Embedded Lending: Neobanks can Offer 4-Click Instant Funding Without Putting their Balance Sheet at Risk
The blog discusses the transformation of SME financing through neobanks' adoption of embedded lending, providing a seamless, efficient funding process that fosters financial independence, reduces credit risk, and enhances overall customer experience.Return to blog posts
There’s a portmanteau that perfectly describes the challenger banks that emerged from the ashes of the 2008 financial crisis: the fusion of neo and banks to create neobanks. The use of neo – another word for new – underscores their determination to disrupt the traditional banking model using the latest technology. These innovative providers of financial services constantly strive to make their offering more streamlined, frictionless, and accessible – and the emergence of embedded lending aligns perfectly with this forward-thinking philosophy.
Embedded lending – a subset of embedded finance – is empowering small and medium-sized enterprises (SMEs) to break down entrenched funding barriers. By leveraging alternative funding options that untether them from traditional lenders, SMEs can achieve financial independence – from making payroll on time, to buying stock for seasonal periods, to settling VAT bills. And it’s neobanks – working in partnership with third-party embedded lending vendors – that are providing them with a platform to access this vital finance at the point of need.
So, what is embedded lending? How can it help neobanks offer sustainable instant funding? And what are the benefits of 4-click instant funding for SMEs?
What is embedded lending?
A thirst among SMEs for frictionless, digital-first lending experiences that break the monopoly held by traditional lenders has been quenched by embedded lending. This process of integrating credit or financing products into non-financial businesses – or in this case neobanks – allows customers to access finance when they need it from a brand they trust. Crucially, the funding gap faced by businesses currently stands at a staggering $5 trillion. With the average bank approval rate for loans being only 30%, it makes it difficult for many small businesses to secure the necessary funding they need. To add to this challenge, the average time it takes for a bank to approve a loan application is between 3 to 8 weeks. Furthermore, only a few banks offer unsecured loans exceeding £25,000, which further narrows the financing options for businesses. These factors make it increasingly difficult for businesses to obtain the funds they need to grow and thrive, especially in today’s uncertain economic climate.
By harnessing a customisable API or white-label solution, neobanks can seamlessly integrate frictionless embedded lending options into their technology ecosystem; before tailoring them to meet SMEs’ needs – and the benefits are compelling:
- The entire lending process becomes faster, simpler, and frictionless.
- SMEs can focus on using the funds, rather than applying for them.
- It facilitates the point of need access to capital that SMEs crave, improving their cash flow management.
By working in partnership with alternative lending providers like Liberis, neobanks benefit from offering SMEs instant funding without putting their balance sheet at risk – while remaining cash rich.
Neobanks: lending challenges
Most neobanks claim they exist to ‘rip up’ the banking rule book, but there’s one sphere of financial services they have struggled to disrupt until now: lending. Rather than reoiling the lending model to make it a frictionless experience, they have been encumbered by regulatory challenges. For example, neobanks that have failed to obtain a full banking licence have been forced to run on an e-money licence model that does not permit them to lend out customer deposits, one of the key money makers for a bank.
Neobanks have also struggled with challenges surrounding credit risk. Their failure to augment the lending application and assessment processes with impactful automation leaves them reliant on outdated infrastructures that fail to flag high-risk customers that might default on their repayment obligations. Not to mention narrow credit scores, which typically focus on a borrower’s past financial information, leaving lending decisions at the mercy of dated factors like payment history and outstanding debt – rather than their suitability to repay the loan in the future.
Embedded lending: instant funding without the risk
By inserting alternative lending experiences into the moment the customer identifies a funding requirement, neobanks can shield themselves from the associated risk to their balance sheet. For example, revenue-based finance is an example of B2B embedded lending that allows SMEs to access funding based on their overall business revenue – not just their credit history.
By hinging creditworthiness decisions on real-time assessment of the current and – crucially – the future business situation – including sales, inventory, and reputation – the likelihood of repayment is based on the borrower’s suitability to repay it thereafter. Using this flexible approach, repayments can be made in line with the businesses cashflow – with more repaid during good months from a performance perspective.
This foresight removes the risk associated with traditional loan applications and assessment models, which rely on the number of transactions and payments made in the past – historic data that fails to horizon scan an SMEs future creditworthiness.
With the risk to their balance sheet mitigated, neobanks can tap into the other compelling benefits that an embedded lending platform offers, including expert underwriting, real-time analysis of vast data sets, and finance monitoring.
Partner with an expert
Success is not guaranteed when entering the lending space. That’s why most neobanks choose to outsource their embedded lending platform to the experts, rather than attempting to build it themselves – a trend that is being perpetuated by four key factors:
- Cost: A neobank is saddled with all the costs when conducting the project in-house. By partnering with a specialist third-party provider, extra revenue can be generated rapidly without the additional costs of building the lending platform from the ground up or the ongoing cost of developing software updates.
- Time to market: The development of embedded lending platforms requires significant investment in terms of time and resources – from building a technology platform to supporting customer onboarding. Specialist third-party vendors possess the skills and experience needed to deliver the project expeditiously. This ensures a quicker, more streamlined launch to market than building from scratch, enhancing customer satisfaction and retention.
- Underwriting expertise: Many third-party providers have an in-house team of underwriters with decades of experience, a resource that many neobanks lack. Instead of relying solely on digital approvals and declines based on credit scores, and because each individual business’ circumstances are different, they speak to the customer to get a full picture of their performance which helps to reduce the SME’s fears of rejection.
- Alignment of goals and objectives: By working with a vendor that aligns with its goals and objectives a neobank can harness their expertise to tailor the lending service they offer to SMEs. This will ensure it’s relevant to their customers’ needs, providing them with the holy grail: certainty of funding at the right time.
This brings the vendor selection process into sharp focus for neobanks seeking to harness the power of embedded lending to mitigate the credit risk associated with instant funding. They must trust the vendor from a security, technical, reputational, and strategic perspective. Take the Liberis/Tide partnership for example: the neobank has partnered with Liberis to provide unparalleled access to debt and equity for SMEs.
Benefits of 4-click instant funding for SMEs
Artificial intelligence can be leveraged to augment the embedded lending process, enabling a seamless and streamlined 4-click journey that has convenience, transparency, and personalisation at its core:
- See the offer: The lending functionality is seamlessly embedded into the brand’s existing customer journey, enabling an automated pre-approved offer to be made.
- Customise the offer: Real-time user experience optimisation customises the lending proposition depending on the brand’s offering and the customers’ requirements.
- Confirm details: The applicant’s details are processed instantly, and an auto-approval decision is made followed by an auto-approved offer.
- Sign the contract: The applicant accepts the offer immediately, gaining access to the funds almost instantly.
This white-label solution places the customer experience at the forefront of the lending journey via a neobank brand they already know and trust.
This smooth application process democratises instant funding for SMEs, which benefit from point-of-need access to capital and improved cashflow management; while the neobanks that embed it into their ecosystem improve brand loyalty and increase revenue through an improved user experience.
Impact of embedded lending on the lending industry
SMEs face an all-too-common existential threat: limited access to responsible and sustainable finance. This unwanted scenario is largely a symptom of legacy providers’ rigid lending frameworks that perpetuate erroneous assumptions that SMEs are too risky to engage with – depriving them of the funds they need to survive and thrive.
According to our 2022 survey commissioned with YouGov, 15% of SMEs say rejection is one of their biggest funding concerns. Embedded lending has the power to address this anxiety by facilitating financing without friction. To say it’s well-placed to go from strength to strength is an understatement: research by Bain Capital estimated that by 2021 around $12 billion in B2B loan transactions were made via embedded finance, which it expects to increase exponentially to between $50 billion and $75 billion by 2026.
Once obstructed by legacy providers’ antiquated systems and processes, SME funding applications have been given the 21st-century treatment thanks to the emergence of embedded lending – and its widespread adoption by neobanks. With rejections replaced by rubber stamps, SMEs can gain instant access to the funding that’s their lifeblood.
Core to this financial inclusion are the frictionless experiences that embedded lending facilitates. Reinforced by these alternative lending models, neobanks can offer 4-click instant funding safe in the knowledge that each applicant’s future financial posture has been considered – shielding their balance sheet from credit risk.
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