Embedded lending’s usage around the globe has been growing — but as we enter new cycles of technology and seamless interactions, we’ll see more consumers and businesses turn to a growing set of use cases where they get the financing they need to get the things they want.
That was one of the insights from Conor Lynch, VP, head of consumer solutions, Asia-Pacific at Visa. The conversation took place in the wake of the release of a PYMNTS Intelligence report commissioned by Visa titled “Embedded Lending: Global State of Play,” that found that across six major world markets, 15% of consumers and 18% of microbusinesses and small businesses (MSBs) have recently used embedded lending options.
The guiding principle behind embedded finance — as eCommerce firms and other businesses offer options to customers — is that the lending and financial products themselves are part of the sales process in consumer- or business-facing environments, Lynch said.
Embedded finance is especially attractive to microbusinesses, which have traditionally been unable to tap into conventional lines of credit.
No matter the use case, ideally, he said, it’s best to be unobtrusive to the end user as they buy goods or services — especially for smaller loans.
But in extending credit at the right time to the right borrower within the right environment — well, that needs information. And gathering that information, to underwrite risk, and tailor an offer, requires that the would-be user provide that granular data, which can lead to friction, which creates the very antithesis of an unobtrusive embedded finance experience.
“It takes the consumer out of the sales flow and makes the whole thing a lot more difficult,” Lynch said. For the lenders, he said, the ideal source of information might be to tap into the banking relationships, if available, and other data.
In order to form the most complete picture of creditworthiness, especially for microbusinesses, Lynch said, it’s important for banks and other firms to partner and pool data in an effort to better understand a borrower’s ability to repay. Those partnerships can include retailers, online entities and service providers (focused on small businesses) to gather as much info as possible so it can be matched against the banks’ data.
“Large financial institutions probably stand a better chance of doing this more practically,” he said, “because they have good information about their own customers, and if their own customer base is big enough, retailers and service providers are more likely to be interested in working with the financial institution to embed the process into their sales processes.”
Partners such as Visa, Lynch said, are enabling the “orchestration” of that data, so that it’s easier for lenders to integrate current account and debit card data so that they can make more informed, and better, credit risk decisions. Visa’s Click to Pay and tokenization technologies, he said, make it easier for issuers to allow consumers and small businesses to embed payment credentials into their daily interactions with enterprises.
“When the consumer already has a credential that allows them to pay from their bank account — a debit credential — those credentials are already embedded into the business’s sales process,” Lynch added, which saves the manual labor of entering card details.
With those streamlined flows in place, small amounts of credit would be extended so that small firms can establish their creditworthiness, and then extend more credit as time goes on. A virtuous cycle ensues: More credit begets more data on creditworthiness, which in turn keeps the lending relationship intact over time.
Drilling down into country-by-country opportunities and challenges for embedded lending, the data shows that embedded lending is less prevalent in Japan and Australia than has been seen elsewhere.
There are at least some similarities, he said, given the fact that both countries are marked by mature economies and aging populations — and both countries are close to 100% “banked,” with access to debit, credit, and buy now, pay later (BNPL) options. Consumer demand for embedded finance may be less acute in these markets than others (and generally speaking, he said, consumers are relatively credit averse in Japan).
Elsewhere, India represents a compelling example. It’s a market in which 37% of microbusinesses have used embedded options. The banked population is smaller, at about 75% of the country. In the meantime, access to electronic payment methods is high — though credit has traditionally been harder to come by.
That means that consumers and businesses are more interested in embedded finance than may be evident in other nations. But lending in the Indian market, he said, requires the same level of partnerships between financial providers, merchants and banks, as seen elsewhere.
In the years ahead, he said, the digital technology cycle we’re in currently will catalyze the embedded finance process — and scale those offerings too. New offerings such as the Visa Flex credential, Lynch said, will help integrate borrower-level data even further, so that payments take only a few clicks compared to the relatively cumbersome, confusing and friction-filled traditional landing process.
“If we were to talk again in a year, I would say we will have made a good deal of progress toward that end game of using digital technology to orchestrate the various ways to pay into a single user experience. And by doing so, we’re expediting the process of making embedded finance more accessible,” he told PYMNTS.
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