Mikkel Velin, Co-CEO at YouLend, explores the trends shaping the future of lending and what this means for the wider B2B lending industry in 2022.
Embedded lending is already thriving. Throughout 2021, we saw huge numbers of retailers offering embedded lending solutions to consumers. Notably buy-now-pay-later (BNPL) offerings exploded across the globe, providing a much-needed boost to retail spending.
A parallel trend has also gained traction in the UK B2B lending space over the last few years. E-commerce platforms and Payment Service Providers, who aren’t typically considered traditional lenders, are now offering financing directly to their business customers. The catalyst behind the boom in non-financial services companies being able to provide lending solutions quickly and safely is the widely talked about but often misunderstood embedded finance.
This year, embedded lending within this framework is set to grow exponentially in the UK and really take root in Europe as demand for financing from SMEs globally reaches boiling point.
The potential benefits for SMEs are several. Above all, it’s about time small businesses across the UK and Europe had access to alternative credit options. Traditional, bank-based lending is marked with poor approval rates, lack of speed, poor custom and clunky onboarding experiences.
New entrants in B2B lending can leverage their modern, high-tech platforms to offer those key elements of the lender-business relationship that traditional lenders struggle with, and therefore benefit from better customer experiences.
With this in mind, it’s clear that embedded lending will continue to have a profound impact on the future of borrowing. But what, specifically, can we expect to see in 2022?
1) Staying in your lane is no longer enough
In a competitive landscape, sitting pretty on core offerings just won’t do. The phrase ‘Everyone’s a fintech now’ is certainly something to be taken seriously and in 2022, firms who aren’t offering value-add financial services to customers on top of core services, are unlikely to stay ahead of competitors.
Embedded finance technology allows firms to build directly on the foundation of their future growth. Business expansion in the digital age is about helping your customers grow as you grow. In this way, embedded lending has the power to elevate, not eliminate, players across the broader ecosystem.
2) BNPL will lead the way for further B2B growth
BNPL is a key trend that has seen exponential growth and adoption, enabling consumers to access credit at the point of sale and pay in instalments over a chosen time frame.
But we are only just beginning to scratch the surface when it comes to B2B. Embedded lending soared in the UK last year and will continue to spread rapidly through Europe and globally in 2022, as demand for financing from SMEs continues to grow. Estimated to be more than five times the size of the B2C market, B2B SME lending in Europe is set to see a transformation like that of B2C lending in 2021.
As businesses and people gain greater confidence in the technology that enables quick access to finance, embedded lending’s potential will be realised and see platforms become established players in the wider lending space.
3) New players will disrupt traditional financing structures
Whilst the huge growth of BNPL has been well documented, lesser known is the rapid growth of eCommerce platforms and Payment Service Providers, offering lending solutions to their business customers in the UK. This will change in 2022 as platforms continue to partner with embedded lending providers to sidestep traditional entry barriers such as large capital balances and economies of scale.
Not only will these barriers be side stepped, but advanced technology now available will ensure the overall outcome is better for SMEs by providing more tailored, accessible, and lower priced financing.
SMEs will avoid the antiquated process of determining credit worthiness. Risk modelling that uses more data sources allows a broader pool of merchants to get approval for financing, mirroring the success of micro-financing in bringing successful solutions to spaces often overlooked by banks.
Embedded lending will also offer SMEs revenue-based repayment options – opposed to fixed amortization repayment schedules offered by traditional lenders, which provide limited leeway for fluctuations in revenue.
Therefore, it’s no surprise that in 2022, the uptick of e-Commerce platforms offering embedded financing options in the UK will continue to boom while European players start to wake up to the opportunity.
Whilst each of these trends are influencing traditional lending structures in their own way, they are also working together. At the centre of all three lies the harnessing of data and technology to create a better product and customer experience. Certainly, invention isn’t always needed for innovation. Rather than reinventing the wheel, there’s tremendous value to be had in taking stock of what exists already to find a better way of doing things.
Those that recognise this and act upon it to seize the embedded lending opportunity at hand will be the ones to not only survive but thrive in 2022. I for one am excited to see how the lending industry will continue to evolve across the UK and in Europe this year – and beyond.