SMEs are seen as the backbone of any economy. They help create employment for a large part of the workforce, drive growth and build competition. The number of SMEs in India is estimated to be at 42.50 million, making the nation have the second largest number of SMEs in the world.

Although SMEs are the growth engines of our economy, they are unfortunately seen at the end of the line when it comes to securing fast access to credit. They currently face a $330 billion credit gap, making them a part of an inequitable lending structure. Embedded Lending is set to change this and boisterously come to their aid.

What is Embedded Lending?

Embedded lending is an example of Embedded Finance. It is an innovation in FinTech that allows the lending of financial services through non-financial services. This seamless integration expands the market for lending and credit, making it easily accessible to those who need it the most. It eliminates third parties from the picture, saves the cost of infrastructure, and offers a lending experience to users in a matter of minutes.

Securing loans from traditional financial institutions like banks often ends up being a long and complicated process, requiring multiple trips to the banks, third party involvement and heavy paperwork. 

With embedded lending, the entire lending ecosystem becomes smooth, as it directly connects the business and customers. The lender can access the customer’s credit history and spending pattern in minutes. Based on the data, the lender can set the amount to be disbursed as a loan and reduce credit risks. The same data can be used to understand the users better and offer attractive rewards as an incentive.

The rise of non-financial services that offer lending services directly to the end-user is creating an opportunity in making credit easier to access than ever before. This model is growing exponentially and is expected to change the way we look at the lending market. Revenues for embedded finance services were $16.1bn in 2020, and are forecast to reach $140.8bn by 2025.

Embedded Lending is Challenging the Status Quo

Traditional systems of lending are manual, laborious and time-consuming. They no longer make sense to the modern customer who wants convenience, personalisation and a seamless experience in all his/her digital interactions. FinTechs understand this need which is why they are coming up with innovative solutions to enhance the lending process for customers as well as businesses. Embedded Finance is making waves in the lending industry by challenging the legacy systems and proposing to make credit give-and-take as smooth as booking a cab.

With embedded finance, the bank/lending agency is replaced with a single platform that integrates innovative lending services into the end-user experience. This opens the market to non-financial services that can provide automated banking services to a vast majority of users. With embedded lending, SMEs can access lending services through various platforms, allowing customers to manage their own finances, applying and getting a loan or credit card at the point of purchase.

Here are some examples of Embedded Lending for SMEs:

  • Buy Now Pay Later

Buy Now Pay Later (BNPL) is an option that converts the cost of purchase into an automatic loan from the online store, increasing the chances of a user purchasing the product. 

A lot of customers are already opting for BNPL, as it helps them get access to credit at their most time of need. According to the Q4 2020 BNPL Survey, BNPL payment in the country is expected to grow by 65.5% on an annual basis to reach $ 11570.7 million in 2021.

For MSMEs, BNPL helps them to purchase on credit and repay later as per their preference. This offers an opportunity to them to grow their business and manage working capital gaps, and pay more attention to their business than be overwhelmed with the lack of finance.

  • Accounting apps

Khata apps help small shopkeepers to manage their accounts by helping track the money owed to them through the means of a digital ledger. It has enabled small merchants to open up to the digital economy, helping the digital bookkeeping sector to take off.

Khata apps offer business loans and cash advances to its MSME and SME customer base using their platform data. This offers a single platform of convenience for the users and opens up more revenue streams for the lenders. 

  • HR Tech and Payroll Platforms

SMEs that use an HR Tech and Payroll platform can use the financial data to offer tailored credit directly to their employees on employee portals. Repayment can be done by deducting equal monthly instalments from the employee’s salary and the payment gets deposited directly to the lender. 

Such portals like Zimyo also offer credit at affordable rates which is usually unavailable in the open market. This also improves the retention and engagement levels of employees. 

Offering Hope for the Underbanked 

New generations of customers are relying less on traditional forms of credit. This evolving behaviour is being noticed and has changed the way companies view their operating models. Embedded finance can help get necessary financial products into the hands of those who have been historically denied loans and credit. 

Traditional banks may shy away from SME lending because of high risks and high costs. But with embedded lending, SMEs can have access to credit through innovative models. And lenders can access a large market of potential customers who are more than willing to participate in the process. This makes embedded lending a true innovation to the lending industry, as it makes us inch a step closer to financial inclusion.

By integrating technology into what SMEs use for their banking or employee management platform, SME owners can make credit accessible to their staff through a simple process. The employees can decide for themselves what kind of credit or loan they want to opt for and the SME owner does not have to worry about aspects such as understanding the regulatory and financial requirements that come with the loan. 

This inclusion will bring more people from SMEs into the digital economy and set up a more equitable credit system. Embedded lending also creates a huge opportunity for legacy providers that want to grow their financial products outside the ambit of legacy structures. Embracing the opportunities that embedded finance creates for their products and services and getting into the right partnerships with FinTech can help them embed their solutions into digital platforms, reaching out more to the modern, tech-savvy customer, as well as utilising the noble chance to offer credit to the historically underbanked populations.

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