International Finance

Embedded Lending: Lifeline or debt trap?

IFM_ Embedded Lending
Amidst the urgent need for financial support, the importance of responsible embedded lending cannot be overstated

In a recent survey, a gloomy picture has been painted as only 12-21% of Europeans expect their household financial situation to improve in 2024. So, in times of economic turmoil, we’d assume that access to credit can be a lifeline for individuals. Last year, over two million Brits used Buy Now Pay Later (BNPL) services to cover essentials like bills and groceries.

However, amidst the urgent need for financial support, the importance of responsible embedded lending cannot be overstated. Unchecked lending and unregulated BNPL services can end up hurting consumers rather than helping. A recent Bloomberg survey found that 43% of those who owe money to BNPL services said they were behind on payments.

Financial institutions that provide embedded lending solutions while promoting responsible financing usage can give customers a safe alternative.

A lifeline: Embedded Lending

The UK credit card average purchase APR rose to 34.7% in February—up 4.1% from 12 months ago. Overusing credit cards could cost consumers substantially more since only 48% of customers pay off their balance in full, accruing additional interest.

Such untimely payments and loan defaults, in addition to inflating the cost of living, can lead to ‘bad’ or low credit scores, leaving those in need without future access to credit cards.

Embedded lending options, including lines of credit, split pay, and instalment loans, from a regulated bank or lender provide an affordable credit option with as low as 0% interest. Due to its accessibility and multi-lender capabilities, embedded lending offers a solution for a range of credit profiles, ticket sizes and product types.

The importance of responsible use

Since BNPL options require a more general review of a person’s eligibility rather than a rigorous approval process, providers and merchants must be cautious to protect consumers from putting themselves at financial risk. Without the proper parameters, shoppers could take out multiple loans simultaneously, leading to a risk of overborrowing and falling into debt.

Financial institutions and merchants offering point-of-sale (POS) financing should discourage customers from spending more than they can afford by educating them on how to use financing responsibly and by matching the right loan or credit option to the right credit profile, product and ticket size.

It’s also important to offer POS financing in the right context. For example, using POS financing to pay for essentials like groceries and gas isn’t the most responsible use case for consumers, as it increases the risk of unmanageable, untraceable debt. The more responsible approach is to offer financing for larger purchases that add value to the customer’s life, such as household appliances, home improvement projects, medical procedures and so on.

A solution: White-label bank Embedded Lending

With the rise in fintechs, there are a larger number of non-financial platforms offering third-party lending.

As Aaron Byrne, Financial Services (FS) Leader at EY-Parthenon, puts it: The “blurred line between financial services and non-financial platforms might make it harder for consumers to differentiate or choose between legitimate services and potentially predatory ones.”

Banks can combat this by offering seamless loan options directly within the customer buying journey—whether online, in-store, or telephonically—ensuring responsible financing with the loan amount and terms tailored to the customer’s credit profile, product type, and ticket size.

As trusted, experienced underwriters and lenders, banks are uniquely positioned to offer responsible loan products with the most competitive rates to consumers and business buyers.

Banks are used to operating within regulated frameworks and providing transparent information to customers, including interest rates, repayment terms and potential late fees. Furthermore, these regulated institutions both report and bank on other regulated lenders reporting a consumer’s credit usage in order to determine eligibility (and in turn, responsibility); something that is currently lacking with non-regulated BNPL solutions.

It’s clear that embedded lending is enabling consumers and businesses to better manage their cash flow and pay for needed purchases. However, responsible use is crucial. Banks are able to position themselves as the safest and most trustworthy partners in the embedded lending landscape.

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