In “How and Why Every Company Should Become a Lender,” webinar host Allen Nance offers embedded lending as a viable solution to the unit economics problems facing many fintechs and non-financial brands.
Serial Entrepreneur Allen Nance has been obsessed with the evolution of consumer-driven finance over the past decade. As the host of our latest webinar “How and Why Every Company Should Become a Lender,” Nance proposed that the new wave of consumer-driven finance will continue to push both fintechs and non-financial brands to create frictionless financial experiences.
For many consumers, seamless financial journeys include convenient borrowing options at the point of sale. This presents an opportunity for many brands who still haven’t explored loan products as complementary offerings to their core products, according to Nance.
Embedded lending, he suggested, could be the answer for brands looking to diversify revenue.
Throughout the webinar, Nance outlined several factors that make the market ripe with opportunity for brands to leverage embedded lending as a tool for driving profitability.
Traditional Banking Has Faded
According to Bankrate reports, consumers’ use of a bank teller to access their accounts declined from 21 percent to 14.9 percent. That percentage drops below 5 percent for people under 35.
The data suggests that younger consumers, who will soon make up most of the market, are already fully immersed in digital finance.
“Think about that for a moment,” Nance said. “That under 35 group, here’s what happens – You’re 25 and then you become 35, and then you become 40, and then you become 45, and then you make up the bulk of the consumer purchasing power in the U.S.”
“And you’re going to have an audience of people who maybe never have been inside of a bank branch,” he continued. “Newer consumers are demanding digital products.”
Consumers are Demanding More and More Access to Credit
While traditional banking is fading, it doesn’t mean that the demand for financial services, particularly credit, has dwindled.
In fact, the data shows quite the opposite.
Household debt in the U.S. rose by $16 billion from quarter one to quarter two in 2023, bringing the total to $17.06 trillion, according to the Center for Microeconomic Data. Then there was credit card debt, which rose by $45 billion from quarter one, bringing total credit card debt to $1.03 trillion by quarter two of 2023.
“So, if you take this idea that there is this explosion of demand of consumer access to credit…and borrowing ability…and you marry that with just the reality of traditional banking fading away,” Nance said, “what you’re left with is literally a market that is tailor made for what we refer to as consumer-driven finance.”
The Fintech Market is Exploding in Response to Consumer Driven Finance
According to Nance, innovative brands have observed consumers’ shift from traditional financial services to fintech products along with the increased demand for credit, and these brands are chasing the consumers’ needs.
As of 2023, the fintech industry is worth $180 billion, according to reports from Deloitte. Market Data Forecast predicts that the industry will grow to almost double that amount – $324 billion – by 2026.
“What that has done is that has led to an almost avalanche of fintechs and an avalanche of financial products chasing a huge market,” Nance said.
But as the fintech market explodes, it presents its own unique set of challenges amidst the stiff competition.
“It seems like there’s a new fintech each day. It seems like there’s a new financial product each day,” Nance said. “So, all of these fintechs are chasing these consumers. And what we’re seeing is many of these fintechs and financial innovative companies…are spending too much to acquire a client, they’re not able to make a profit on [their] core offering…and they’re operating in this super competitive market that keeps evolving.”
In other words, many fintechs and e-commerce companies are facing a unit economics problem.
Embedded Lending as a Product Strategy
One very viable strategy to remedy the unit economics problem within a highly competitive industry, according to Nance, is to incorporate embedded lending as a complementary service alongside the brand’s core offering.
Making financing directly available through their own platforms can be advantageous for brands with a digital presence on many levels. The benefits of embedded lending include diversifying revenue streams, making customers stickier, and helping secure future growth with a product that’s highly scalable.
Trillions of dollars are already being spent through embedded finance products. Bain & Company reports that embedded finance (including embedded lending products) accounted for $2.6 trillion of total U.S. financial transactions in 2021. The same reports predict it will exceed $7 trillion by 2026.
In other words, the time to start leveraging embedded lending as a product strategy is now, Nance proposed.
But while it can be extremely profitable when done right, developing loan products can be challenging as there are a host of compliance regulations and risk analytics to pay attention to.
Offering lending as an option to consumers isn’t something brands have to do alone though. According to Nance, any company can become a lender with the right partners.
“We don’t think [embedded lending is] a new concept. But what we do see emerging and what we do think is new is the idea that any organization has the potential ability to be a lender without having to have the infrastructure of being a lender,” he said.
“It’s really you have a consumer offering, and you want to provide a lending option to your users,” he continued. “You go partner with a third party that can effectively, as an outsourced provider, take all of the necessary ingredients of being a lender and through a series of APIs bake it or, if you will embed it, into your offering.”
About Bloom Analytics
Ready to start exploring embedded lending as a product strategy?
Bloom Analytics delivers a full suite of customizable solutions that enable lenders, fintechs, and non-financial brands to increase their revenue through enhanced underwriting and embedded lending opportunities that serve consumers across the credit spectrum. Bloom helps companies turn risk into opportunities and secure new revenue streams with turnkey business management solutions, including lending consultation, AI-driven analytics, and underwriting.
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