The Consumer Credit Economy MonitorEdge Report

Small Businesses Want Embedded Lending, So Why Are They Not Getting It?

August 2024 Small businesses are eager to access embedded lending, but many are left out of the fold. Blame the lenders — or the complex embedded finance landscape.

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    Small businesses and microbusinesses are eager to access embedded lending.

    Some want to go further and integrate embedded lending into their own platforms. The benefits of smoother cash flow and happier customers are worth it.

    But often, the embedded lending ecosystem stands in their way. Lenders face many technology and infrastructure integration issues in offering these products, and most are focused on consumer lending rather than small businesses. The demand for embedded lending is growing. Will the lending ecosystem rise to the challenge?

    Small Businesses Are Keen to Switch to a Lending Provider Offering Embedded Lending

    Embedded lending is attractive to consumers and small businesses alike that prioritize smoothing out bumpy cash flows. For the smallest businesses, accessing financing solutions directly within platforms reduces purchasing frictions and helps to alleviate cash flow issues, among other benefits. Some small businesses even partner with FinTechs to offer their own embedded financing options. Providing superior customer experiences can drive loyalty, increase sales and provide a competitive edge in a crowded market.

    Data from entities that have already used embedded lending — individuals as well as microbusinesses and small businesses (MSBs) — speaks volumes. Many would switch to a lender that offers embedded lending — presumably for the access. Among MSBs, 69% said they are highly interested in switching to a lender offering embedded lending solutions. Consumers echoed that sentiment, with 43% highly interested in turning to providers offering embedded lending options.

    Given the enormous interest, why are so few consumers and MSBs using embedded lending?

    Most Lenders Prioritize Embedded Lending for Consumers and Not for Small Businesses

    In the emerging landscape of new financial services, small businesses are wielding power over developing and delivering new financial products. The embedded finance market is slated for growth, expected to reach $80.7 billion in 2024. With a compound annual growth rate of 18.75%, it could reach $228.8 billion by 2030.

    MSBs’ interest in switching to providers offering embedded lending is a case in point. However, embedded finance’s complex landscape does not necessarily match their desire.

    “We see 80% of lenders offering embedded lending products to consumers,” Arvind Ronta, global head of BNPL and embedded finance at Visa, told PYMNTS. “But there’s a huge gap in how these lenders are offering embedded lending products to small businesses.”

    Most lenders are more focused on consumers than they are on MSBs. PYMNTS data showed that 83% of lenders that lend to consumers offer at least one embedded lending product. By the same token, 55% of lenders serving smaller businesses offer embedded lending. The current embedded lending landscape leaves many MSBs in the cold without access to embedded lending products.

    The Complexity of Integrating External Platforms Is a Big Obstacle for Lenders — and a Missed Opportunity

    Many lenders are overwhelmed with the number of hurdles they face in integrating embedded lending products with external platforms. This leads them to miss the opportunity to provide embedded lending to MSBs. Some of the biggest challenges that lenders not currently offering embedded lending face include technology integration and infrastructure (cited by 34%) and operational issues (cited by 23%). Among lenders serving individual consumers, 58% have at least one third-party platform integration, such as with a marketplace or eCommerce platform, while 64% of lenders serving MSBs offer at least one integration. Those small businesses, too, face similar challenges with integrating technologies and payment systems into their platforms. Both sides feel this pain.

    This complex landscape, however, makes one thing clear about the future of financial services integration. There is work to be done.

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    PYMNTS INTELLIGENCE

    PYMNTS Intelligence is a leading global data and analytics platform that uses proprietary data and methods to provide actionable insights on what’s now and what’s next in payments, commerce and the digital economy. Its team of data scientists include leading economists, econometricians, survey experts, financial analysts and marketing scientists with deep experience in the application of data to the issues that define the future of the digital transformation of the global economy. This multilingual team has conducted original data collection and analysis in more than three dozen global markets for some of the world’s leading publicly traded and privately held firms.

    The PYMNTS Intelligence team that produced this report:
    Managing Director: Aitor Ortiz
    Senior Analyst: Yvonni Markaki
    Senior Writer: Anna Sofia Martin
    Content Editor: Matthew Koslowski

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