Lenders Must Overcome Application Friction to Grow Embedded Lending Share

Embedded lending is all about the future of credit.

As such, it has opportunities and challenges, even in developed markets like the United States. The PYMNTS Intelligence report “The Embedded Lending Opportunity: U.S. Edition,” commissioned by Visa, found that 17% of consumers and 16% of businesses have used embedded lending platforms over the past 90 days, accessing credit directly through a merchant or service provider’s platform.

While the model is promising, it faces hurdles that lenders must overcome to maximize its potential.

The promise and challenge were top of mind for Shane Holdaway, global head of card products at Visa, in a conversation with Karen Webster. Holdaway said lenders must carefully navigate risks, regulatory demands, and evolving customer expectations to succeed.

Case in point: Embedded lending has become attractive to consumers and small businesses grappling with unpredictable cash flows. According to the report, 33% of U.S. consumers with unstable cash flows used embedded lending in the last 90 days, and 26% of small businesses with similarly volatile financial situations used it in the past year. These numbers underscore a growing appetite for flexible lending solutions that can address real-time financial needs without the friction associated with traditional loan products.

“For many small businesses, cash flow is a constant balancing act,” Holdaway said. “Embedded lending allows them to address those mismatches between inflows and outflows in real time. That’s the promise of embedded lending — it’s about being there when a business needs to cover an unexpected expense or seize an opportunity, right at the point of purchase.”

On the consumer side, embedded lending provides an alternative to traditional credit options.

“Many consumers don’t want to rely on high-interest credit cards or payday loans when they’re facing short-term cash flow issues,” Holdaway said. “Embedded lending offers a more predictable and, often, lower-cost solution, and that’s particularly appealing for people who are navigating financial uncertainty.”

One of the biggest barriers to the adoption of embedded lending is the cumbersome application process. The report revealed that 68% of consumers and 48% of small businesses that used embedded lending encountered friction, particularly when applying for the product. This friction is a deterrent for potential borrowers, even those who could benefit most from embedded lending’s flexibility.

Holdaway said the application process needs more speed and simplicity to engage the customer. It can be streamlined by using better technology.

“What we need is faster processing and real-time data integration,” he said. “Lenders should be using APIs to pull in data that can confirm identity and creditworthiness instantly. That’s what will create a seamless experience. Borrowers shouldn’t have to wait or guess whether they’ll be approved.”

Bridging the Gap Between Lender Interest and Consumer Demand

While the report made the demand for embedded lending clear, there is a gap between consumer interest and lender participation. Only 15% of lenders are highly interested in expanding embedded lending offerings to consumers, and just 18% are focused on small businesses. This represents a missed opportunity for lenders.

“There’s a real supply-side issue here,” Holdaway said. “We’re seeing that consumers want these products. They’re already using them, especially when they have unpredictable cash flows. But many lenders are hesitant to jump in, either because they haven’t optimized their offerings or because they’re concerned about managing risk in this new environment. The timing is built in. You’ve already got the right moment because the customer is in the process of making a purchase. But lenders need to focus on getting the right product to the right customer. That’s where the gap is right now.”

The report indicated that, despite the hesitation, 27% of consumers and 42% of small businesses would switch to a provider that offers embedded lending. This suggests a growth opportunity for lenders willing to overcome the initial hurdles and refine their product offerings.

How Embedded Lending Can Drive Customer Loyalty

One of the most compelling aspects of embedded lending is its potential to foster long-term customer loyalty, Holdaway said. According to the report, 55% of consumers and 66% of small businesses that have used embedded lending would be highly likely to switch to a provider offering these services. For lenders, this represents an opportunity to not only attract new customers but also engage and retain them over time.

“First impressions matter,” Holdaway said. “If you can get the user experience right the first time, you’re more likely to create repeat customers. And repeat customers are where the real value lies.”

Embedded lending offers lenders the chance to gather data from a borrower’s initial experience and use that information to tailor future offers, creating a personalized lending journey, the report found.

“It’s not just about getting the loan approved,” he said. “It’s about using the data from that first interaction to improve the next offer. If a customer successfully repays an embedded loan, you should be able to offer them better terms or a different product next time, without making them go through the entire application process again.”

Overcoming Challenges

Despite the opportunities, lenders face several challenges in implementing embedded lending solutions. One of the biggest is managing regulatory compliance, Holdaway said.

“Regulatory compliance is part of the core physics of lending,” he said. “It’s something every lender has to deal with, and it can be costly and time-consuming.”

The report reinforced this notion, saying regulatory compliance and the competitive landscape prevent more lenders from embracing embedded lending. However, advancements in artificial intelligence and automation offer a way forward.

“AI could play a role in helping lenders manage compliance in a more efficient, cost-effective way, enabling real-time checks, which not only reduce costs but also improve the customer experience,” Holdaway said.

Another challenge is ensuring that borrowers understand the products they are using. Financial literacy has long been a sticking point in lending.

“You can’t just put up a page on your website about financial literacy and expect people to go read it,” Holdaway said. “You have to build the education into the product itself. Give borrowers small reminders and tips throughout the process. That’s how you create informed, responsible borrowers.”

As embedded lending continues to evolve, Holdaway said lenders looking to succeed in the space should first focus on the user experience to retain repeat customers and foster long-term relationships.

Second, they should use technology to improve the lending process, he said.

“AI, machine learning, APIs — these are all tools that can help lenders make better decisions faster,” he said. “They also allow you to extend credit to populations you might not have been able to serve before, which is critical for expanding your customer base.”

Finally, Holdaway said lenders should view embedded lending as more than just a transaction.

“This isn’t a one-and-done situation,” he said. “It’s about building a relationship with your customers over time. The more data you have from their previous interactions, the better you’ll be able to serve them in the future.”

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