Visa: Embedded Lending Is Big Hit With Consumer Lenders, a Work in Progress With Small Business

Embedded lending — the burgeoning category of payments in which borrowers apply directly within the merchant or provider’s platform — is finding traction with consumers. In fact, five out of six lenders provide access to embedded lending products to consumers, addressing the high demand for embedded financial experiences.

That’s one of the top-level findings from a new report from Visa and PYMNTS Intelligence that unpacked the opportunity that embedded lending solutions can offer. Some countries, like Japan and Australia, index even higher, with 93% of lenders offering embedded lending to consumers. Other countries are lagging, such as Germany, with less than two-thirds of lenders providing similar services to consumers.

The developments for consumer-facing applications are significant as embedded experiences are becoming table-stakes for credit as well as loans. But despite the momentum behind embedded lending, the study found substantial runway for it, as the number of consumers indicating strong interest in embedded lending is triple that of consumers who actually used embedded lending within the last 30 days.

The reasons for this gap? The key issues uncovered by the report range from technology integrations to the onboarding process for merchants. But there is strong and persistent progress in this area, as more than two-thirds of lenders who do not currently offer embedded loans intend to do so over the next two years.

The larger opportunity, however, lies beyond consumers — with small- to medium-sized businesses (SMBs).

“We see 80% of lenders offering embedded lending products to consumers,” Arvind Ronta, global head of BNPL and embedded finance at Visa, told PYMNTS CEO Karen Webster. “But there’s a huge gap in how these lenders are offering embedded lending products to small businesses.”

The result? 

“A huge and material unmet need that presents an opportunity for lenders to engage and retain SMB customers,” Ronta said, noting that lenders across six major economies are widely missing the opportunity to not only address a critical marketplace need, but also to capture the sizable potential that the SMB market represents.

When it comes to SMBs, the numbers showed that only 30% to 50% of lenders, depending on the market, provide these products.

The report underscored the critical nature of credit access for SMBs. Stable cash flow is essential for sustainable business growth, yet many small businesses struggle to find adequate credit options that can effectively meet their needs.

“There’s a huge appetite [for embedded lending products] on the SMB side,” Ronta said. “We’ve seen that 56% of businesses that have stable cash flows leverage credit tools to expand, and 43% invest these new credit lines into R&D.”

Research uncovered by the report indicated that when it comes to providing embedded lending to SMBs, lenders face additional challenges beyond those who provide access to consumers. There is also a need to properly manage balance sheet risks associated with SMB lending and to navigate the compliance requirements for each serviced vertical.

“There’s an opportunity, and of course a challenge,” said Ronta, noting that many of the challenges can be addressed through strategic partnerships to help lenders unlock the growth runway that embedded SMB credit solutions represent.

Adding to the allure of the embedded lending opportunity for small businesses is the fact that there’s a noted lack of interest in innovation among leading lenders.

“Only 22% of lenders are actively looking to offer new embedded lending products despite 85% already offering them to consumers and the high potential for growth in the SMB sector,” Ronta said.

And while some lenders may feel they have already met the demand or see a lack of immediate need, remaining complacent could lead to missed opportunities.

The report suggested several strategies for lenders to close the gap. Improved external integrations, such as eCommerce plugins and face-to-face transaction tools, are critical. Only 37% of lenders use eCommerce plugins, and just 30% integrate face-to-face transaction tools. These technologies can streamline the credit process and enhance the borrower experience.

Lenders who can overcome the technological and operational barriers to better serve SMBs stand to gain. The demand for credit in the SMB sector is strong, and with the right tools and partnerships, lenders can efficiently meet this need.

“Ultimately, it’s about creating a seamless, integrated experience that benefits both lenders and small businesses,” Ronta said. “The tools and the demand are there; it’s now up to lenders to bridge the gap and capitalize on this opportunity.”

To access the Embedded Lending report, download here.

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