Embedded finance refers to the integration of financial services into traditionally non-financial platforms and experiences. Over the last five years, it has become increasingly popular—In 2021, businesses and consumers spent $2.6 trillion in transactions through embedded financial services in the U.S. By 2026, this number is expected to grow to $7 trillion.
Initially born from traditional point of sale (POS) transacting, embedded finance is widely regarded for its diverse applications and potential to benefit parties on all sides of the transaction. For customers, embedded finance brings radical new convenience and access to financial service offerings. For the companies who provide customers access to these products, it provides exciting avenues for growth and heightened customer satisfaction. And for financial institutions, it enables targeted portfolio diversification and potential access to new deposit streams over time.
As a derivative of embedded finance, embedded lending represents the application of embedded finance technology to the delivery of loans across different verticals. Despite the recent growth of embedded lending, many financial institutions are still unsure of what it is, where it fits, and how to leverage it to advance their short-term and long-term objectives.
In this blog post, we’ll take a closer look at embedded lending—exploring its benefits, growth, and many applications.
What is Embedded Lending?
Embedded lending refers to the integration of lending services directly into the platforms and applications of businesses outside of the lending sector. This allows customers to access loans at any point in their journey without leaving their platform, dramatically enhancing the quality of the lending experience by making it more convenient and more contextual.
For example, when a customer is looking to make a big-ticket home improvement purchase—like a new HVAC—embedded lending allows financing options to be readily accessed at the point of purchase without having to search for, compare, and contact various loan providers. User experience improves significantly when financial services are integrated efficiently into other platforms, as multiple services can be rolled into one, customer-centered retail experience. Many industries stand to benefit from embedded lending—home improvement, large ticket retail, elective medical, and renewable energy are among a few.
How Can Embedded Lending Benefit My Institution?
The seamless and contextualized experience afforded by embedded lending has the potential to dramatically enhance customer experience, engagement, and loyalty for financial institutions. According to a recent survey, 94% of more than 20 global financial technology leaders believe the key to success is the relevance of a financial product in addressing customers’ real-time needs. With context comes the ability to deliver relevant offers that engage customers in other product areas, which can help drive depositors, promote other loan types, or generate demand for other products.
Embedded lending also has the unique ability to provide financial institutions with access to new markets. This access may be geographic, as is the case with a regional credit union looking to offer loan products nationally. Alternately, this access may be demographic, as is the case with a bank that predominantly serves baby boomers but is trying to diversify its customer base to include a greater portion of millennials. Because embedded lending can be offered across virtually any loan size and category, it can also be a powerful tool for risk optimization and management.
Last, but not least, embedded lending is inherently flexible and highly efficient with a very light operational footprint. Credit unions and banks can adopt embedded lending to improve the operational efficiency of their lending workflows, and access the operational analytics needed to identify and replicate best practices in a more scalable way.
How Can Embedded Lending Advance My Institution’s Deposits?
Given the banking sector’s intensified focus on driving new deposits, it might seem initially that embracing embedded lending is an endeavor for another day. But embedded lending has an undeniable impact on the deposits side of the balance sheet over time. In fact, it is an essential tool in any long-term strategy to grow depositors, and by extension, deposits.
The path to new deposits through embedded lending is not just incidental. Rather, it can and should be highly intentional. Here are a few ways financial institutions can maximize embedded lending’s potential to grow deposits over time:
- Be Targeted: Harness demographics to target borrowers that are known for their loyalty, earning potential, risk-aversion, and savings habits. These segments are most likely to become depositors in the future, and certain loan products can give you greater access to them. For example, home improvement loans are often sought by first time home buyers who are early in their earnings years and have a renewed focus on saving to replenish the funds used in the purchase of their home.
- Focus on Experience: Utilize integrations to cross-sell checking or savings accounts at your financial institution, which provide customers greater seamlessness and convenience. Build a customer-centered ecosystem that extends multiple products—loans, payments, investments, savings—in one unified experience.
- Harmonize Promotions: Reach your borrowers with targeted promotions to incentivize the creation of checking and savings accounts through rewards and special rates. Or reach beyond your borrower community with targeted referral programs that reward them for bringing friends and family to your institution.
- Embrace Analytics: The data offered by embedded lending platforms is a treasure trove of insight that can help you customize products to maximize relevance. Perhaps a segment of your borrowers is comprised of parents who are saving for their children’s higher education. You can use this insight to offer savings products that provide increased interest rates for consistent, regular deposits.
And these examples just scratch the surface. Converting satisfied borrowers into satisfied depositors can be successfully done in a variety of creative ways that combine data and action to strengthen customer experience and value. The right embedded lending platform and partner can ensure you have the flexibility needed to execute your strategy, and the partnership desired to collaborate on new strategies in the future.
How Can I Get Started?
At LoanStar, we provide a configurable, flexible, and customer-centered embedded lending platform that enables credit unions and banks to deploy programs that optimize their loan portfolios by forming connections with hard-to-reach customers in diverse lending sectors, then converting those customers into depositors. If you’d like to learn more about the MerchantLinQ platform or see a demo, contact us to speak with a member of our team.
