Embedded finance is rapidly reshaping the small business lending sector, radically changing how financial institutions assess borrower creditworthiness.  

Consider these statistics: 

  • Sponsor banks say more than 51% of their earnings and deposits are due to embedded finance partnerships. 

Embedded finance’s influence largely stems from its ability to integrate data from multiple sources into the small business loan application process. This enables lenders to assess applications with more accurate, dynamic insights into the company's financial health and potential. This data-driven approach reduces risk for lenders and offers small businesses quicker access to funds.  

The Rise of Embedded Finance

Traditional small business lending models rarely provide a comprehensive view of a business’s ability to repay a loan, especially for new or small businesses without established credit histories. As a result, many small business owners can’t access the capital they need. In fact, 38% of small businesses say roadblocks to obtaining capital are a primary reason their business failed. 

These inefficiencies have paved the way for embedded finance, which offers a more accessible alternative to traditional lending. Through Application Programming Interfaces (APIs), embedded finance platforms collect copious amounts of data about a business’s transactions, operations, and finances, offering lenders a more extensive and up-to-date picture of a business’s performance.  

As momentum for embedded finance continues to build, it presents an opportunity for lenders to leverage its power as a growth strategy. At the same time, it can be a threat to financial services providers who aren’t on board with it. One Accenture report highlights that up to $32 billion in traditional banking revenue will likely transfer to embedded financing. The earlier the adoption, the greater the advantage will be for embedded finance lenders. 

The Value of Data in Embedded Financing for Lenders 

Lenders previously relied on credit scores, financial statements, and collateral to assess a borrower’s risk and make loan decisions. While they offer some helpful insight into a business’s financial health, they don’t always provide the most accurate depiction. Because of this, many SMBs experience challenges when applying for financing through traditional channels. 

Embedded finance taps into data from multiple sources, including sales statistics, transaction histories, inventory, customer experience, and more to arm lenders with relevant data intelligence. The benefits are numerous: 

Real-time Insights and Predictive Analytics 

Financial statements can be irrelevant, incorrect, or outdated. Embedded finance platforms solve this problem by accessing real-time data illustrating a business’s current financial standing and loan eligibility, enhancing decision-making for lenders. Additionally, advanced analytics and machine learning technologies empower embedded finance platforms by using historical data to predict future behaviors and trends. With this, lenders can anticipate any challenges or opportunities a business might experience. This can lead to more strategic decisions during the loan process. 

Enhanced Risk Assessment

Multiple data sources offer a broader view of a potential borrower, improving risk assessment for lenders. For example, a lender can consider alternative metrics, including customer retention, payment patterns, transaction history, and sales volume.  

Automated Regulatory Compliance

Meeting regulatory compliance is a core challenge among fintechs and financial institutions. Embedded financing systems address this challenge by leveraging data and automating and documenting the regulatory reporting processes. This ultimately reduces the risk of non-compliance and resulting fees. 

Smarter and Faster Decisions

Embedded finance utilizes machine learning and AI, significantly reducing the time to approve a loan and facilitating faster decision-making, which is essential to today’s SMBs operating in a fast-paced market. 

Higher Conversion Rates

With more accurate risk assessment and more informed decision-making, overall, embedded lending converts more leads into clients, ultimately increasing ROIs. Dollar for dollar, embedded finance offers a higher return on investment than traditional lending models. 

Expanded Reach and Cross-selling Opportunities 

Through data-driven insights, financial institutions can extend their services to a wider demographic that has previously been underserved. Data can also identify cross-selling or upselling opportunities for other financial products, thus, increasing ROI and bottom line. 

Challenges of Embedded Finance for Lenders 

The advantages of embedded lending far outweigh the challenges. But disadvantages do exist. Some of the key concerns are as follows. 

Insufficient Credit Risk Assessments 

While embedded lending should ultimately enhance risk assessment, partnering with the wrong technology provider can do the opposite. There’s a potential for revenue loss if a loan isn’t paid off. Therefore, it’s essential to partner with providers that use smart risk assessment models to lower the risk of loan defaults. 

Data Privacy Concerns 

Data is a significant aspect of embedded lending, and as such, leveraging its use comes with some risk, particularly with the privacy and security of sensitive data. The best embedded lending platforms have safeguards built into the system. Partnering with a reputable embedded lending provider that proactively integrates data privacy measures can alleviate some of the worries about data getting into the wrong hands. 

Identity Theft and Fraud 

Embedded lending platforms exchange and utilize large amounts of financial and personal data. Unfortunately, we live in a world of deep fakes, identity theft, and cybercriminals, all of which increase the risk of identity theft and fraud. It’s essential to have robust fraud prevention and identity verification measures to protect both lending platforms and SMBs. There are AI solutions to enhance protection in these areas. 

Regulatory Challenges 

While working with a technology provider that has robust regulatory compliance measures in place can minimize the risks of non-compliance, regulatory mishaps are always a concern for lenders. Sponsor banks don’t have control over their fintech partners' regulatory policy controls. Nonetheless, with multiple stakeholders, it’s essential to proactively navigate these challenges to avoid penalties and fines. 

Benefits of Embedded Finance for SMBs

Embedded finance doesn’t just benefit financial institutions. There are many advantages for SMBs. By integrating financial services such as lending into non-financial business ecosystems, SMBs experience a more convenient, cost-effective, and streamlined loan application process. 

Embedded finance platforms also offer flexible, data-driven lending solutions tailored to the specific needs and cash flows of businesses. Additionally, the ease of accessing personalized loan solutions can help businesses scale their operations more effectively. This can help them maintain a competitive edge and position them for sustainable success. 

Conclusion 

Data plays a crucial role in embedded finance lending by providing comprehensive insights to assess creditworthiness, personalize lending options, and manage risk.  

As data collection and analysis technologies continue to evolve, embedded finance will further transform small business lending for both financial institutions and borrowers. Effectively leveraging data can help financial providers offer more inclusive loan products that meet the unique needs of SMBs. 

Biz2X is at the forefront of the embedded technology revolution, empowering financial service providers and SMBs through innovations that unlock new opportunities. The experts at Biz2x are here to help with adopting the latest trends and staying relevant while being part of the future of things to come, whether it’s embedded finance or another revolutionary trend that changes the way business is done.