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Embedded Lending

Expert Talks: Open Banking and Banking as a Service make it possible: Every company can become a bank.

Alternative credit providers are offering more loans to small and medium-sized businesses than ever - and providing a better customer experience on top.
Jens Röhrborn
2 June 2023
12 minute read

The introduction of the PSD2 directive and the opening of bank interfaces laid the foundation for the digitization of financial products. However, banks still struggle to transition their processes into digital and efficient models. As a result, a significant market of small and medium-sized enterprises remains untapped, as manual processes are too cumbersome and costly for smaller loans. Additionally, young companies are excluded from the loan offerings of most banks due to risk factors.

Embedded finance providers are entering precisely this gap and creating new opportunities. Companies and platforms that are used daily by customers can offer financing options through them, while technology and capital providers remain in the background with white-label or co-branding products, putting the platform with which the customer already interacts in the foreground.

Traditional loan applications are time-consuming and costly

Anyone who has ever applied for a loan from their bank knows the lengthy process involved. Traditional banks struggle with time-consuming and costly processes when it comes to loan approvals. Not least, this makes loans to small and medium-sized enterprises unattractive for many banks. Increased lending requirements and extended documentation obligations make it difficult for SMEs to obtain fast and affordable financing. Many of these businesses rely on bank financing. If such financing is no longer available or only available under unfavorable conditions, they have to seek alternative funding.

Lending as a customer retention strategy

Alternative lenders have filled the gap that banks have failed to serve. Many SMEs have successfully applied for and received financing from these providers. Now, the loan offerings of banks and alternative providers face competition from platforms that are regularly used by customers. Through embedded finance providers, an e-commerce marketplace like Amazon, Zalando, or eBay, a payment provider like Payone, Telecash, Unzer, VR Payments, a software provider like Shopify or SAP, restaurant platforms like Lieferando, or point-of-sale system operators like Orderbird, advertising platforms like Google and Facebook, etc., can suddenly offer financing options to their business customers, particularly based on their sales data on that platform. And this has significant advantages for platforms. Not only do they receive a commission for facilitated loans from the embedded finance providers or capital providers, but loan approvals are the most powerful customer retention strategy there is.

Such financing options are in high demand. In the USA, pioneers such as Amazon, Stripe, Square, and Shopify can be recognized, mainly offering revenue-based financing and being exempt from regulation. According to a study by the Federal Reserve, these forms of financing are already the most common type of SME financing, accounting for over 10% of it.

Offering loans where customers make money

The integration of embedded finance allows customers to stay in their familiar platform environment while still accessing financing options. Loan decisions and disbursements can now be made entirely digital and within minutes. Platforms utilize embedded finance providers and can organize themselves through banking-as-a-service without needing their own license.

Banks are faced with the challenge of adapting to these new conditions. Instead of competing with alternative providers, banks can benefit from collaboration. By utilizing the white-label technology of embedded finance providers, banks can improve and offer their own loan offerings as if they were neobanks. This allows them to build and maintain customer relationships that may not meet the typical criteria of banks.

Embedded finance lenders create a win-win-win situation:

For the customer – as they don't have to leave their familiar environment of a known platform and can receive a loan decision quickly and conveniently based on recent performance.

For the platform – as they gain an additional customer retention strategy that brings real value to the customer.

For the bank – as they can acquire or retain customers who would have otherwise switched to third-party providers or not become bank customers, potentially resulting in loss for the bank.

The future of lending, especially to SMEs, is shifting from traditional banks to platforms with which businesses already have a close business relationship. Banks need to adapt by partnering with embedded finance providers to serve these customer segments and provide a similar customer experience as neobanks – fast, dynamic, and convenient. In the near future, at least in the SME segment, one of the domains of a bank, lending to businesses, will be primarily conducted through platforms with which customers already have a close business relationship. They will source their financing where they sell their goods, through their sales channels, or their payment providers.


Digitization and the integration of financial services into existing platforms offer new opportunities for borrowers and platform operators. It remains exciting to observe how the market develops and how banks, alternative lenders, and platforms continue to collaborate to meet customer needs and revolutionize the lending landscape. However, a collaboration with embedded finance providers allows banks to continue serving this target group and offer customers a significantly better customer experience.

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