Four key insights from our webinar on Embedded Consumer Lending

Written by Jeff Manghillis Lead Client Partner, BaaS
Image of mother and child using ATM

Embedded lending creates synergies between banks, retailers, and financial technology providers, enabling them to grow their customer base and revenues. When done correctly, it’s a winning business model for all and meets the needs of customers for convenience and speed of purchasing.

To be a leader in this fast-moving marketplace, banks, embedders, and retailers should look to partner with organizations that complement their business model and strengths, and that also enable efficient and secure transactions.

Recently, we moderated a panel with our partners, LoanStar Technologies’ CEO, Andrew Turner, Seattle Bank’s EVP, Chief Banking Officer and Head of Partnerships, Josh Williams, and Jeannette Kescenovitz to discuss the key attributes needed to make embedded lending a success.

Here are the key takeaways from the webinar:

What are the drivers for embedded lending?

As inflation continues to rise, consumers are increasingly seeking financing options to maintain their purchasing power, while continuing to value convenience and simplicity.

Banks wish to meet this demand and grow their assets, while maintaining their risk profile. On the other hand, merchants are looking for new ways to grow more sales. Embedded finance, specifically embedded consumer lending, can help all of these participants to meet their objectives. It helps consumers finance their everyday purchases, whether they are must-haves or luxury goods. It offers banks the ability to reach those customers with the ease and convenience of a FinTech. And it enables more sales for merchants who can now offer easy and convenient financing for a high-ticket sale.

Finastra has collaborated with LoanStar Technologies and Seattle Bank to develop such a banking-as-a-service (BaaS) solution, connecting retailers and banks, and enabling customers to finance purchases such as a home remodel at the point of sale.

What is embedded lending and how does it differ from buy now, pay later solutions?

The simplest definition of BaaS, a market that is predicted to be worth $7 trillion by 2030, is that it enables a business to provide relevant financial services to customers. Within BaaS, embedded finance, or embedded lending, is a category of services that can be offered from a non-bank, such as providing a loan ‘in context’ during the purchasing process.

Embedded lending allows customers to access financing from the same online or offline location that they are using to look at and purchase products. They do not need to leave the merchant site to request a loan.

Through embedded lending, retailers and merchants can provide a wide range of regulated banking products and services without having to build out their own infrastructure or take on financing risk. Instead of investing significant time and resources to build their own solution, they can rely on platforms that provide secure application programming interfaces (APIs) and services built for purpose by FinTechs.

Banks, on the other hand, can expand their customer base, and grow their loan portfolio and revenue by accessing new customers and providing those customers with lending products and services, particularly for bigger ticket purchases. Once they establish a customer relationship, those banks can then deepen that relationship into other products and services such as deposit accounts.

How should banks and retailers partner with financial technology providers?

Josh Williams explained that in his experience the first element to consider is whether a technology partner is offering a solution that works, rather than being a clever idea looking for a market.

“We always start by asking whether a partnership means we're solving a problem for the client,” he said. “Then we generally look at three big questions. The first is, is it technically possible and can we connect from point A to point Z and get the right outcomes that we want along the way? The second is whether it works from a regulatory standpoint, and whether we're supporting consumers making good choices in terms of what they can afford. And then lastly, what are the commercial aspects - can we all make an acceptable return?”

Seattle Bank has partnered with LoanStar and Finastra to meet customer needs through an embedded finance solution that is technologically feasible, meets regulatory requirements, and drives value to the bank.

Embedded lending in action

Loanstar, an embedder, has partnered with Finastra Embedded Consumer Lending to make the buying process as frictionless as possible, providing financing options to consumers and an alternative to the buy now, pay later (BNPL) approach for merchants and providers alike.

Andrew Turner, CEO at Loanstar Technologies said, “Working with Finastra will enable us to scale up significantly, providing access to hundreds of financial institutions, like Seattle Bank, across the US.”

Integrated with Finastra’s lending and origination core systems and hosted on Microsoft Azure, the solution enables financial institutions to process point of sale loan applications. This includes performing identity verifications, decisioning and facilitating e-signatures, and account creation and funding through the bank’s core banking system.

With loans from Seattle Bank flowing through the platform since February 2023, the future for embedded lending as a proposition is bright.

Watch the on-demand webinar to learn more about unlocking the value of embedded lending.

Written by
Jeff Manghillis

Jeff Manghillis

Lead Client Partner, BaaS

Jeff Manghillis is Lead Client Partner for Banking-as-a-Service at Finastra in the Americas. He enables solutions and partnerships with banks, embedders, and other entities that bring financial solutions to end customers in context. Before Finastra, Jeff has worked in banking, management consulting...

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