Embedded lending as a mechanism for expanding access to loans

What is embedded lending – and how does it promise to broaden financial inclusion for people in developing markets? Discover how the growing digital footprint of MSME entrepreneurs may be the key to expanding financial access.

In the quest to broaden financial inclusion for people in developing markets, financial service providers are increasingly looking to the potential of embedded lending.

Embedded lending is the contextualised integration of lending services into platforms designed for other purposes. For example, Buy Now Pay Later (BNPL) payment options offered during search or checkout on ecommerce platforms, or loan offers built into payroll disbursement platforms.

In the recent past, these types of lending offers might have been unavailable to MSME (micro, small and medium enterprise) business owners in the developing world due to lack of traditional proofs of creditworthiness. Now, however, these entrepreneurs’ increasing adoption of digital business tools like marketplaces, payment solutions, stock management, and accounting solutions are helping them create an ever-growing digital footprint.

Each individual digital footprint offers an opportunity for behaviour analysis and solvency assessment – and the possibility of expanding financial access through embedded lending to MSME business owners using digital platforms.

Platform users as loan customers

Another promising context for embedded lending is digital service platforms, which have become a fast growing source of employment throughout the developing world. In Africa, ecommerce platforms like Jumia, Konga and Takealot, as well as ride-hailing platforms like Uber, Yango and Heetch, are attracting increasing numbers of MSME entrepreneurs looking to work as free agents, casual earners, or to provisionally supplement other sources of income, some or all of which may be informal. Their work on platforms, documented through an expanding digital footprint, opens up the possibility of deeper participation in the formal economy through access to finance via integrated loan offers.

Embedded loan offers meet at the intersection of the platform, the financial service provider (FSP), and the platform user. Each has their individual needs, and there are significant potential benefits for each in terms of efficiency, effectiveness and inclusion.

Benefits of embedded lending

For FSPs, benefits include access to a potentially huge new pool of prospects, along with relevant real-time behavioural data with which to evaluate creditworthiness. With the right technology and behavioural analytics expertise, the FSP can score the whole platform’s user base daily and pre-qualify creditworthy MSMEs for loans, proactively pushing offers to them through the platform. If leveraged intelligently, platform data may help FSPs broaden their offer to customer segments formerly excluded due to failing to meet traditional loan prerequisites.

MSMEs benefit from access to loan offers targeted to their needs and their ability to repay. By working with the transactional and behavioural data they have stored in the platform, loan decisions can be made automated and frictionless. Automated repayment through a Repay As You Earn approach removes potential sticking points from the repayment process while adapting to the borrower income, thus helping ensure that payments are made regularly and on time, and allowing them to build a strong record of solid repayment.

Finally, platforms benefit from embedded lending as it increases the value of their service to potential users. Platforms may see an increase of engagement and retention from users who take offered loans and benefit from new-found inclusion.

Requirements for embedded lending

Platforms and FSPs considering embarking on an embedded lending journey should remember that partnership is essential when it comes to creating financial opportunity for all parties.

Platforms need to work in partnership with FSPs to provide comprehensive data, responsibly and securely, about the users on their platforms so that FSPs can make the best, most responsible loan offers. Another thing is that the platform needs to have a certain baseline level of trust with its users. If the platform has a reputation for supporting users, embedded loan offers may be seen as an additional benefit that’s attractive. Platforms that don’t have such a reputation, however, may see embedded loan offers not taken up.

FSPs should consider how to adapt their loan offers to MSMEs and platform workers, not simply in terms of scoring, but in terms of UX/UI. While platform users may have a certain level of digital sophistication, they may not have a history of taking formal loans, especially through digital apps. That means that offers must be made in the clearest, most transparent way possible, so that they can choose whether or not to take a loan in absolute confidence. Finally, the FSP needs to make sure that all data is handled safely and responsibly.

Lending-as-a-Service (LaaS) partners

Last but not least, embedded lending requires technical expertise and experience scoring and crafting loan offers from platform data – experience not all FSPs can offer on their own. For this reason, many digital platforms looking to launch their first embedded loan offer may seek out a technical partner who can provide Lending-as-a-Service (LaaS). The LaaS partner brings their expertise to the table, acting as an intermediary between the platform, the lending institutions, and the platform users, to help make sure the embedded loan products are best designed to help all parties achieve their aims.

With the right research, preparation, and partners, embedded lending offers considerable promise for the increasing number of digital platforms ready to make the leap. It can offer new avenues to financial inclusion for MSMEs, while helping platforms stay one step ahead in our rapid digital evolution.

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