Embedded lending: business financing reinvented

Lending is not easy. It requires a sophisticated tech stack, complex processes, lending capital and a scale for success that is beyond the capabilities and size of most retailers, software providers, platforms, and marketplaces. So how can investors and companies avoid the complications that come with lending? Embedded lending may be the solution.

Embedded lending allows any company to access a vast and secure infrastructure for lending, and immediately start financing its business customers. Lending is a highly value-added offering that reinforces core engagement and retention and drives new revenues. For fintech lenders, embedding enables effective low-cost distribution and to reach a profitable scale, in addition to tapping into highly valuable predictive data from the partner.

From point of sale financing for consumer purchases, seen in the current popular trend of buy now, pay later (BNPL), to small and medium enterprise (SME) financing with merchant cash advances, revenue-based financing or working capital term loans – embedded lending offers more flexibility and adaptability to varying types of financing.

On dealroom.co, we’ve mapped 30+ embedded lending startups and scaleups providing access to vast and secure infrastructures for lending.

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Overview of embedded lending startups

Where embedded lending is at

Embedded lending is still in its early innings, compared to payments where embedded offerings are kind of de facto already and the competition is about polishing the customer experience. Embedded lending’s maturity is similar to embedded insurance and the opportunity is huge with embedded retail lending alone to represent a $2.1T opportunity by 2030.

Lending is complex

Lending requires a complex tech stack and processes ranging from underwriting (bank, accounting, income & employment data; KYC/KYB & AML, etc.), compliance reporting, and debt management to servicing. This complexity, or even simply have the funds available to lend, was out of reach for non-financial companies and even for most fintechs.

In fact, despite lending representing nearly 60% of total revenues for US banks, it has not yet been fully unlocked in fintech. Challenger banks are still interchange or subscription-driven, with few heavily involved in lending, and Banking-as-a-service companies focus mostly on credit cards products without crossing to lending. Even the first wave of full-stack online lenders had challenging economics due to the high cost of customer acquisition (CAC) and the high cost and complexity of the lending stack.  

Embedded lending changes distribution, from a horizontal distribution, where direct customer acquisition became increasingly expensive, to vertical distribution, where lending is offered by SaaS and eCommerce with almost null marginal distribution cost.

Embedding also brings unparalleled data richness for underwriting and pricing thanks to “digital platforms” data, which means loans can also be offered proactively when users are likely to need them.

In house-lending vs lending-as-a-service

Some of the leading marketplaces, like Amazon, Shopify, and eBay, offer business lending propositions. Also, payment providers like Paypal and Block (ex-Square) are heavily involved in lending.

Shopify and Paypal (which is the largest non-bank lender with $54B of assets as of Feb 2021) offer business loans and cash advances in-house, while Amazon, after a first phase from 2011-2019 offering lending directly, transitioned to rely on partners, most notably Goldman Sachs. eBay, which recently started offering lending in the UK, partners with YouLend, Funding Xchange, Wayflyer.

Below you can find a more detailed comparison of their efforts 👇

embedded lending offering by main marketplaces and payment providers

All these players can rely on more precise data than any lender on the company they finance, bringing accurate credit decisions for themselves or their partners. For instance, Shopify uses, “70 million data points to understand larger trends across the platform for merchants, and can see they are growing before they even can so we can preemptively offer them.” It can offer funding before the company ever realizes it might need it and avoids processing fees, late fines, or hidden costs.

But what about other marketplaces, payment providers, shop system providers, and software-as-a-service providers?

Extremely high fixed costs and small scale make it nearly impossible for a brand to profitably launch a lending program internally, despite having no or limited incremental distribution cost in cross-selling these loans. Furthermore, they just simply lack the competencies in-house in order to launch a lending program in-house.

Lending-as-a-service providers, like Banxware, provide the technology and the funds for business financing, be it fully embedded in platforms or as an affiliate solution. Banxware focuses on enabling digital platforms for marketplaces and other aggregators, like Payment Service Providers or Shop System Providers, to offer embedded lending products in real-time to its business customers. The main focus at the moment is on merchant-cash advances, but the vision is enabling partners to launch many different lending programs internally.

“The future of business lending will be platform-embedded lending solutions” 👉 Read the full interview with the Founder and CEO of Banxware, Jens Röhrborn.

He is going to be one a speaker for our upcoming Embedded Finance event 👉 Grab your seat

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Additional resources:
Thomvest ventures: Embedded Lending — Our Thesis on SMB Lending, Enabling Infrastructure and the Opportunity to Unlock Access to Capital
Redpoint Ventures: Embedded Fintech – Which financial services should be embedded?
SciFi VC: Embedded lending – investing thesis