Embedded lending is booming. Over the past year, we’ve seen huge numbers of retailers offering lending services to consumers with new buy now, pay later (BNPL) offerings providing a much-needed boost to spending in the sector.
SME demand for finance is set to continue to grow globally in 2022
In the UK B2B space, a parallel trend is emerging. Payment service providers (PSPs) and e-commerce platforms outside of the traditional finance environment are lending to their business customers directly.
SME demand for finance is set to continue to grow globally in 2022, bringing with it a surge in prevalence of embedded lending, which is still ripe for the taking in Europe.
It’s about time that small businesses across Europe were offered alternative routes to accessing credit. For years, traditional, bank-based lending has let SMEs down with bad onboarding experiences, slow decisioning, poor customer service and low approval rates.
Observing the growth in embedded lending up until now, it is reasonable to assume that it will continue to influence the way SMEs think about funding. But what specifically can we expect to see this year?
1) Survival will depend on collaboration
In today’s environment, ‘everyone is a fintech’. The popular phrase has a lot of truth, and the accessibility of technology has made the landscape more competitive; staying in your lane is no longer enough. In 2022, we will see firms dwarfed by their rivals if they don’t add critical ancillary services to their roster of offerings.
Embedded finance technology encourages firms to build directly on the foundation of their future growth. In the digital age, doing business is about enabling the growth of your customer community alongside you. With embedded lending, when the business customer grows, you grow. In this way, embedded lending has the power to elevate, not eliminate, players across the broader ecosystem.
2) B2B growth will be fostered by BNPL
One embedded lending trend that we’ve seen experience rapid growth and success is BNPL, enabling consumers to buy goods on credit and pay for them within a set period after the point of sale.
In the B2B space, we are only scratching the surface. A surprising fact considering the scale of the opportunity. Estimated to be more than five times that of the B2C market, B2B SME lending in Europe remains outdated and ripe for innovation.
As confidence in the technology that supports rapid access to funding grows, opportunities to employ embedded finance across many sectors will balloon in 2022.
3) SMEs will consider e-commerce platforms as a primary source for funding
The huge growth of BNPL has been well documented. However, a lesser-known story is the substantial increase of lending solutions being offered by e-commerce platforms to their business customers in the UK.
Challenges that have barred market players from becoming lenders in the past, such as having strong economies of scale and building capital, can be sidestepped with the help of embedded lending.
E-commerce platforms, such as eBay, have become a source of funding for thousands of SME customers who are now able to access credit. Revenue-based financing provides a flexible alternative to fixed amortisations offered by many traditional banks; access to more data to assess credit risk means loans can be approved much faster.
The results are more customisable, accessible, and cheaper sources of funding for SMEs. Additionally, they can avoid traditional lenders and the lengthy processes to determine creditworthiness, expensive fees, and high interest rates that accompany them. Mirroring the success of micro-financing, flexible risk models allow a larger pool of merchants to access financing, bringing growth to a sector often ignored by banks.
It is no surprise, therefore, that in 2022 the selection of e-commerce platforms offering embedded financing options in the UK will continue to expand while European players start to wake up to the opportunity.
While each of these trends are influencing traditional lending structures in their own way, they are also working together. The cornerstone of all three trends is the harnessing of data and technology to improve the available products and customer experience. Invention is not always necessary for innovation, and this is proof. Instead of reinventing the wheel, take stock of what exists already to find a better way to do things.
Those who recognise this and seize the opportunity at hand provided by embedded lending will be those who thrive in 2022. I for one am excited to see how the lending industry will continue to evolve across the UK and in Europe this year – and beyond.
