Posted: March 29, 2022 By Kieran Darmody

How embedded finance modernizes lending access and combats discrimination

Redlining is a practice that has long been outlawed in the US, but still rears its ugly head in less-obvious ways today. We take a look at how embedded finance can combat discrimination in lending.

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When we talk about fueling economic growth in the SME space, we often consider smaller loans as the catalyst without considering that these game-changing loans aren’t always equally available. Embedded finance, and Liberis as a part of the industry, is helping change that status quo.

What is “redlining” ?

“Redlining” is a practice that started in the 1930’s in the US that enabled banks to deny mortgages to people based on or zip code or neighborhoods with a greater share of people deemed more likely to default on mortgage. Using red ink, lenders outlined on paper maps the parts of a city that were considered at high risk of default.

This largely affected people of color, minorities and low income familities in urban areas, such as Atlanta, Chicago, & Detroit.

How does redlining affect America today?

While the practice was banned via the passage of several laws, some of the effects are still felt today. Many scholars point to redlining as a factor in wealth disparity.

And it doesn’t stop there; today we can see a trend called “reverse redlining,” where banks may engage in predatory lending in the same neighborhoods that were historically redlined.

How can embedded finance combat redlining?

While we’ve largely discussed mortgages and housing, redlining affected (and still affects) other types of loans as well.

Embedded finance options can combat redlining, by not taking zip code into account when considering a loan and focusing solely on business merit. Liberis bases credit-worthiness wholly on revenues, thus evening the playing field.

Liberis also takes a personable approach to credit worthiness; spending time to understand the history of the company as well as future plans while taking a look at current operations to get a deeper understanding of the client in order to make better decisions – for both parties involved.

Using transaction volumes, daily cash flows, and visibility to bank account balances means that Liberis can get an accurate read on feasibility of working together successfully. In this way, Liberis removes location or other demographic details entirely; each application is truly underwritten based on operational merit.

And once a merchant becomes a Liberis customer and everything has already been linked, access to future funds becomes a seamless process – enabling long-term growth and success; in fact, Liberis customers have used funding to grow revenues by 25% on average – half of whom would have delayed their growth plans or given up entirely without Liberis.

In this way, embedded finance not just about fueling economic growth, but it’s also a way to modernize and equalize access to financing.

Contact us to learn more about lending options and revenue-based loans.


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