What equipment finance lenders might learn from PayPal, Square, Stripe & Apple Pay.
Anticipating an embedded finance takeover in business equipment finance.
Before consumer lending platforms like Klarna, AfterPay, and Affirm, payment platforms like PayPal, Square, and Stripe started the embedded finance revolution.
REPORTS REFERENCEDPwC | Uncovering Value in Embedded Finance: Challenging Assumptions to Chart New Growth
Payment processing within software, websites, or apps — often without requiring the user to leave the platform or interact with a third-party payment processor — were the first examples of embedded finance after credit cards.
PayPal was the pioneer of online payments. While not initially an embedded payment platform, PayPal enabled third-party websites to process payments in new ways.
Square provided small and medium businesses (SMBs) with a mobile point-of-sale (POS) credit card processing system. Over time, Square expanded its offerings to include integrated payment solutions, allowing businesses to embed payment processing in their digital platforms.
Stripe advanced the evolution of embedded payments. Stripe provided developers with simple APIs that could be integrated into websites and mobile applications, enabling businesses to process payments efficiently.
Apple Pay (2014)
Apple Pay enabled payments from within apps and websites, advancing the concept of embedded payments, especially in the mobile ecosystem. More recently, ApplePay facilitated new consumer financing offerings with BNPL characteristics at the point of sale.
These four examples show how embedded finance transformed commerce and altered consumer preferences.
An early 2023 report by PWC anticipated the recovery of embedded finance consumer lending companies like Klarna, AfterPay, and Affirm, Uncovering value in embedded finance | Challenging assumptions to chart new growth, challenged prevailing bank attitudes predicting the embedded finance revolution that occurred in payments would not enter lending.
PwC suggests the prevailing thinking was wrong:
Embedded finance is outperforming four common assumptions prevalent in banking for more than a decade, including the false assumption, “New entrants won’t enter into lending like they did with payments.”
It has been clear for some time that embedded finance is defying conventional wisdom surrounding banks by surfing a wave of very powerful trends: increasing digitization, a focus on customer-centricity and the growing power of ecosystems. As applications reach into areas previously ring-fenced by traditional financial infrastructure—payments, lending, savings, and banking licenses— the opportunities and implications for business model transformation have also quickly intensified.
Consumer and business lending were seen as untouchable business units, as regulatory hurdles and processes were seen as risks or deterrents to new entrants. But, PwC’s report points out that big-tech and large retailers are making inroads in embedded finance, largely through payments and white-label credit offerings. BNPL is predicted to reach US $437 billion globally by 2027, a 291% increase from US $309.2 billion in 2023.
Based on trends in both payments and unsecured lending, embedded finance offerings for business equipment borrowers at the point of sale now appear inevitable. If regulatory barriers haven’t slowed the progress of consumer lending, it’s difficult to imagine what will prevent embedded finance from rapidly expanding into business equipment finance, as business lending is generally less regulated than consumer lending.
Key learnings from the early days of embedded payments include:
Seamless User Experiences: Embedded payments have shown that integrating financial transactions at the point of sale can significantly enhance the customer experience. This seamless process can be applied to embedded lending, where loans or credit facilities are offered at the point of sale, and may be consummated in minutes.
OEM Advantages: As was the case with consumers in the early days of embedded payments, embedded finance makes it easier for business customers to transact with OEMs. This provides meaningful marketplace differentiation for OEMs and tech companies offering embedded financing at the point of sale.
Increased Personalization: Embedded payments systems capture and leverage data to understand customer behavior and greatly enhance the potential for repeat business and account control. With embedded lending, borrower data may be used to more efficiently and accurately facilitate loan offerings, establish pricing, and determine credit thresholds.
Increased Access: Embedded payments made financial transactions more accessible. Similarly, embedded lending in business equipment finance can efficiently deliver credit facilities to creditworthy SMBs that may not have easy access due to business proximity or other factors.The loan processing costs for embedded loans are a fraction of the origination costs incurred with the traditional lending model.
Risk Management: The ability to accurately and securely authenticate mobile users for embedded payments provides tested tools for securely facilitating embedded lending. Facial recognition and drivers license authentication technologies have been widely tested and adopted to facilitate secure payments. The same tools facilitate embedded equipment finance lending.
Partnership Ecosystems: The growth of embedded payments was facilitated by partnerships between fintech companies, traditional banks, and non-financial businesses. Similarly, embedded lending in business equipment finance is likely to thrive through collaboration among manufacturers and technology companies, banks, and emerging embedded lending platform providers.
Customer Trust and Loyalty: Offering financial services like payments within a familiar platform builds trust and loyalty. Embedded lending fosters higher customer loyalty and repeat business.
Technology Infrastructure: The technology that supports embedded payments—such as APIs, cloud computing, and mobile platforms—are being leveraged for embedded lending. This technology enables the secure integration of lending into the business equipment sale process.
Regulatory Compliance: Embedded payments have navigated complex regulatory environments, ensuring compliance with strict consumer protections. Business equipment finance, which operates in a less tightly regulated market, should be able to navigate potential regulatory challenges. Recently published regulatory guidance for banks partnering with Fintech companies has enabled enabled bank participation in embedded finance platforms designed for business equipment finance.
Compelling Unit Economics: As with the preceding embedded payment revolution, the cost savings and marketplace advantages for early adopters are significant. Current embedded finance platforms serving business equipment finance are priced at less that one-third the cost of operating the legacy delivery model. The cost difference may expand from 3x to 10X as the digital embedded finance platforms serving business equipment finance gain scale.