What Does Embedded Finance And Apis Mean For The Lending Industry?

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Never before have the times been more volatile and dynamic than they are right now. The legacy lending industry has been hampered by the recession, regulatory pressures, financial reforms, and the recent global pandemic. As a result, the lending industry faces a number of challenges when it comes to loan approval and disbursement.

Cultural Shift: Manual systems and processes are used by traditional lending institutions. Even when the systems are automated, much manual labour is required. The applicant must usually take the paperwork to the branch or office.

Rising expectations: Consumers today are more savvy and well-informed than ever before. They expect their banking experience to be convenient and personalized. According to a survey, future generations will prefer omnichannel banking to visiting physical bank branches.

Lack of personalised experiences: Although NBFCs claim to provide highly personalised services to clients in order to differentiate themselves from traditional lenders, the execution is difficult. Customers are frequently dissatisfied because loan disbursement norms are generalised packages, ...
... whereas customers' needs vary.

Tedious lending process: The lengthy processing of documents and loan applications takes a significant amount of time. Lenders must also keep a large workforce on hand to manage the work, which adds costs and expenses.

Technology platforms: To serve customers remotely, lending institutions are expected to provide mobile banking via internet banking and mobile apps.

Other competitors: Banks and NBFCs compete with each other as well as other lending institutions such as microfinance institutions, retail and technology firms that leverage their existing customer base and financial expertise to venture into banking, payment through online payment gateway, and lending services.

However, operational challenges bring with them new opportunities. So, how does embedded finance assist?

Embedded Finance and API in the Lending Industry
Because COVID-19 has had such a profound impact on our lives, traditional lending models have come under intense scrutiny. The lending landscape is rapidly changing, with financial services no longer being provided by traditional financial institutions. Non-financial companies can position themselves as service providers with a variety of financial products to meet the needs of their customers thanks to embedded finance.

Previously, if a company wanted to provide financial services, it had to establish a separate domain within the organization. This often required significant investment and took years to develop and become profitable. However, the embedded finance infrastructure enables fintech experiences for end users and at the point of demand within non-fintech platforms.

The next stage of evolution is embedded finance. Shopify, for example, was a pioneer among e-commerce companies in allowing merchants to accept payments directly through the platform rather than through a third-party best online payment gateway. (BaaS) Business as a Service is accelerating the spread of embedded finance. These platforms enable online merchants to connect to financial systems via APIs and efficiently integrate financial services into user experiences.

Role of Embedded Finance in Lending
As embedded finance becomes more common, it has the potential to drive growth and opportunity in the lending ecosystem. Prior to the introduction of embedded finance into the lending scene, there was a chasm between the consumer and the company with which they did business. To bridge the gap, the consumer needed to contact a traditional lending institution, such as a bank or a lender. To finance the purchase, the consumer had to either obtain a credit card from the bank or approach a lender for a loan. With embedded finance, the customer can apply for and receive a loan at the time of purchase. Amazon, for example, offers a "Buy now, pay later" option that divides the purchase price into an automatic loan from the store rather than a third-party lender.

The role of the third-party lender or bank diminishes with embedded finance. It enables financial institutions to bridge the gap between themselves and the consumer. The service provides seamless integration as well as a cost-effective lending experience.

Future scope of embedded finance in the lending industry
As newer lending models emerge, consumers' perceptions and use of financial products change. The current tech-savvy generation prefers to open an account or apply for a loan without having to interact with a traditional financial service provider. Customers' willingness to share their data over the internet also influences their preference. The preference also drives the customer to seek out a product that provides them with competitive pricing and convenience.

Several organisations are considering offering financial products, and with technology evolving, there are several options:

* Create their own fintech tools and launch a financial product.
* Collaboration with existing fintech titans to resell their financial products.
* In collaboration with an embedded finance company, offer a financial product.

Embedded finance is the most promising of the three options discussed above, driving the wave of embedded lending and disrupting the fintech space.

Embedded Lending – the Next Big Thing
Embedded lending is here to stay and is gaining traction for a variety of reasons.

Increased digitisation: As businesses and customers move towards digitization, contacting a traditional lender has become obsolete. As financial services become more popular through digital channels, more aggregators and marketplaces are emerging, providing access to financial services with embedded lending.

Newer revenue channels: With rising competition, more businesses are looking for new ways to monetise and develop alternative revenue streams. Offering financial products is one method, and embedded lending is one method for optimising that.

Pandemic constraints: With social distancing norms and lockdowns, now is the time for disruptions in how financial services are delivered. Trust and data security are also issues. Customers prefer to purchase services in bundles, which is ideal for non-financial service providers offering an embedded lending product.

Embedded lending plays an important role in the lending ecosystem. With its deep and seamless integration, it makes more sense because financial products can be customised and made more relevant.

Banks will collaborate with fintech to create lend tech: financial institutions will use their vast data to acquire new customers, improve service to existing ones, customise financial products, and enable repeat transactions.

Digital platforms will play an important role in the distribution of financial services: embedded finance will enable digital platforms to serve their customers more efficiently and in ways that traditional lending models cannot. Customers now expect digital platforms to fulfil their needs more deeply, to foster innovation, and to play a pivotal role in distributing financial services to customers, owing to changing dynamics.

Innovative financial products: Embedded finance enables lending institutions to tailor financial products to the needs of their customers. Furthermore, new data sourced from platforms will facilitate advanced underwriting and customer approval.

Vertical SaaS growth: Embedded finance has enabled SaaS companies to provide financial services alongside their core software products. Most customer problems can be solved with customised software products.
Improved financial services: More customers can be acquired in a more efficient and cost-effective manner, while also bringing repeat customers. This increases lending institutions' margins, implying that they can offer the same financial products to customers at lower costs.

To Sum Up
Embedded finance is here to stay because it is driving how lending institutions will operate. Digital platforms are critical in the development of a new generation of efficient and innovative financial products. To stay ahead of the competition, businesses must use embedded finance. Lenders benefit from higher margins. To do so, they must collaborate with digital platforms in order to gain access to the diverse pool of customers available to them.

You need the right fintech service provider to have a financial service that can cater to all social demographics and economics.