How to build a great embedded lending partnership

Embedded lending has become a crucial resource for vertical software and marketplace companies. It's not just a "nice-to-have." It's a strategic enhancement to a platform's core infrastructure, which can significantly boost customer engagement and satisfaction.

Recognizing this, we have crafted this guide in order to assist companies, leadership, investors, and technology enthusiasts in navigating the complex terrain of choosing the right embedded lending providers.

Our goal? To offer you a comprehensive framework that simplifies this critical decision-making process, leveraging our extensive experience in financial technology lending. Whether you're looking to enhance your customer experience, boost your ROI, or stay ahead in the competitive market, this guide is your compass.

Understand your needs and challenges

As you embark on this journey, it's crucial to adopt a broad perspective. The first step is not about solutions; it's about understanding the challenges you and your customers face and visualizing the potential impact of solving these challenges.

Key questions to consider

1. Identifying customer challenges: Every business, especially newer or smaller ones, faces unique hurdles. What specific difficulties are your customers encountering? Maybe your platform serves landscaping businesses that need to ramp up hiring in the spring, and payroll becomes tricky. Maybe your platform serves retail suppliers and they're constantly dealing with inventory management and supply chain challenges. This insight is the foundation of your quest for the right solution.
2. Current solutions and effectiveness: Are there existing solutions addressing these challenges? If so, how effective are they? This analysis helps in identifying gaps and opportunities for improvement.
3. Potential solutions and their impact: Consider the possible solutions at your disposal. How can they address the identified challenges? It's about finding a fitting piece for the puzzle.
4. Assessing customer receptivity: Would your customers be open to a lending solution from you? Understanding their readiness and openness to new solutions is crucial for successful implementation. Really listen to what your customers say!
5. Integrating solutions into your value proposition: How does this potential solution fit into the broader picture of your company's offerings? It's essential to ensure that any new solution aligns with and enhances your overall value proposition.

Reflecting on these questions will set a strong foundation for your journey through the landscape of embedded lending solutions.

Start your diligence

The journey to selecting an embedded lending provider begins with a comprehensive understanding of your potential partners. In this section, we'll take a look at a few things you should evaluate about your potential partner, which includes leadership, operational core, funding, and its business model. Ask your prospective infrastructure partners to provide:

1. Executive summary: The bird's eye view

• Overview of the financial solutions platform: They offer a high-level summary of the proposed lending platform, highlighting its key features and the expected benefits it brings to your company. This snapshot provides a clear picture of what the platform stands for and its potential impact on your business.

2. Company background: A closer look

• Leadership background: The strength of a company often lies in its leadership. Understanding the experience, expertise, and vision of the company's leaders can give insights into the provider's reliability and future direction.
• Noteworthy investors and experience: Knowing who backs the company financially and their track record can offer a sense of stability and credibility. Also, a look into the company's history and their journey in the financial technology landscape can reveal their adaptability and resilience.

Through this deep dive into a company's core, you gain not just information but insights that are crucial in determining whether their solutions align with your goals and values. This foundational understanding sets the stage for evaluating the specifics of what they offer and how it can harmonize with your needs.

Solution set

Understanding the range and depth of solutions a potential embedded lending provider offers is crucial in assessing their suitability for your company's needs. This section is designed to guide you through the various aspects of the solution set, enabling you to gauge how well it aligns with your specific requirements and objectives.

1. Use cases: Addressing specific challenges

• Solving unique challenges: What specific problems does the provider's solution address? It's essential to understand how these solutions cater to the unique needs of your customers. Do they serve the size and expected credit quality of customers that you work with, for example?
• Methodology: How does the solution tackle these challenges? The approach and technology used can significantly affect the solution's effectiveness.
• Versatility: Does the provider offer multiple solutions to cater to different needs? This flexibility can be crucial for adapting to diverse customer requirements.

2. Beyond lending: Comprehensive financial solutions

• Additional offerings: Apart from lending, what other financial solutions does the provider offer? Services like embedded payments, insurance, or charge card solutions can add substantial value.
• Integration: How seamlessly do these additional services integrate with the lending solutions? This integration is key to providing a cohesive experience to your customers.

3. Geographic reach: Service availability

• Service areas: Where does the provider operate? For companies targeting a specific region, this factor can be a deal-breaker.
• State-specific services: In countries like the United States, the ability to operate across all 50 states is an important consideration.

4. Underwriting process: Efficiency and requirements

• Data Requirements: What kind of data does the provider require for underwriting? The extent and sensitivity of data needed can impact the customer experience.
• Turnaround Time: How quickly does the provider process financing requests? Speed can be a critical factor in customer satisfaction.

5. Branding and customization: Making it yours

• White labeling: Does the provider offer solutions that can be branded as your own? This feature allows for a seamless integration into your existing platforms, enhancing brand continuity.
• Customization: To what extent can the solutions be tailored to fit your specific needs?

6. Technical aspects: Front-end and back-end solutions

• Full stack vs. modular solutions: Understanding whether the provider offers a complete end-to-end solution or allows for modular integration can impact your operational flexibility.
• Outsourcing: Does the provider outsource any part of the customer experience? This can affect the consistency and quality of the service, while posing reputational risk to your platform.
• Implementation time: How long does it take to implement the solution, and what is the estimated time to the first value?

Customer engagement

In this critical phase of our journey, we shift our focus to how embedded lending providers engage with customers. This aspect is vital as it directly impacts the borrower's experience and your company's relationship with its clients. Let's explore the key elements of customer engagement you should consider.

1. Embedded vs. referral experience

• True integration: Is the lending experience seamlessly embedded within your platform, or does it merely act as a referral with a redirected application process? True embedded lending should offer a fluid, intuitive experience that feels like a natural extension of your services, resulting in meaningfully higher conversion rates.

2. The borrower journey

• Application process: What does the application journey look like for a borrower? Is it straightforward and user-friendly? Understanding this process helps gauge the ease with which your customers can access lending services.
• Supporting materials: Can the provider supply diagrams or mock-ups of the borrower journey? Visual representations can offer deeper insights into the user experience.

3. Marketing and communication

• Marketing strategies: How does the provider propose to market their solutions? Assessing their marketing approach can help understand the level of effort required from your side to promote these services. Collaborative development of a sophisticated promotional strategy is crucial to the success of the program.
• Collaboration: What kind of support and materials does the provider offer to assist in your marketing efforts?

4. Servicing and collections

• Ownership and process: Who manages the servicing and collections? Is it handled in-house or outsourced? The management of these processes can significantly impact the customer experience.
• Collection philosophy: Understanding the provider's approach to collections gives insights into their values and how they align with your company's ethos.

5. Customer testimonials and case studies

• References: What do previous clients say about the provider? Testimonials and case studies can provide real-world evidence of the provider's performance and reliability.

Regulatory requirements

In the complex world of financial services, compliance with regulatory requirements is not just a necessity; it's a cornerstone of trust and reliability. This section focuses on the critical regulatory aspects to consider when choosing an embedded lending provider. Understanding these elements is essential for ensuring that your chosen provider not only meets current legal standards but is also prepared for future regulatory changes.

1. Data security and privacy

• Security standards: What measures does the provider have in place to ensure data security? Look for certifications like ISO or SOC compliance, which are indicators of robust security protocols.
• Privacy policies: How does the provider handle sensitive customer information? Ensuring they have stringent privacy policies in place is crucial to protect both your customers and your company.

2. Compliance with lending laws

• Lender of record: Who is the official lender of record? This designation has significant implications for responsibility and risk management.
• Credit and fraud risk: How does the provider manage credit and fraud risks? Understanding their risk assessment and mitigation strategies is vital for a secure partnership.

3. Regulatory risk management

• Adaptability to change: The financial regulatory landscape is ever-changing. Does the provider have a strategy for staying current with legal developments? Their ability to adapt is crucial for long-term sustainability.
• Strategic approach: What is their regulatory strategy? A proactive and informed approach to regulatory compliance can safeguard your company from future legal complications.

Commercial considerations

The final piece of our comprehensive guide focuses on commercial considerations. This section is crucial as it delves into the financial aspects of partnering with an embedded lending provider. Understanding these elements will help you gauge the economic viability and potential revenue opportunities of the partnership, ensuring that the provider aligns not just with your operational needs but also with your financial objectives.

1. Customer pricing

• Pricing structure: How does the provider price their solutions for borrowers? Understanding the interest rates, fees, and their calculation methods is key to assessing affordability and transparency.
• Disclosure: How are these costs communicated to the borrowers? Clear and upfront disclosure is vital for maintaining trust and compliance.

2. Incentives for repeat borrowing

• Encouraging loyalty: What strategies does the provider employ to encourage repeat usage? This might include lower pricing for returning customers, expanded line sizes, or increased term lengths.
• Value proposition: How do these incentives align with your customers' needs and your business model? The right incentives can drive long-term customer engagement.

3. Platform incentives

• Revenue sharing: Does the provider offer a revenue-sharing model? Understanding how this works can reveal potential revenue streams for your platform.
• Incentive structures: Are there specific incentive structures for bringing in new borrowers or hitting certain milestones? These incentives can significantly impact your bottom line.

4. Platform fees

• Implementation fees: Are there any upfront costs associated with implementing the provider's solutions?
• Licensing fees: Does the provider charge ongoing licensing fees? Assessing these costs is essential for understanding the total investment required.

5. Additional revenue opportunities

• Risk sharing: Is there an opportunity for your platform to participate in risk-sharing arrangements? This could potentially increase your revenue upside but also comes with its own set of risks.
• Balancing risks and rewards: Understanding the balance between potential revenue and the risks involved is key to making an informed decision.

6. Balance sheet considerations

• Provider's financial capacity: What is the capacity of the provider's balance sheet? This information can give insights into their ability to support lending at scale.
• Scaling funding sources: How does the provider view the scaling of their funding sources? A provider with a robust and scalable funding model is more likely to be a reliable long-term partner.

Next steps

With this guide, we have traversed the landscape of selecting an embedded lending provider. From understanding your challenges to scrutinizing the commercial implications, each step is designed to provide a holistic view, enabling you to make a well-informed decision. Remember, the right partnership can unlock significant value for your business and customers. It's about finding a provider that not only offers the right solutions but also aligns with your strategic goals and values.

As you move forward, use this guide as a roadmap to navigate the intricate process of choosing an embedded lending partner. Your journey towards enhancing your platform with the right financial solutions starts here.

As always, we would love to hear from you. Contact us at hello@kanmon.com!