Visa: Embedded Lending Creates ‘Halo Effect’ for Repeat Transactions

You’ve heard of embedded finance. Get ready for embedded lending.

It’s a relatively new term to describe an important trend in consumer financial behavior, and Visa is among the companies that believe it is poised to take off, if its partners can educate consumers about its advantages.

“We’re still on the journey of educating consumers on how to think of these products,” Arvind Ronta, global head of BNPL and embedded finance at Visa, told PYMNTS’ Karen Webster recently. “The issuers, the sellers and providers all serve a role in driving education.”

As Ronta explained, “embedded lending is a subset of embedded finance — and that’s an important distinction.”

He noted that embedded lending is a term that encompasses any credit tool or borrowing capability that borrowers can apply for directly within a merchant, or provider, or FinTech’s platform environment.

Embedded lending, he said, “is contextualized to a transaction or a purchase,” as a consumer interacting within an app or experience does not have to venture outside of that ecosystem to gain access to lending options and then return to complete the transaction.

Visa, for its part, has seen success with its own embedded lending innovations, as Visa Installments have fostered “huge spike in conversions” when customers are presented with those options right when they are considering purchases. Embedded lending, he said, is valued by users as an effective cash flow management strategy.

Challenges and Opportunities

And yet, in terms of the disconnect, many customers are not even aware that they can use their credit in the form of installments at checkout at their preferred merchants — in effect, using the credit that they already have.

Joint research from Visa and PYMNTS Intelligence across six major economies across the globe shows that only 50% of consumers are satisfied with their current set of available options for financing. Three times more consumers are interested in it than have actually used it. The appetite’s there — and more than 40% of consumers say they would switch allegiances to firms and platforms that provide lending options.

Despite the interest, the hesitancy’s illuminated by the fact that only 15% of consumers have used embedded options. There’s a lack of trust that providers must overcome. Consumers know that embedded lending will require data sharing. Twenty-nine percent of consumers are somewhat comfortable doing this, and 37% are extremely comfortable, so the opportunity is there.

While that dissatisfaction and lack of trust herald significant challenges, Ronta said, they are “also opportunities.”

For the merchants who get it right — who get the lending options right, delivered at the right moment — embedded lending can be a strategic differentiator.

There are some must-haves, cautioned Ronta, who added: “The bar is high, in the world we live in, and in terms of what consumers expect.”

There needs to a good mix of installment plans, as defined in terms of rates offered and funding structures — whether those structures are merchant-funded, consumer-funded, or a hybrid thereof. Data-driven underwriting can extend offers across a variety of shopping personas, credit needs and credit profiles.

“The customers who are new to credit, or don’t have sufficient credit lines that could be thoughtfully underwritten,” Ronta said, “could be a huge opportunity for banks and lenders.”

That range of options, he said, offers the flexibility that consumers expect when shopping across a range of transactions, from retail to travel tickets.

Simple, consistent and full transparent language around disclosures of what customers should expect from the lenders can go a long way toward cementing trust, Ronta said. Customers checking out with Visa Installments know exactly know how much you should expect each month to repay to the issuer and at what rate, and how their data is being used, based on the information shared with the bank.

The Halo Effect

The rewards are significant for the enterprises that offer embedded lending options that meet expectations — they see repeat purchase rates on the order of 30%. And, because a significant percentage of younger consumers across Generation Z and millennial demographics have stated they are interested in embedded lending options (and most want to use a brand they trust), those repeat purchasing life-cycles can and will prove to be long-lived.

Sixty-three percent of millennials, the data shows, believe installment plans could help them afford items that they couldn’t have afforded otherwise.

As Ronta told Webster, “there’s enthusiasm for embedded lending — and it’s a huge opportunity.”