Build or buy embedded lending: a guide for platforms
Embedded lending is business financing built into a platform. Merchants get offers inside the platform they already use, and credit decisions come from data the platform already has. It is no longer an experimental concept, but a way for platforms to capture roughly 400 billion of unmet European SME demand.
The question every platform goes through is whether to build it in-house or buy it from an infrastructure partner. In this blog, we will cover what each path involves, how to decide between the two, and what to ask a partner before signing.
What does building in-house take?
Building your own financing solution offers complete control and customisation over the product, and is ideal for platforms that have unique needs and resources to manage the complexity. However, it also requires a significant investment in time, money, and expertise. Building embedded lending might take around 12-18 months as it requires a platform to navigate regulatory requirements if the product is deployed in more than one market. Full control means full responsibility.
If a platform decides to build, the clearest way to evaluate the readiness of the platform is by asking what expertise has to be developed, mainly:
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1.
Capital
Where will the capital come from? From your own balance sheet or will you look for external investors?
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2.
Regulatory requirements
Do you hold the necessary licences to offer financing and comply with all the regulatory requirements? While licenses can be pass-ported, there might be local nuances.
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3.
Underwriting and risk
Do you have expertise to assess credit risk based on your own data? You will need to predict the probability of default and keep the default rates manageable to make sure the lending programme is successful commercially.
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4.
Operations
Do you have resources to handle end-to-end operations? You will need to handle compliance checks, payouts and repayment tracking. All of it requires a dedicated team or investment in automations.
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5.
Product and tech
Do you have product and tech resources to build the product? If you decide to build multiple lending products, the resource requirements might be even higher.
What does buying from an infrastructure partner look like?
Partnering with external providers gives you access to a ready-to-go financing solution that can be tailored to your specific needs. It means trusting team of specialists that already run embedded lending across multiple platforms and markets.
If a platform decides to partner, it does not have to obtain licences, fund loans, underwrite, or operate the day-to-day operations. The partner takes care of that. Additionally, partnering allows the platform to launch the product faster, without an increase in headcount or need to deal with multi-market complexity. However, partners usually charge fees and might offer less customisation and less control over the product.
When buying from a partner, some of the aspects you will discuss in the buying process are:
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1.
Product experience and setup
In a solution design workshop, platform and partner co-design the product experience and roles in delivering that experience to merchants. You will discuss topics like integration depth, data sharing process to enable underwriting or repayment setup.
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2.
Commercial and contractual setup
You will need to align the contractual setup and discuss commercials for a mutually-beneficial partnership.
How to decide?
Whether you decide to build a financing solution or partner with an external provider, what matters most is choosing a path that aligns with your goals, experience and resources.
To make a decision, every platform needs to consider how much control they need, and whether they have time, human resources and capital to build embedded lending in-house.
| Questions to consider | Building in-house | Partnering with a provider |
|---|---|---|
| How much control do you want to have over the product? | Full control of the product experience | Level of control depends on partner |
| How fast do you want to go live? | Implementation might take around 12-18 months, including obtaining licenses, sourcing capital and building product | Partner takes care of the launch, usually in weeks |
| How much resources are you ready to invest? | Costs are high, including setup costs and running the teams | Costs are lower, but you need to compensate the partner through fees |
How much control do you want to have over the product?
How fast do you want to go live?
How much resources are you ready to invest?
For most platforms, the best choice is to buy. Partnering with an expert allows you to use proven systems, scale quickly and focus on what you do best, managing and growing your platform. However, even considering that building in-house is a long road with plenty of risks and challenges, for a business with enough to gain, the payoff can be worth it.
What to ask a partner?
If you do decide to buy a solution from an embedded lending partner, here are five aspects worth considering before signing:
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1.
Country coverage
How many markets are covered under the partner's own licences? The partner usually deals with most of the legal compliance work, but how much you're involved will depend on several factors, including how well-versed your partner is in navigating the process.
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2.
Eligibility and limits
How many of your merchants will actually qualify, and how much do they get offered? You want to make sure you can cover maximum portion of your merchant base as well as offer relevant limits to them.
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3.
Payout speed
How fast is the payout process? The promise of embedded lending is speed. Make sure the payout timelines do not resemble those of traditional banks.
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4.
Product breadth
Are they offering different financing products? Different merchant segments need different products. Make sure that the partner supports all of the products you want to offer.
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5.
Implementation work and time-to-market
There are different integration methods, therefore it is important to consider how long it takes from signed contract to a live programme with each one of them.
What this comes down to?
Twenty years ago, platforms faced the same choice with payments. Partnership became the default. Risk, identity, regulation, and day-to-day operations turned out to be specialist work, and the platforms that tried to own all of it spent years catching up to the ones that did not.
Lending is at the same point now. The build-or-buy question is the one platforms ask first. The harder question, the one that surfaces once a programme starts scaling, is who can run it across 30 markets without rebuilding the stack each time a regulation shifts.
Embedded lending is hard, and that is the point. The partners that get this right build it to run, not just to launch.
Curious to see how embedded lending could work for your platform? Book a demo.
finmid is the embedded lending infrastructure powering platform growth. With its API, finmid enables platforms to launch tailored financing products for their business customers at scale. Across industries, borders, and business models, finmid drives revenue, improves retention, and fuels core business growth. finmid is trusted by Europe’s most ambitious platforms, including Wolt, Delivery Hero, Just Eat Takeaway, Glovo, and FREENOW. Learn more at finmid.com.
