Loan Automation

Unlocking the Power of Embedded Lending for Financial Institutions

August 27, 2023
Unlocking the Power of Embedded Lending for Financial Institutions

As the lending market grows, savvy professionals in the financial industry are embracing innovative solutions like embedded financing—a faster, more organized, and more streamlined approach to providing loan products to customers.

Embedded lending is a recent innovation in the financial industry. Yet despite its infancy, it is estimated to reach a trillion-dollar market in the next decade. 76% of business leaders recognize its growth potential for their businesses, primarily because it streamlines access to financing for customers, unlike traditional lending processes.

How can lenders leverage embedded lending to increase their value to partners, like financial institutions, by increasing their revenue and achieving higher customer satisfaction? Modern loan origination systems like Fuse can expedite the process.

What Is Embedded Lending?

Embedded lending is part of the broader infrastructure of embedded finance, which provides any business (in any industry) access to financial services like lending or payment processing so it can meet customers’ needs more effectively. For financial institutions, this presents an ample opportunity to meet the demand for loans at a greater scale, integrating into non-financial platforms to deliver reliable loan processing for the end user.

In traditional, non-embedded lending, the loan servicing process can be slow and error-prone, which frustrates customers and negatively impacts the value that lenders and their partners can provide.

The delays intrinsic to traditional lending processes make embedded lending a more attractive option for lenders looking to offer financing to various types of businesses, especially those whose customer base is typically excluded from accessing loan products.

The Business Value of Embedded Lending

By reducing friction across processes, embedded lending opens up more options for lenders to provide customized solutions for banks, credit unions, and other financial institutions that effectively meet their customers’ needs and uphold their quality standards.

Here are some ways embedded lending can enhance a lender’s business value:

Remaining Competitive

As more companies leverage embedded finance to offer a fast, streamlined, on-demand customer experience, there will likely be more competition in the lending sphere.

Remaining competitive will require increasing customer engagement through seamless loan accessibility, which will then lower the barrier to a financial institution’s myriad loan offerings. Investing in modern loan origination software for banks and credit unions will help bridge this gap and give lenders a competitive edge.

Revenue Diversification

Besides the increased loan accessibility, embedded lending also creates more opportunities for lenders to grow their  business partners’ revenue by adding more income streams. Streamline the lending process with an advanced loan origination software that offers a variety of lending options – from personal loans to commercial loans.

Determined by the rules and criteria set, loan approvals can be achieved instantly rather than days or weeks. Faster approvals can create a larger stream of cash flow, which is achievable through a customized, scalable lending solution.

Enhanced User Experience

When businesses partner with lenders who can increase their loan offerings, they can effectively boost customer satisfaction and loyalty, ultimately increasing their revenue. The lenders providing these solutions gain some of that star power, becoming a reliable and lucrative partner and fortifying a more trusting relationship in the process.

Unleashing Embedded Lending: Key Use Cases for Lenders

So, how does embedded lending work in practice for lenders? And how can financial institutions leverage this offering to enhance their business value? Let us explore the top five use cases.

#1 A Fast, Secure E-commerce Experience

The e-commerce industry is a prime market for lenders to offer embedded lending, mainly because many e-commerce shoppers make instant purchases. Shoppers tend to apply for POS loan options if the financing experience seems fast, simple, and secure and does not necessitate jumping into an entirely new platform to do so.

Embedded lending helps lenders offer instant secure financing to retail businesses, reducing the time customers typically spend completing potentially unsecured, lengthy third-party transactions when applying for traditional POS loans.

#2 Flexible Payment Options for Point-of-Sale Financing

Similarly, the flexibility of embedded lending options enables businesses across the retail industry to offer more flexible POS payment options, which translates into higher customer engagement, increased cart sizes, and lower e-commerce drop-off rates.

When lending software empowers customers to make flexible POS payments, these customers can automatically apply for credit at checkout instead of waiting to start the loan origination process at a third-party financier’s website, application, or in-person.

#3 Convenient Financing for Rental Platforms

The huge demand for housing in urban areas is also a lucrative opportunity for lenders to offer tenants and property owners convenient mortgage or consumer loan options through embedded lending. Customized financing simplifies rental transactions and enables both parties to participate in a flexible repayment process.  

For instance, property owners can provide flexible loans to tenants who are unable to pay the entirety of a month’s rent payment, whether due to a sudden financial emergency or loss of income. Lenders can offer loans to these tenants if there is sufficient evidence of their ability to pay off the loan, helping property owners maintain trusting relationships with their tenants.

#4 Integrated Lending in the Marketplace

Ultimately, when financial institutions integrate innovative financing options like embedded lending into the marketplace, they significantly reduce the barriers to loan origination for their customers. Such a strategy helps drive transactions and boost sales, enabling lenders to stay ahead of the competition and grow their loan portfolio.

Driving Financial Inclusion through Embedded Lending

Importantly, embedded lending drives financial inclusion for consumers who typically cannot access loan options with the traditional lending process. Whereas traditional processes often use outdated algorithms that do not fully capture each applicant’s complex financial history or credit rating, embedded lending takes a more thorough, holistic approach.

Here are some ways embedded lending promotes financial inclusion:

Providing Credit Access to Underserved Populations

According to Experian, the traditional credit scoring system excludes communities from accessing credit products at multiple levels:

  • Thirty percent of individuals in low-income neighborhoods are considered “credit invisible” compared to a meager five percent of those in high-income ones.
  • Forty percent of “credit invisible” individuals are under 25, with 65% of those between 18 and 19 lacking credit history.

However, these communities are growing, meaning individuals will likely require credit financing to make large purchases. Embedded lending can resolve these systemic barriers to credit access and provide loan options to traditionally underserved communities.

Leveraging Alternative Data Sources for Assessing Creditworthiness

Instead of focusing on traditional data sources like credit history to determine creditworthiness, lenders can use alternative ones, such as individuals’ rent and utility payment history. These data sources enable lending institutions to reach communities traditionally ranked unqualified to access certain credit products.

Making faster decisions on credit applications is possible with embedded lending because lenders can support businesses to meet their customers’ financing needs without relying on manual or outdated processes to decide who qualifies for credit.

Expanding Lending Opportunities to Individuals with Limited Credit History

For individuals with short credit history, embedded lending presents opportunities to access types of credit that would otherwise be inaccessible if they applied for them through traditional lending. Lenders can then expand their customer base and serve customer bases that may typically not qualify for credit elsewhere.

Embedded Lending With an Advanced LOS

Although embedded lending offers lenders more opportunities to provide financing to customers, they must also have the ability to seamlessly integrate into various existing platforms or infrastructures to be successful.

That is where an advanced loan origination system (LOS) like Fuse comes in, giving lenders a completely customizable platform to integrate and embed seamlessly.

Take a look at these considerations for financial institutions on implementing embedded lending, and how Fuse can help make it possible.

Technical Complexities and Solutions for Seamless Integration

Like any other novel technology, it can be challenging to fully integrate a lending solution into a financial institution’s current infrastructure, especially one that uses the embedded lending approach.

For example, some lenders still use outdated legacy systems to handle their loan origination processes, making them slow from start to finish. Additionally, many of the new solutions on the market require some level of software development experience in order to operate it, let alone customize it to meet customer needs.

Luckily, Fuse is a fully customizable, scalable, and virtually low-code LOS designed to grow with a lender’s loan portfolio. It can be tailored to meet any lender’s custom software requirements—without needing prior coding experience to manage the platform.

Regulatory Compliance and Data Privacy Considerations

As any lender knows, processing consumer data comes with the responsibility of strict data privacy and compliance regulations. One way to secure customer data 24/7 is to fully comply with regulatory frameworks such as SOC, which helps ensure minimal data risks.

Fuse is SOC 2 Type 1 and 2 compliant, meaning the platform secures data from potential privacy and security risks year-round—providing financial institutions and their customers peace of mind.

Risk Management Strategies for Responsible Lending

Managing risk throughout the lending process is critical to ensuring a lender upholds responsible lending standards, starting from loan origination through disbursement.

With Fuse, lenders can effectively manage all these processes in one platform, providing the oversight needed to practice responsible lending and minimize the chances of fraud.

Automation, AI, and Machine Learning: Streamlining Loan Origination and Underwriting

Today, many companies leverage AI and machine learning-enabled automated tools to make credit decisions, speeding up the rate at which credit applications are accepted or rejected. These technologies can dramatically augment a lender’s internal loan origination and underwriting capabilities so the lender can serve more customers effectively.

Fuse streamlines each step of the lending process, speeding up loan origination and underwriting while reducing the overall margin of human error.

Data Analytics for Accurate Risk Assessment and Decision-Making

Without data analytics, lenders have limited visibility into the statuses of loans and lending projects. Lending requires financial institutions to accurately evaluate numerous documents, requirements, and approval stages at the same time. Not only do smart decisions need to be made and risks properly assessed, but they must be done so quickly.

With Fuse, lenders can establish self-service rules to help them manage risk throughout lending, reducing the time spent making decisions and training individuals to identify risks in credit applications.

Regardless of the scale at which you provide loan solutions, if you are looking to optimize your current lending workflows and be an invaluable asset to your partners with embedded lending, Fuse can help.

Schedule a demo to see how Fuse can enhance your loan origination today.

CFO. 76% of Executives Say Embedded Lending is Massive Growth Opportunity.

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Unlocking the Power of Embedded Lending for Financial Institutions
Loan Automation

Unlocking the Power of Embedded Lending for Financial Institutions

As the lending market grows, savvy professionals in the financial industry are embracing innovative solutions like embedded financing—a faster, more organized, and more streamlined approach to providing loan products to customers.
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