As sales and customer experience continue to drive allocation requests, CFOs may be tasked with assigning capital to programs that offer financing for customers. More than three quarters (76%) of executives have gone as far as to label embedded lending products as a "massive" growth opportunity, per a recent survey.

Whether it comes from the sales manager or the technology team, finance executives of consumer-based businesses shouldn’t be surprised if they are pitched on this. Lenders and fintechs alike are selling their services to growth-minded companies, as technology’s impact on the collaboration between finance and IT continues. 

The expectations around fintech have begun to create an environment ripe for embedded lending, where the financial service is offered through nonfinancial products or services at the point of sale. The need for a 3rd party is removed, streamlining the process. 

In their Future of Customer Experience in Embedded Lending Survey, OneSpan and Smart Communications surveyed 350 senior executives in the lending industry on the emergence of some of fintech’s trendiest offerings. Offerings such as Buy Now Pay Later (BNPL) are already prevalent in the consumer space. But they are only the tip of the iceberg.

Respondents were clear in their belief that embedded lending is the future of both corporate banking and consumer experiences.

Embedded Lending Avoids Additional Balance Sheet Risk

"Whereas previously a business would have referred a client to a third party service provider for things like invoice factoring, merchant services, etc., they can now all be offered directly by you, without you needing to take on the balance sheet risk," said Tal Schwartz, head of product at Nomis Solutions, and former head of policy and research at the Canadian Lenders Association. 

"Shopify has offered BNPL to shoppers through Affirm since 2021," he said. "[This allows] the marketplace to expand average order size without taking on any balance sheet risk themselves."  

  Tal Schwartz

Schwartz made it clear — a CFO who is presented with an embedded lending product needs to make sure their team has clear goals surrounding its implementation. "Not all lending is made equal," he said. "Focus on products that are strategic, that capture more client value, and that seamlessly fit into your brand."

For CFOs who are looking for additional relationship-developing and monetization strategies within an existing customer base, embedded lending products may be a viable option, Ahon Sarkar, general manager of Helix by Q2, a banking as a service (BaaS) platform, told CFO.

These kinds of products not only generate cash flow opportunities, he said, but solve a major issue in the traditional lending industry. Embedded lending, according to Sarkar, increases the amount of lending products available to the borrower. 

"The challenge with traditional lending is that it requires the customer to self-select into going to a specific lender and applying for a loan," Sarkar said. "Embedded lending allows for consumers to get their loans met at the place they already have an existing relationship, within the context of the transaction, and allows for a win-win where the consumer gets the cash they need when they need it."

  Ahon Sarkar

"Think about getting a loan to cover the cost of braces at the dentist's office or getting a purpose-built construction loan for a contractor at a home improvement store," Sarkar said. "Instead of having to stop the purchase experience, go somewhere else, and apply for a loan only to potentially get denied, the consumer can complete the transaction and get all their needs met in one place." 

For companies that offer an expensive product, like Rocket Mortgage, which recently integrated Q2's embedded finance offerings, Sarkar believes that embedded lending products should be on the finance executive's radar due to their upside for midsize to large companies looking to grow.

"Embedded lending can lower drop-off, drive engagement, and increase average cart size as it enables consumers to more easily go through with the transaction instead of forcing them to jump through another hoop," he said.

AI and Human Intelligence

Among fintech’s many offerings, a recent hype cycle by Gartner found some of the greatest excitement around specializations in the areas of application and decision processing — the exact technology that embedded lending relies on.

Researchers still believe a harmonious relationship between artificial intelligence (AI) and human intelligence is pivotal to those looking to leverage technology in embedded finance. “A future autonomous finance organization will require people and machines to work together in a learning loop,” said Mark D. McDonald, senior director of research in the Gartner Finance practice. “People will exercise judgment, perform controls, validate output, and ensure financial integrity while machines will focus on the analytical work and repetitive processes that, comparatively, humans struggle with.”

   Mark D. McDonald

One in five loans will occur in a nonfinancial context by 2024, according to OneSpan and Smart, and the implementations show no signs of slowing down. The vendors predict that proportion would rise to 34% and 45% over a three- and five-year period, respectively. 

Short-Term Tech and Data Issues 

With countless fintechs offering their services in the market for embedded finance, competition is steep. Companies are competing by doing their best to make the onboarding process at the point of sale seamless for customers. Despite best efforts, there are still difficulties in the widespread use of the technology due to redundancies in the onboarding process.

OneSpan and Smart found that 60% of responding organizations ranked the option to switch sales channels during the application process without having to re-enter information as “very important." The findings indicate the ability to eliminate redundancies for consumers is a top priority.

Only 9% of lenders surveyed enabled customers, irrespective of their choice of channels, to start an application on one channel and complete it on another without re-entering information. Twenty percent didn’t offer seamless channel switching at all. 

Findings also show the lending industry is still having a hard time properly putting all of its data to use. Seventy-five percent of those surveyed in the lending space said they commonly ask applicants for data the organization already holds internally. Nearly all (93%) believed "smooth and effortless loan applications" were a survival factor in the lending industry. 

On average, the lenders surveyed expected their organizations to stop using "static one-size-fits-all web forms" and to "stop asking for data that could be drawn from third-party sources" by 2026, according to the OneSpan research.