Fuelled by the power of embedded finance, embedded lending is pushing the boundaries of SME funding to new frontiers. Mikkel Velin, Co-CEO at YouLend, explores the trends shaping the future of borrowing and what this means for the lending industry in 2022.
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.
On the other side to consumer financing, a parallel trend has emerged rapidly in the B2B space in the UK, with e-commerce platforms and payment service providers (PSPs) from outside of the traditional finance sector, lending directly to their business customers. In 2022, the prevalence of embedded lending, which is still ripe for the taking in Europe, is predicted to surge across the region as SME demand for finance continues to grow on a global scale.
This will bring many benefits. After all, it’s high time that small businesses across Europe were offered alternative avenues to accessing credit. Traditional, bank-based lending is plagued by low approval rates, slow decisioning, poor service and bad onboarding experiences. New players have an opportunity to leverage their technology capabilities to offer excellent service offerings to their merchants, and benefit from those strong customer relationships.
With this in mind, it’s clear that embedded lending will continue to have a profound impact on the future of borrowing. But what, specifically, can we expect to see in 2022?
1) Collaboration will be key to survival
In a competitive landscape, simply staying in your lane is not enough. The catch-all phrase ‘everyone’s a fintech now’ certainly has some truth. But in 2022, firms who aren’t already offering critical ancillary services to customers will have to reconsider their approach in order to stay ahead of their rivals.
Embedded finance technology allows firms to build directly on the foundation of their future growth. Doing business in the digital age is about enabling your customer community to grow 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) BNPL will open the door for growth in the B2B space
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.
But we are only just beginning to scratch the surface when it comes to B2B – which is surprising considering the scale of the opportunity at hand. Estimated to be over five times larger than the B2C market, B2B SME lending in Europe remains antiquated and ripe for transformation.
As companies and consumers gain more and more confidence in the technology that underpins rapid access to funding, opportunities to utilise embedded finance across multiple sectors will continue to snowball in 2022.
3) eCommerce platforms will overcome traditional hurdles to offer financing
Whilst the huge growth of BNPL has been well documented, lesser known is the rapid growth of eCommerce platforms offering lending solutions to their business customers in the UK. Via embedded lending, challenges that have prevented other market players from becoming lenders in the past, such as building capital and having strong economies of scale, can be sidestepped.
Thousands of SME customers are now accessing credit via e-commerce platforms, such as eBay, as a source of funding. Revenue-based financing provides a flexible alternative to fixed amortizations offered by many traditional banks; access to more data to assess credit risk means loans can be approved much faster.
The result? More customisable, accessible, and cheaper sources of funding for SMEs whilst avoiding the lengthy processes to determine creditworthiness, expensive fees, and high interest rates that so often come with traditional lenders. Flexible risk models allow a much wider pool of merchants to be approved for financing, mirroring the success of micro-financing in bringing growth to a sector often overlooked by banks.
Therefore, it’s no surprise that in 2022, the uptick of e-commerce platforms offering embedded financing options in the UK will continue to boom while European players start to wake up to the opportunity.
Whilst each of these trends are influencing traditional lending structures in their own way, they are also working together. At the centre of all three lies the harnessing of data and technology to create a better product and customer experience. Certainly, invention isn’t always needed for innovation. Rather than reinventing the wheel, there’s tremendous value to be had in taking stock of what exists already to find a better way of doing things.
Those that recognise this and act upon it to seize the embedded lending opportunity at hand will be the ones to not only survive but thrive in 2022. I for one am excited to see how the lending industry will continue to evolve across the UK and in Europe in the new year – and beyond.
