Why is bridging so late to embedded finance?

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rabbit and clock

I know that I shouldn’t be surprised. And yet, clicking through website after website it is astonishing to me that you still need to call or email to apply for a bridging loan.

We live in a world where 24.6 million Brits (half the adult population) get instantly approved for loans at the checkout by the likes of Klarna and ClearPay.

And yet, what is supposed to be the quickest of all alternative finance – bridging – is a manual process … How can that be?

Here’s why and how bridging finance should claim its share of the $115.8 embedded finance market.

AI offers more personalisation than any human could

Who knows you better, your mum or your phone? It’s a funny one, isn’t it? And yet, most of us deep down know that it’s the hordes of unbiased, real-time data contained in our devices that reveal the most about us.

Your phone knows the last thing you searched for, how long you sleep and (for smart watch wearers) even the regularity of your heartbeat.

Frankly, it’s creepy. But companies harvest and sell our data all the time – even banks, who make a reported $4.5 billion a year from it. And younger customers are ok with that. Mostly.

A study by Mastercard found that 84% of adults under 30 are willing to grant lenders access to their banking data to secure a loan, compared to 68% of over-60s.

Firms are taking full advantage. Within mere seconds, alternative lender Klarna analyses our (deep breathe now…) credit scores, income, employment stability, spending patterns, debt-to-income ratio, residential status, identity and age verification, credit history, affordability assessment, savings, investments and outstanding credit. In an eyeblink.

Insurance companies take it even further. In a whirlwind of picoseconds, they create fully risk-assessed and perfectly tailored propositions for customers at the checkout. In just a few years, it’s already become a $156 billion industry, and it’s growing at 35% each year… which is insane.

Lending is a huge part of the embedded finance space. I seriously think that the bridging industry is missing out on a $3.2 billion opportunity here. (And since I wrote that article in 2022, it’s probably substantially more now).

Human interaction is becoming less comfortable for borrowers

Of course, bridging isn’t just about creating deeply personalised loans. I get that. It’s about picking up the phone and talking to someone you trust.

When I speak to lenders, they often bring up the deep-rooted personal trust and sometimes handholding needed, which is at the beating heart of their business.

And I’m not suggesting taking that away. But younger customers are.

A quarter of under-25s refuse to pick up the phone at all. Think about what that means for phone-based businesses.

More than three in five avoid making calls. And if they absolutely must, over four in five experience apprehension anxiety beforehand.

Couple this pre-existing phone anxiety with asking for a big loan… and you’ve got a majority of potential younger clients who really, really, REALLY don’t want to dial your number.

It’s not just younger clients either, a study by Liveperson found that 91% of customers are more likely to do business with a company if they can message rather than call.

Some bridging lenders already cater for this by offering online forms and email options… But surely, it’s just a matter of time before that gets old too. While some customers may like picking up the phone, there are a growing number who prefer to keep it digital and faceless.

2023 research by Zendesk found that 67% of customers prefer self-service over communicating with a representative. Bridging lender Morpheus has already moved into this space with a digital-first proposition.

But this doesn’t have to cheapen the service. On the contrary, PwC uncovered that clients are willing to pay 16% more for a great experience, and they’re 63% more likely to allow access to their data too.

For bridging lenders, offering an omni-channel service which includes embedded lending at the checkout, could spark a whole new world of profitability.

Some firms are closer than others

Some lenders have already started making tentative steps in the direction of embedded lending. Ashman, OakNorth, Offa and Together are all examples of firms who have migrated to the Cloud (or at least, started the process).

Firms that still run from physical mainframes will not be able to offer embedded lending, because they can’t share data with other financial services.

Not to give anyone a headache or use unnecessary jargon, but the things that connect one source of data to another are called “Application Program Interfaces” (APIs), and they are the reason embedded finance can exist in the first place.

They’re the thread that sews all the patches of personal data together into one coherent piece. And they work on the cloud.

One bridging firm, Together, stands out as a promising candidate for embedded finance. Partnering with nCino this year, it’s planning to build a “Lending-as-a-Service” option. This the back end, or what’s under the hood of embedded finance.

Here is a quick model of how it could work:

Picture

With the support of a SaaS technology provider, the bridging lender can offer loans directly within the auction site.

It would probably look like a button to customers, it probably wouldn’t even have the lender’s own branding.

Lending-as-a-Service is usually white-labelled so the e-commerce or auction site can put their own look on it, as the customer already has a relationship with them. It’s called embedded lending, but it could just as easily be called “invisible lending”.

Another promising firm is Ashman, who partnered with Software-as-a-Service (SaaS) provider, Mambu in 2022 to build “a speedy, personalised service for conscientious property businesses and entrepreneurs in the UK“.

It wouldn’t be surprising if the partnership moved into embedded bridging loans too – especially as Ashman has a banking licence.

Better late than never!

Ok, so bridging finance is kind of late to the embedded finance party. But there is still time. This is a meteoric opportunity, which is already part of our lives right now.

Firms looking to future-proof can talk to SaaS companies, and start to forge relationships with e-commerce sites, including online auctions.

If you’re firm is the default auction-branded “Klarna” option at the checkout, you’re going to get a mammoth first-mover advantage.

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