The impact of neobanks on the traditional banking model should not be underestimated: they are what Amazon is to the high street and what Uber is to local taxi ranks – a disruptive force that challenges the status quo. At the last count, there were 276 of these challenger banks globally – exponential growth considering the first players only emerged in the wake of the 2008 financial crisis. 

This shift from bricks-and-mortar branches housing narrow financial services to customer-centric digital offerings represents an inflexion point for small and medium-sized enterprises (SMEs). By embedding lending into their ecosystem, neobanks are providing SMEs with a frictionless and opportune alternative to traditional banks. No longer reliant on these legacy providers’ rigid lending frameworks, they are being empowered by an innovative approach to lending that delivers finance at the point of need – vital funds that can mean the difference between survival and ceasing to exist. 

So, why is embedded lending important to neobanks? How do traditional lending models restrict them? And what risks do face if they fail to move into embedded lending? 

Advantages of neobanks over traditional banks

It’s easy to say with the power of hindsight that it was only a matter of time before a new breed of provider challenged the traditional banking model by embracing digital channels. But the early trailblazers in the neobanking space faced a huge battle to alter a deep-rooted mindset: banking was the preserve of high street institutions, which consumers – until then – had entrusted with their finances.  

Thankfully for them, as the world began to recover from the 2007–2009 financial crisis, a symptom of this global event played straight into their hands: a growing distrust of big banks. Not least by SMEs, who were ready for an alternative to the clunky and restrictive financial services peddled by traditional banks for so long – and neobanks had the foresight to give them what they wanted: 

• Lower costs: These digital-first businesses have lower overheads because they do not have to splash out as much on property or people. They also focus on delivering a smaller range of services more effectively and profitably, without cutting corners. 
• Better customer experience: They offer a consistent, personalised experience compared to traditional banks, which provide clunky generic services and charge opaque fees. Their ability to streamline banking processes and tailor them to their customers’ needs has reshaped the financial services landscape.  
• Advanced technology: By leveraging innovative and low-cost digital channels they are delivering an increasingly comprehensive suite of banking services expeditiously. Meanwhile, traditional banks remain weighed down by antiquated legacy systems. 

Importance of lending for neobanks

For neobanks to offer SMEs a truly comprehensive digital banking service, they must break down entrenched barriers that have restricted their access to finance when they need it most. To achieve this, they must set themselves apart from legacy lenders by addressing short-sighted assumptions that SMEs are too risky to engage with.  

For too long, this myopic view has deprived SMEs of the funding needed to enter the market, achieve financial security, and scale the business. If they can’t get off the ground in the first place due to financial exclusion, neobanks’ other SME-focused services will be futile.  

By providing frictionless digital lending services that allow SMEs to access finance at the point of need, neobanks can attract and retain customers that recognise legacy lenders’ limitations. And by working in partnership with them throughout their lifecycle – from starting up to embarking on growth – neobanks can generate sustained revenue. 

According to the independent financial comparison website NerdWallet, Tide is the leading neobank when it comes to attractive small business loans. SMEs can apply for a loan that meets their needs in a matter of minutes, with the funds potentially available in around 24 hours. With this service powered by their embedded lending partner Liberis, Tide currently boasts £1bn worth of demand for business finance from SMEs each month. 

Limitations of traditional lending models for neobanks

To successfully augment the lending application and assessment processes with impactful automation requires investment, regulatory knowledge, and technical acumen. Otherwise, neobanks are left to rely on outdated legacy infrastructure that hinders their lending service – including:  

• Protracted loan application and processing times – if eventually authorised it might be too late for an SME that has a time-critical need for capital. 
• Reliance on credit scores which typically focus on an SMEs past financial information, rather than their suitability to repay the loan in the future. 
• Limited access to customer data or functionality to analyse it in real-time limits their ability to tailor their offering. 
• Convoluted, labour-intensive processes result in high fees that add to SMEs’ financial burden. 

Benefits of embedded lending for neobanks

Thankfully, neobanks don’t have to settle for outmoded models amid the emergence of a distributed approach to providing access to timely capital: embedded lending. This process of integrating credit or financing products into a neobanks environment has gained traction in response to a growing demand for a frictionless, digital-first lending experience – requirements that align with neobanks core principles.  

For neobanks, the benefits of integrating embedded lending options into their technology ecosystem are hard to ignore: 

• Allows customers to access finance when they need it from a brand they trust – enhancing their reputation. 
• Removes any interaction with a traditional bank from the lending process, which have a poor track record when it comes to funding SMEs. 
• Access to vast datasets, together with the ability to analyse them in real-time, means products and services can be tailored to meet specific customer needs, ensuring brand integrity remains intact. 
• They achieve a competitive advantage by augmenting their offering with technology that facilitates a frictionless customer experience. 

Potential risks of not moving into embedded lending

Fintech lending is expected to reach a global value of $27.1bn by 2028, growing at an annual rate of 18.13% – and it’s up to proactive neobanks to tap into demand from SMEs for customer-centric, frictionless lending services. If these digital-first businesses drag their heels when it comes to embracing the benefits of embedded lending, they will expose themselves to some potentially crippling risks: 

• They will lose customers to rival neobanks that can provide the point-of-need access to capital that SMEs crave. 
• They will remain reliant on outdated lending models that damage their reputation due to lengthy processing times and high costs. 
• Their rigid lending service will lack the agility needed to tailor products to their customers’ requirements, causing them to miss out on revenue opportunities. 
• They won’t be able to contribute to the democratisation of finance by removing barriers to financial inclusion that have plagued SMEs for too long.  

Traditional lending models act as a roadblock to innovation and agility for neobanks. From cumbersome client support infrastructures to lengthy and tedious application and assessment processes, these outdated systems simply can’t keep pace with changing consumer behaviour, nor can they adapt to changing market conditions. 

Revolut Business is a prime example of a leading neobank that doesn’t currently provide business loans. This gaping hole in their offering has caused them to fall behind comprehensive providers like Tide in the neobank popularity stakes.  

Conclusion

Neobanks simply can’t afford to overlook embedded lending – not just in terms of generating extra revenue but staying true to their principles as well. These digital-first businesses are built on a foundation of seamless technology, frictionless service, and low costs – a triumvirate of factors that allow them to disrupt traditional banking services. If they fail to embrace embedded lending, they will fall short of this mission statement when it comes to servicing SMEs’ funding requirements – a vital segment of the market that has been underserved by traditional banks.  

If they are going to be banking’s answer to Amazon or Uber, neobanks should partner with an expert embedded lending provider like Liberis, rather than attempting to build a platform in-house – saving money, accelerating the time to market, and providing a truly frictionless digital lending experience that empowers SMEs to thrive.