Embedded finance is a rapidly growing trend in the financial services industry. And for good reason. This service, primarily enabled by Application Program Interfaces (APIs), allows data connectivity between financial institutions and non-financial companies.
The power of Embedded Finance is undisputable. The traditional lending process is cumbersome and time-consuming. From manual data entry to payment reconciliation, the lending industry is spending too much time and resources on tasks that should be automated and embedded right into their operations.
This article explains how today's API technology holds the key for a lending business to thrive and how a fully embedded digital experience allows lenders to come out on top.
Firstly, understanding what an API is and how it facilitates embedded finance is necessary. Leave it to the professionals at Amazon that break it down concisely (explain like I am 5).
"APIs are mechanisms that enable two software components to communicate with each other using a set of definitions and protocols. For example, the weather bureau's software system contains daily weather data. The weather app on your phone "talks" to this system via APIs and shows you daily weather updates on your phone. Essentially, every piece of software built today either uses an API or is an API. In other words, whenever you check the weather, order a pizza, hail a cab or do almost anything digitally, an API is involved.
The definition of embedded finance is the practice of offering financial services, such as lending or payment processing, into a consumer's everyday experience through non-financial products and services. Embedded finance has become the new way to streamline financial processes for clients.
Whereas embedded payments fall under the umbrella of embedded finance, providing a seamless check-out process that makes the payment process easier than ever. Integrated payment solutions mean merchants can offer customers a personalized and intuitive experience. Both are made possible by an API.
In the first place, let's say a small business applies for a $50,000 loan, filling out either a paper or online loan application. The lender must manually transfer the information into the Loan Management or processing system used. And this includes banking information, where things often can go wrong.
Did the client provide the correct transit number? Is it possible they left made a misstep in their account number? Alternatively, when the lender inputs the information, did a number become inverted. Human errors are common and costly. So much so that Fintech Futures suggests that many high-profile financial firms lose millions, and sometimes billions, of dollars due to flawed manual processes.
Secondly, we can look at the payout process. The fact of the matter is that many lenders continue to use checks for disbursements, even as electronic payments and Interac e-Transfer® become more common. But did you know that those checks are expensive? According to Pymnts, each cheque can cost a business anywhere from $3 and $20 to write and process.
Finally, the cheque is in the mail. Whether the loan payout is a check or wire transfer, the entire process has little to no transaction visibility from either perspective, be it the lender or the client. Not to mention the processing time involved once the cheque has been deposited.
When lenders integrate payment processing into their operation, it revolutionizes the antiquated process outlined above. A simple embedded finance API makes it one seamless process from loan origination to the dispersal of funds.
The acceleration is happening alongside the rise of digital payments. And it is taking off like a rocket ship. According to Research and Markets, the global Embedded Finance industry is expected to grow by 39.4% this year (2022) to reach US$241,018 million. And if you think that's impressive, the embedded finance revenues will increase from close to US$250,000 million this year to over US$775,000 million by 2029.
For lenders, that means it's essential to grow alongside the customer base and give them what they want: a seamless loan process powered by Embedded Finance APIs.
With payments embedded into the lending platform, you'll have access to better data, and you'll start to notice overall market inefficiencies. This will improve offerings to clients and ideally increase valuation.
But there's more to it than that. You are stepping ahead of the competition by making the lending platform experience a seamless one-stop shop for customers. You are embracing new technology and signalling to clients that this mutually beneficial platform is here to support you 24/7, 365 days of the year.
Lender A offers a reasonable rate, but "bolted-on" payment systems occur on the website. When finalizing the payment process takes longer than anticipated, a customer can fast become irritated.
Lender B offers the same rate, but the customer can finalize payment in less than a minute due to the embedded payment model.
In today's hypercompetitive lending market–Lender B wins.
How important is it to satisfy the client? With the onslaught of new lenders, it's more important than ever. And clients seem to be getting pickier. In fact, according to PwC, 59% of customers will leave a company after several bad experiences. And after one bad experience–17% will go.
It's worth keeping the customer satisfied to ensure loyalty and repeat site visits and purchases. Plus, high customer satisfaction is another way to edge in front of the competition.
Lender A offers a frictionless experience due to Embedded Finance with APIs. A satisfied customer shares their positive experience with the lender with friends and family.
Lender B has a payment platform that is full of kinks, leaving the customer frustrated. The customer leaves a bad review and tells family and friends to avoid the lender.
In today's lending market, Lender A wins by satisfying the customer, likely gaining new customers, and avoiding the pitfalls of bad reviews and negative word of mouth.
Embedded payments provide lenders with a mountain of invaluable data. With this data, lenders can see customer payment trends, various times of payment execution and various patterns that lead to improved products for the customer.
And what does that leave us with? A satisfied customer.
Lender A offers a product that is tailored to the individual user's needs. The customer not only purchases the original item but goes on to purchase a few more. Because of Embedded Finance with APIs, it was easy for the lender to decipher what the customer wanted.
Lender B offers a long list of products, but none work for the customer. A frustrated customer begins to surf competitors' sites.
In today's lending market–Lender A wins by utilizing Embedded Finance with APIs to create products that customers want.
VoPay is the leading lending payment platform across Canada. Lenders and Loan Management Software companies prefer our developer-friendly API payment technology.
Empowered by VoPay, lenders can offer efficient and cost-effective embedded real-time funding options while reducing NSFs and returns during payment withdrawals through data-driven EFT and Interac e-Transfer.
A VoPay Bite-Size Business Case: With embedded payments, lenders can simplify the issuance of the loans and disburse them to customers automatically once a loan is approved. Automate collection and recurring payments using our multi-channel payment platform, straight from the Loan Management Software.