Integrated consumer credit offers many advantages over BNPL. Working with a BaaS supplier like Window allows banks to control their roadmap in an increasingly crisis-ridden sector.

Finastra’s main client partner for integrated finance and BaaS, Come Appana, said opportunities exist for financial institutions of all sizes, incorporaters and merchants. This is due to several factors, starting with the amount of data available and interpretable today. Customers demand more experiences. Open finance further expands the possibilities.

Important differences between embedded lending and BNPL

BNPL is undeniably popular, but it raises the question of whether it is the right solution for market participants. Often it isn’t.

“Embedded lending is in a position where it represents a more strategic solution for banks, ecosystem players and the consumer,” Appana began.

BNPL works best in retail, with small amounts and simple terms. As the space evolved, interest-free and interest-bearing models with late fees arrived. Especially with new consumer protections, customers have improved transparency, which has been key to its success.

Appana sees embedded lending differently. Facilitating larger sums for expenses like home improvements or medical bills is a different value proposition for banks.

“Banks are very interested in using their deposits opportunistically,” Appana explained. We have seen the cost of financing increase; deposits are difficult to obtain. How to profitably distribute these deposits in terms of loans? This is the core banking philosophy… and embedded lending enters that space, where banks can now lend to customers who need this type of lending.”

Bundled lending allows banks to reach consumers who may not be their customers. Finastra is the orchestrator, working with those institutions, merchants and business partners. Through hundreds of conversations with banks, large and small, Appana knows what they are looking for and how to deliver it.

Those conversations are full of questions. What customer experience is the bank looking for? Which segment of consumers do they want to attract? Do they have the right credit profile?

Customer considerations: their journey, acquisition costs

BNPL and embedded lending differ for many reasons, starting with who owns the client. With BNPL the front-end provider does this, while with embedded lending the loan is in the bank’s system.

Venu Appana said embedded lending is an inexpensive method of customer acquisition.

It’s a cheap way to acquire customers, much less than the $200-$500 they might spend on an ad campaign. There are many cross-selling opportunities and how to attract these people is part of the design discussions.

What is senior leadership looking for strategically? The answer impacts their technology stack. For example, many banks are looking for ways to reuse existing systems.

Each bank’s customer journey is specific, which impacts its personalization process and how it integrates into its credit decision-making systems.

“This is where Finastra provides the power of orchestration,” Appana explained. “We have adapted to different ways to connect to banks and to provide that credit decision. Then, depending on the size of the loan, various documents will need to be generated. How do you create those documents? How do you accept that loan? What customer segment are they looking for? What is handstand?”

Additional key considerations about embedded lending

The conversations continue. What are the legal and compliance implications? Will each ecosystem participant earn sufficient revenue? Will the bank build it in-house, outsource it, or mix and match?

What is the desired in-store experience? Which payment channel is preferable?

As macroeconomic conditions change, banks continually evaluate options. As Finastra combines elements, the bank can test and adjust. There is flexibility to change the route if necessary.

Should everyone be an integrated lender?

Should everyone be an integrated financial services provider? Appana said it depends on where you are. If your brand offers smaller ticket items, is there any difference compared to BNPL? Looking for consumers with stronger credit?

If so, they are open to larger amounts, which need to be considered differently. Several guardrails must be included. This is crucial because one of the bank’s best strengths is being a reliable and compliant entity.

Guaranteed integrated loans and open finance: new opportunities

Appana sees interesting opportunities on the horizon, starting with integrated secured loans. Finastra is working on some options.

Others are simple but impactful. Open finance provides the data needed for customization and personalization. How can vendors use AI to provide such granular relevance?

As you think about this, the opportunities grow.

“Open finance leads to open banking,” concluded Appana. “Open finance leads to an open economy and there are huge opportunities to monetise and provide the right services.”

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  Tony is a long-time contributor in the fintech and alt-fi spaces. Twice named journalist of the year at LendIt e winner in 2018, Tony has written more than 2,000 original articles on blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain expo in Hong Kong. Email Tony here.

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