“45% of loans will be taken out in a nonfinancial context in the next five years.”¹

The sessions kicked off with an informative talk from Claire Cherrington, Mortgage Intermediary Technology Lead – Strategic Partnerships at Lloyds Banking Group. “Embedded lending seems to be becoming a bigger and bigger buzzword within financial services,” she said, noting how changing customer behaviours are driving this interest. “The shock of COVID turbocharged the adoption of online services and now we are seeing more and more customers carrying out complex journeys online.”

“Social media is playing a bigger and bigger role in educating, influencing and engaging.”

Claire Cherrington, Lloyds Banking Group

Customer expectations have been raised by their experiences with other online brands, such as Amazon, while their decision-making is increasingly influenced by forces outside the financial services sector. “Social media is playing a bigger and bigger role in educating, influencing and engaging borrowers about their financial decisions, with more customers actually starting in TikTok and YouTube for that education,” said Cherrington.

Lenders need to start thinking about how they can match the simplicity, personalisation and convenience that is the hallmark of the big platform businesses. As Cherrington pointed out, for these customers the actual financial product is becoming less important than the ease and simplicity of the purchase experience, whether that’s buying a house, a car or an item of clothing.

“As an industry, embedded finance is currently worth an estimated $2.6 trillion and is expected to grow to over $7 trillion by 2026.”

Claire Cherrington, Lloyds Banking Group

“As an industry, embedded finance is currently worth an estimated $2.6 trillion and is expected to grow to over $7 trillion by 2026,” said Cherrington. “In particular, it’s the growth of adjacent services such as insurance in particular and lending that we think will drive this adoption.”

Embedded lending will take lenders out of their comfort zone, with their products and processes embedded within the online channel of other brands, which may have very different customer base, communication style and channel portfolio.

“It’s quite interesting to me, the concept of working in a partnership with another company in their platform to serve their customers,” said Cherrington. “The difference for me is it’s about being in a partnership, not a supplier relationship. And it’s about how you share and set up the relationship so that you have an equal balance of power.”

Getting this brand alignment right is going to be hugely important, she said – “and that’s before you actually start to think about operationalizing the new model.”

Indeed, Cherrington said there are many questions to answer before getting started. These include: What’s the mechanism for data sharing? Is it APIs or distributed ledger technology? How much of this capability to operationalize a model like this should be bought versus built? What role do gateways play within these services and what role does cloud computing play?

“Who owns the customer, and what do the communications look like?”

Branding is just as important to consider, she added. “Who owns the customer, and what do the communications look like?”

When you start to dig into these questions, you soon realise that embedded lending is going to require a fundamental rethink for many incumbents. Embedded lending, said Cherrington, is “fundamentally different” for the mortgage market with a “digital business model that we’ve probably never seen before.”

“Embedded finance doesn’t really work for intermediaries.”

Roundtable participants were at different stages of their embedding lending journey: some were still at the starting line and just beginning to explore the topic. “Embedded finance doesn’t really work for intermediaries because the whole point of it is that it does away with the brokerage,” said one.

Others felt it’s something of a niche play, such as enabling trade credit for small businesses so they can access materials they need even when they have a cash flow shortfall.

“It meets a transactional short-term cash-flow based need,” said one participant, “at a time when the customer doesn’t necessarily want an overdraft, credit card or a term loan. They just want to buy the product so they can carry on with their business. I think it’s those sorts of circumstances where it works really, really well.”

“It’s about ensuring that we are providing the right product at the right time.”

Another participant agreed. “It’s about ensuring that we are providing the right product at the right time. It’s exactly that cash flow point. So, if you’ve got a cash flow tool embedded into your app and the customer is looking at it, the bank should be immediately going, “We can see there’s going to be a cash flow issue in three weeks’ time and then, bang, [offer the customer] a line of credit.”

More difficult to square, however, is the economics of it as a lender. “To be able to deliver that sort of journey, you have to partner with a merchant,” said one participant. “Yet you’re on the hook for the credit losses even though you never truly understand the customer, because they’re never yours and you haven’t onboarded them. Therefore, you can’t really manage them and you can’t monitor them.”

“Transforming the way you capture the information to kick off the process is so important.”

Karen Oakland, Smart Communications

Karen Oakland of Smart Communications said there are a number of API-driven solutions that enable lenders to pull the necessary credit information on a customer and then use AI to analyse credit risk and decisioning. It’s important that this data capture is as smart and low friction as possible whilst still enabling the lender to expedite prudent decision-making.  “Transforming the way you capture the information to kick off the process is so important,” she said.

Claire Cherrington of Lloyds agreed. “Once the data feeds start to open up and we operationalize API gateways, there’ are a number of ways that you can start to be able to consume and augment that data. But we’re definitely not there yet.”

“The more data you have the more you can make better decisions to remove the risk and if this can be done without adding in friction at point of sale then that’s fantastic,” said one participant from a global bank.

This is particularly the case as embedded lending starts to extend to bigger ticket items.  “With Buy Now Pay Later and other similar products, it’s easier for financial institutions to underwrite because the loan amounts are typically pretty small,” said one participant. “But when it comes to high-ticket purchases, especially if it’s not a bank customer and you do not have an existing relationship, how do you get instant information about the customer so as to underwrite that?”

Towards responsible low-friction lending

The business model also needs to weigh not just the costs of building APIs for every partner – and research by MoneyLIVE, Smart Communications and OneSpan found that lenders expect the number of their embedded lending brand partners to double over the next five years – as well as resourcing the commercial, legal and compliance issues.

There is also the issue of increased regulatory scrutiny, with regulators around the world increasingly concerned that customers may not fully understand the products they are taking out.

As one participant pointed out, Buy Now Pay Later has been getting regulator attention in Europe and the U.S., and this is driving these solutions towards “more responsible lending that is being associated traditionally with financial institutions.” It’s one way that incumbents may have an advantage over new entrants.

“We have a duty to understand the customer…but we also owe it to them to make it the easiest possible process.”

Data will be key to enable lenders to assess the risks and costs of their lending decisions, and also to generate insights into which customers may require additional information and guidance on a personalised basis to fully understand the implications of their loan. “We have a duty to understand the customer,” said one participant. “There’s that balance of you owe the customer a fair decision as well as you owe it to them to make it the easiest possible process that you can for them.”

Risk assessment and clear decision rules will be even more important in the context of rising interest rates and inflation. Properly communicating with consumers and educating them about the cost of credit and affordability is important not only for the customer experience but for regulatory compliance as well.

“This is something that all lenders are having to face into currently,” said one participant, “and I’m just thinking about how you would, through a third-party route, establish that your customers are getting the right level of service, especially those who may be vulnerable.”

The future: a one-click mortgage?

Looking ahead, our participants agree embedded finance is a fast-growing market and one likely to extend from small consumables such as clothing and furniture to much bigger purchases, such as home improvements or possibly even property purchases. As one participant noted, the adoption of tools like Apple Pay will shift customer demand into new use cases, such as payments for elective health services. Traditional lenders are thus re-imagining processes in that digital journey.

“There’s quite a lot of innovation around ID verification, salary verification, particularly in the lending and mortgage space… The idea that you might one day buy a mortgage through Amazon is quite thought provoking.”

Christophe Déplacé, Smart Communications

“There’s quite a lot of innovation around the front-end piece around getting ID verification, salary verification, particularly in the lending and mortgage space,” said Christophe Déplacé, Account Director at Smart Communications. “I think that will accelerate this whole discussion. The idea that you might one day buy a mortgage through Amazon is quite thought provoking for me.”

Others think there will be natural limits on how far low-friction lending can go. “I can certainly see a use case for embedding services into companies who can provide heat pumps or solar panels or insulation,” said Claire Cherrington of Lloyds. “But I’m still not sure I can see the one-click mortgage within an estate agency or something like that.”

Indeed, Simon Turley of OneSpan pointed out that customers don’t always want a completely frictionless experience when it comes to managing their finances. “If I’m taking out a mortgage or a high-value loan, I want some assurances around whether this is the right product for me, can I afford it? Are those checks being done?”

“We’re seeing increasing demand for virtual rooms where you have a secure digital interaction, with co-browsing functionality, so you can walk people through a document.”

Simon Turley, OneSpan

He said virtual rooms or branches are emerging to provide the right support at the right time, without jeopardizing the ease of the digital interaction. “We’re seeing the demand for that type of human support increasing more and more,” he said. “If you have that kind of environment where you have a secure digital interaction, with co-browsing functionality, that reduces a lot of the back-office friction because you can walk people through a document in that personal but secure human interaction rather than a back-and-forth process.”

It’s not about adding friction, but increasing choice for additional human support where it’s needed most. And the benefits cut both ways. After all, as another participant pointed out, some players, such as some fintech and mobile-driven lenders are not doing too well at the moment. “If you look at some of the more frictionless channels, you’re actually starting to see a lot of increases in credit losses.”

Yet demand for simplicity will continue, pushing banks to focus on delivering a consistent, personalised experience cross channel. They key is empowering the customer to engage anywhere, anytime, from any device, on demand, said one participant.

When it comes to the crunch, lending isn’t just about onboarding customers – it’s about managing risk and maximising returns in the overall bank loan portfolio, while building a customer relationship that is long lasting. Banking remains a backbone of consumers’ lives and as such, regulators like the FCA are paying attention to credit and lending communications, especially from fintechs. Getting these decisions right, without introducing too many pain points in the customer journey, will be key to the eventual success of this exciting new market.

Footnotes

¹The Future of CX in Embedded Lending Infographic