SMBs to the forefront of the financial landscape.

Read more: Embedded Finance and BaaS: From Marketing Buzz to Banking Bedrock

Unpacking the Embedded Lending Opportunity

The embedded lending model has traditionally been epitomized by buy now, pay later (BNPL) options, which have gained immense popularity in the eCommerce sector. By offering financing options directly within their platforms, SMBs are able to provide a seamless purchasing process that eliminates the need for customers to seek external credit solutions. This integration not only simplifies the shopping experience but also significantly increases the likelihood of conversion.

That’s because by enabling customers to finance their purchases, SMBs can tap into a broader customer base, including those who might not have the liquidity to pay upfront. This expanded reach translates to higher sales volumes and larger average transaction sizes.

“At the end of the day,” Chris Guido, head of TD Owned Brands, Sponsorships and Emerging Opportunities for TD Retail Card Services, told PYMNTS, “the financing program needs to be an extension of the business … to help grow the retailers’ businesses.”

“You’re reaching additional customers that you could not reach before, and customers are able to transact more efficiently because they’re given more options,” Chad Evans, VP of merchandising at AVB Marketing, told PYMNTS.

SMBs are not just passive participants in the embedded lending ecosystem; they actively shape the financial products offered to their customers. By partnering with FinTech companies, businesses can tailor lending solutions to meet the specific needs of their clientele. This level of control allows businesses to differentiate themselves in a competitive market, offering unique financing options that cater to their customer base.

Access to valuable customer data also further empowers SMBs to offer personalized lending options. By analyzing purchasing behavior and financial profiles, businesses can embrace a data-driven approach that enhances the customer experience and increases the likelihood of loan acceptance, benefiting both the businesses and the customer.

And the marketplace is responding with new solutions. Payments provider Rainforest in June raised $20 million to expand its embedded payments offering, while Gynger the same month raised a separate $20 million in a Series A funding round led by PayPal Ventures to support its own embedded financing platform.

See also: Small Businesses Emerge as Prime Candidates for Embedded Lending Products

Embedded Lending’s Big Potential for Small Businesses

PYMNTS Intelligence finds that 37% of SMBs are highly interested in switching to providers that offer embedded lending options. But while SMBs are highly interested in offering embedded lending to their customers, the same intelligence also shows that one of the biggest opportunities for the lenders may actually be those same SMBs.

That’s because, while lenders across global economies are offering embedded lending, the data shows that the typical lender serving SMBs has not fully embraced its potential.

The PYMNTS Intelligence report, “Embedded Lending: From the Lender’s Perspective,” commissioned by Visa and designed and conducted by PYMNTS Intelligence, found that lenders’ tepid interest in offering embedded lending options is out of sync with consumer and SMB interest in switching to providers that offer them.

“Among lenders that serve consumers, 22% show high interest in offering new embedded lending products in the next two years,” PYMNTS wrote. “Another 27% are somewhat interested. The trend is similar for lenders lending to SMBs, as 22% express high interest and 29% moderate interest.”

“We see 80% of lenders offering embedded lending products to consumers,” Arvind Ronta, global head of BNPL and embedded finance at Visa, told PYMNTS. “But there’s a huge gap in how these lenders are offering embedded lending products to small businesses.”

The result?

“A huge and material unmet need that presents an opportunity for lenders to engage and retain SMB customers,” Ronta said, noting that lenders across six major economies are widely missing the opportunity to not only address a critical marketplace need, but also to capture the sizable potential that the SMB market represents.

In her op-ed piece of June 24, “Why the Connected Economy Isn’t,” PYMNTS CEO Karen Webster wrote, “Creating experiences that connect discrete digital activities within new connected ecosystems is a work in process. Truly making the physical world a contextual part of a digital experience remains largely untapped. Too much of the digital transformation to this point is digital — but not exactly transformational. It’s one of the greatest opportunities for innovators and business leaders to seize as they write their strategies for the rest of this decade and well beyond.”

Embedded lending represents one of the many spear tips of innovation pushing forward the digital economy.