Embedded finance can be hugely convenient for customers – but only if they understand what they’re getting into, writes Richard Carter, CEO of Lenvi.
Companies have long pursued more convenient and simpler ways for consumers to borrow or pay for goods and services.
Think of the double-glazing sales forces of past decades offering deals on finance. Or mail-order catalogue companies, like Littlewoods, which for decades enabled families to pay for the latest trendy gear over many weeks or months (for a fee, of course).
These are among the unlikely forerunners of today’s much-discussed growth of embedded finance, the process of integrating the financial journey within the purchasing journey.
Embedded finance is changing and growing in scale
While embedded finance has so far been an evolution, rather than a revolution, it is expected to have a big future: for example, by 2030, Bain & Company forecasts that 20% of all lending will be embedded.
The delivery channels are changing, bringing increased seamlessness, simplicity and integration of the finance deals that are available to customers.
However, some embedded transactions are becoming so slick, that if you’re not paying attention, or don’t pause for thought, you could find yourself using a finance method you don’t understand. If you miss a payment, you could face late fees or even find yourself chased by debt collectors. Missed payments could also be recorded on your credit report.
One prominent type of embedded finance is certainly bamboozling a large proportion of consumers: buy now pay later (BNPL). A report from Citizens Advice, published in 2021, showed 39% of people who had used BNPL in the last year did so without realising. What’s more, 40% thought BNPL wasn’t “proper” borrowing and 42% didn’t fully understand what they were signing up for.
Those stats are for BNPL users in general. Within them will be more vulnerable groups, who may find some embedded finance particularly challenging to navigate. For example, people with neurodiverse conditions such as ADHD.
But anyone can get caught out by embedded transactions. I know from my own experience how easy it is to sign up to a payment plan, without thinking it through. I’m embarrassed to admit that I did just that, in a hurry one day, and ended up getting an arrears letter. Only then did I realise my mistake and rectify it.
As embedded finance spreads far and wide, its impact on consumer finances will grow. Even leaving your car in a car park that automatically charges for the parking session is an example of a frictionless, embedded payment. This is hugely convenient for many of us, but there will be incidences where someone gets caught out (not to mention users, like some older people, who don’t have a smartphone or struggle to use the apps).
Or think of paying for something monthly on subscription – an increasingly popular way of paying for anything from food to cars – and continuing to pay even as you stop using the service. It’s easy to lose track.
So, the health warning is that these sorts of schemes work well for the majority of people – and can be very convenient – but a significant minority will get caught out and that can cause distress and create financial insecurity.
Accumulating accounts, and stress
There is a risk that the problem will deepen as embedded finance becomes more widespread, and finance options are offered by more and more non-banks. We’ll all end up with an increasing number of accounts and payment plans in different places – it’s already common to have dozens of finance related contracts and accounts – which are increasingly hard to keep track of. This proliferating number of deals and debts can become increasingly stressful, particularly if you can’t afford to pay for them all.
So, what do we do about this? Embedded finance in its many guises brings many advantages to consumers, not least convenience. But at the moment we have industry forecasts about the great potential of embedded finance in one corner; and warnings about consumers’ growing indebtedness and misunderstanding of financial products in the other. So, there is a disconnect.
Yet the pursuit of increasingly frictionless finance needs to keep consumers’ needs at its core: for me, this means looking at ways to make it clearer for consumers what financial transaction they are entering, and its implications for their finances.
All transactions should come with enough information so that consumers understand how and when they are spending their money and what the implications might be if they can’t afford it, or don’t keep up with payments.
It’s all about educating and informing consumers, so they are able to make better decisions about their money and how they use it. There is a mismatch between the increasing sophistication and ease of financial transactions, and the gaping whole in financial savviness.
Financial journeys can still be smooth. But some friction is needed: a moment of pause so that consumers can be sure they understand the transaction and it is the right choice for them.