Embedded Financing

What is Embedded Financing?

Embedded financing is defined as a form of financing at the point of purchase. The origin of embedded financing popularized by e-commerce and online shopping in the early 2000s. As people become more comfortable with online shopping, digital payments exploded from the 2000s to the 2020s.

As the variety of goods and services being sold online exploded, there are bigger ticket items that consumers would like to pay over time. Nowadays, everything over $100 USD seems to be able to be financed or paid over time with an installment payment. 

One form of embedded finance is BNPL or buy now pay later. Although there aren’t dominant players in the embedded finance market, there are a few companies in the US and EU that’ve made a name for themselves, such as Klarna and Affirm.

These companies will work with retailers of all forms and create a checkout function for their clients to make payments over time or finance the product or services over time.

Why is Embedded Financing becoming so popular?

There are multiple reasons why embedded financing has grown in popularity in the past 20 years. 

The first reason is that it is the convenience of it all. Many embedded finance companies have made it easier for merchants to embed this service into their commerce or e-commerce platforms. At the end of the shopping experience, consumers are presented with many choices of how to pay for their product and services. These finance now, pay later options are very easy to use and don't take more than a few clicks to get approved for financing.

Embedded financing companies have also deployed plug-ins in most of the popular e-commerce platforms such as WooCommerce, BigCommerce, Marketo to list a few. These plugs can be added to the merchants’ overall e-commerce platform setup process.

The other reason why embedded financing is widely adopted is that bigger ticket items are not affordable to many consumers. Some consumers can checkout with their preapproved credit such as credit card. But most don't have a credit card or don’t want to use their credit card or their spending limit is approaching their existing credit card.

Therefore a financing option to pay over time for a product and service they desperately need is a great way to meet the consumers demand and bring additional revenue for the merchants. It’s a win-win situation for everyone involved.

The last reason and perhaps the most important reason is cost. Most of the embedded financing offerings are in the form of a termed installment loan with a fixed interest rate. Why is this important? If you checkout on a credit card and aren't able to pay it off at the end of your billing cycle, the credit card company will start charging you interest. The interest you pay on a credit card balance is in the form of a compounding interest. It means that you are paying interest on the unpaid balance and all of the interest you’ve accumulated from the previous billing cycle. You could be trapped in an endless cycle of debt and some people take years to pay off their credit card balance because of it.

Embedded finance products are not designed to charge you compounding interest. It is a fixed interest rate with a finite number of payments. It is designed to pay off the entire balance in a short amount of time. Some of these embedded financing products are in the form of Pay-In-Four, meaning that you will be able to pay off the entire purchase in 4 payments. Sometimes these payments are synced to your payroll dates and if you are getting paid from your work twice a month, you might be able to pay off the entire purchase over two months with minimum interest and fees compared to putting the purchase on a credit card and risk paying compounding interest.

For merchants: What if I want to do this myself? What would it take to set up my in-house financing?

When we speak to merchants that want to add their own in-house financing options alongside some of their embedded financing partners, we often tell them that they need these three things to get started.

Item 1 is that you need to get a lending or lease-to-own license. Any form of financing or lending requires you to be licensed by the State which you operate in. If you are outside of the United States, you will need your local government to give you a license to provide credit, even if you are providing credit for your own clients. With a license to lend, you are now legally allowed to offer financing inside of your store or online. 

In-lieu of getting your own lending licenses, you can also work with a local bank. Your regional or community bank might be able to help you. How it works is that the bank is the official lender on record, meaning that the loan agreement is offered by the bank and you are acting as a facilitator of the loan. This is how your favorite embedded financing partners operate today, they are working with a nationally chartered bank to offer financing products everywhere you operate.  

Item 2 is that you will need a financing facility and/or taking on credit risk yourself. You might need to find a financing partner that’s willing to finance your product and services. This could come from the same bank that’s providing their banking licenses to you to lend. This could be another private fund that’s willing to buy these loans from the bank after a few days after the bank has originated the loan through a partnership with you.

In-lieu of Item 2, you can choose to take on the risk yourself and provide a simple payment plan and let your clients pay for the product and services over time. You may not get the full price of the product and service paid right away but you can take a downpayment to lessen the hit on your top line and wait for the rest of the payments to come in over time. 

The risk is that if your client stops making payments then you are at a loss. To balance this risk, you can play around with the down payment percentage to hedge your risk. Buf if you charge too much for a down payment, it may upset the client and defeat the purpose of making an easy purchase by not paying the entire amount up front.

We think that if you offer a service that can be rendered over time, an installment payment would be perfect. If the client stops paying, you can stop rendering the service. Medical treatments, legal services etc are all perfectly suited for letting the consumer pay over time without taking on too much financial risk for the merchants.

Item 3 is technology and there are a few things we want to point out. First, you need a checkout experience on your checkout page. If you are hosting these sites yourself, you could use LendAPI to create a private labeled checkout button. LendAPI can provide a few lines of code to embed into your website as well as APIs to pre-fill the credit application so the consumer doesn’t have to type their information again. Assuming that the client has logged in and provides all of the information already as part of the shopping cart or checkout experience. 

Secondly, you might want to check the consumer's credit if you are passing this loan to your bank partner or financing partner that will purchase the loan form you directly if you are licensed or from your bank partners. To check a consumer’s credit, you will need to engage a credit bureau such as TransUnion, Experian or Equifax. They will provide you with access to their credit reporting database and you can pull your consumers credit report. LendAPI has all of these credit bureaus connections pre-built so you don’t need to hire any additional software engineering staff to help you with this process. LendAPI also has underwriting templates and rules that can help you determine if the applicant is credit worthy enough for you or your bank to grant them credit to purchase the product or services.

Along with the creditworthiness check, LendAPI’s pricing engine automatically provides the amount of credit approved and granted as well as interest rate you would set to let you borrow from you. All of these can be configured in LendAPI’s pricing engine which is connected to the credit decisioning engine.

Once the consumer accepts the financing option, LendAPI can help you to connect to your or your bank’s loan servicing tools to disperse the payment to you, the merchant, to pay for the goods and services and collect those installment payments going forward until the loan is paid off.

LendAPI is connected to a variety of loan servicing companies, platforms. The merchants do not have to hire any engineering staff to connect approved users to loan servicing platforms for merchants to get paid and for the financing companies to get paid over time.

If the merchant is financing this themselves, the servicing companies will remit payments to you over time whenever the future installment payments are collected from the consumers.

Some additional capabilities to consider, if you have a physical location, LendAPI gives you the capability to have your store clerk to enter the final shopping amount and enter that back into the system. A 

For merchants: What’s the benefit of having your in-house financing capabilities?

There are three main benefits of having your own in-house financing capabilities. 

First, sell more stuff. When you have an additional payment option or financing option, you can get more clients to purchase your product and services. Your current financing option might not be able to take on all of your customers for a variety of reasons. Most of the time, they can only finance consumers with great credit. 

Over 60% of Americans are considered as subprime and your current financing partners may not be able to underwrite these customers and leave them with no choice. But if you are willing to take on a little more risk and understand these customers better than your current financing partners, you can move a lot more goods and services and therefore increase your top line revenue.

If you are in the servicing industry, you can offer payment plans and immediately increase your customer base and make more money by delivering your services and get paid as you deliver more services to your clients over time.

Secondly, you have an additional revenue stream, interest payments. Your current financing partner is probably charging your customers a 15% annualized interest rate. If you are offering your own financing, you can earn a portion of that interest income from your consumers. This greatly increases your top line and adds immediate value to your finances. 

Think about it, your customers are already paying this interest rate to your financing partners, why can’t you take advantage of that as well?

Lastly, having your own financing capabilities will give you more freedom to deliver additional products such as embedded insurance products. If you are selling consumer goods, protection or loss insurance sold through the checkout process can also bring additional revenue streams directly to your business.

LendAPI’s embedded finance platform is private labeled and can help you launch your in house financing capabilities without any need to have your in house engineering team and can quickly get you launched and start financing your own product and services.

For merchants: Where do I start? 

Sign up at LendAPI.com today by clicking on the Sign Up button. One of our staff will help you collect requirements and start building out your financing product right away. We can also make introductions to banks and financial institutions that might help you to get started as well.

We are here to help you to get your in house financing platform up and running. If you are an online e-commerce merchant, we can help you as well by integrating into your e-commerce platform such as BigCommerce, WooCommerce or whatever platform you are using today.

Embedded Financing summary

Whether you are working with some of the best known BNPL or embedded financing firms out there, or you want to start on your own financing arm, LendAPI is here to help. With our state of the art digital onboarding platform with embedded features as well as our decision engine and in-store clerk dashboard, we can be your technology partner and get you started as soon as possible.

About LendAPI

LendAPI is the only digital onboarding platform for banks with a suite of Product Studio, Rules Studio, Pricing Engine, Integration Marketplace and Variable Library all working in concert on one platform. Follow us on Linkedin, X, YouTube and our “Two Minute Demo Video!”