Why Companies are Cutting Out Banks and Helping Customers Buy Now, and Pay Later

Embedded Finance, also known as “Point-of-sale (POS) financing services” has grown significantly over the past two years, diverting $8 billion to $10 billion in annual revenue away from banks.¹ Although Financing at the point of sale is only a small portion of the total unsecured lending market today, the upward trend indicates this may only be the beginning. Trends that have sparked growth include digitization of consumer and corporate financial infrastructure, rising merchant integration of third-party software-based banking platforms, increasing repeat usage among younger consumers, and an expanding set of players targeting lending at point of sale.¹ As we know, software companies are the key harbingers of data, and it is no different in this case. By partnering with key fintech companies, organizations can streamline their customer financing solutions and provide integrated shopping products with the intent to improve the customer shopping experience overall. Matt Harris, a partner at investor Bain Capital Ventures says “Embedded financial services takes the cross-sell concept to new heights. It’s predicated on a deep software-based ongoing data relationship with the consumer and business.”² It must be known that not all embedded finance systems are equal and these organizations must implement these novel financing services in ways that suit their unique business models.

The vast majority of consumer-centric organizations optimize their sales funnel in order to retain customers and drive sales. The growth in POS financing for consumers is driven by organizations that leverage a distinct set of models. These models reveal the various competitive fronts that banks and traditional lending institutions have to contend with. Below are 3 of the most popular models for embedded finance integration.

• Integrated shopping apps: the largest players are building scaling applications that not only encompass payment, but also shopping, financing, and banking. Out-of-bank financing options were accelerated by the Covid-19 crisis, increasing at 300 to 400 percent in 2020 and accounting for about $15 billion in originations. This is projected to increase to $90 billion in originations by 2023, resulting in $4 billion to $6 billion in revenues.¹

• Off-card Financing Solutions (Affirm (NASDAQ: AFRM) and UpLift): offer financing on mid-size purchases (between $250 and $3000). Off-card financing solutions have originations, requiring consumers to pay an APR that is oftentimes partially subsidized by the merchant, resulting in cheaper credit and easier payment terms than traditional banks would offer.¹

• Card-linked Installment Offerings: dominant form of financing at the point of sale across Asia and Latin America. In North America, card-linked installment services are offered by fintech companies like Splitit (ASX: SPT). Traditional banks have launched post-purchase installment functionality, such as American Express Plan It and Citi Flex Pay, but have seen low adoption rates due to alternative solutions that offer low or zero percent APR.¹

Traditional financial institutions still maintain a foothold when it comes to lending, and there are a host of areas in post-purchase financing in which banks can compete with embedded financial systems. Namely, banks can target large ticket purchases, such as home improvements, due to their fleshed-out pre-existing financial infrastructure. Furthermore, they have the ability to cross-sell mortgage refinancing and other banking services that they have experience in.¹ That being said, a great way to probe the viability of a particular industry or trend is to look at venture capital investment within new startups, as well as growth-oriented acquisitions within the space. So far this year, investors have poured $4.25 billion into embedded finance startups, accounting for almost three times the investment in 2020.² Below are several of the most prevalent firms that have received investment or that have been making waves in the embedded finance industry. 

Traditional lending institutions face an increasing threat due to the myriad of ways fintech organizations are teaming up with large retailers in order to provide novel financing solutions for their customers. For a long time, banks have reaped the rewards of capitalism, however, they are beginning to fall victim to its competitive nature as well. That being said, the largest financial institutions in the world will not go out without a fight. Ultimately, the uptick in competition as institutions and corporations vie for consumer attention is good since the decision-makers will be those of us who choose to use the services offered. For us as consumers, this means that organizations that achieve larger market share will win by providing us with asymmetric value. Regardless, consumers receive the benefits, no matter who is victorious.