Home Finance Credit as a Service: The next frontier for embedded payments

Credit as a Service: The next frontier for embedded payments

by maria
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By Ivo Gueorguiev, co-founder of Paynetics

Firms are increasingly seeking ways to bring the ease and simplicity of digitalised consumer payments to new verticals and explore new use cases. And Credit as a Service (CaaS) is set to be one of the main drivers in this next phase of payments innovation.

At its core, CaaS is the ability to integrate credit into other environments, create new user experiences, and leverage the wealth of transaction data generated by the purchasing behaviour of customers. Through CaaS technology, companies have the tools they need to tailor the way they use and exchange credit, in line with their specific business needs.

Its implementation can help businesses increase conversions, reduce churn, explore new revenue streams, and more easily scale their lending operations across borders.

A change in the paradigm of how credit is offered

Credit is a cornerstone in our financial life and a major driver of economic activity. Historically, the provision of credit has been restricted to specialised institutions; and offering and distributing credit has always been compartmentalised. However, with the development of financial technology and specifically with the emergence of embedded finance, this is changing. The credit offering can now be embedded in a wide variety of environments.

For example, let’s take the world of fintechs focusing on specific use cases and verticals.  While they tend to have a very narrow focus on the specific problem they are solving, adding CaaS allows them to leverage on the client base they have. This enables their consumers to apply and get credit in a few simple steps.

The CaaS module can be easily integrated into existing front-end mobile apps without disturbing existing user experiences and flows. Proven in practice, the lending module increases engagement, generates traffic, grows the customer base, and provides a valuable additional source of revenue.

The most successful businesses have a deep understanding of their customers. And they know how to embed finance into their platforms to enrich their services.

Investing in the best end-to-end CaaS solutions enables continuous monitoring and analysis of customer behaviours, including through non-traditional data sources, such as social media. This insight into customer trends and spending habits empowers companies to personalise and differentiate their offering – giving them an edge over competitors.

Understanding how and where customers spend their money is also the holy grail of underwriting. So not only will this data help to spot trends that boost sales, it will also improve risk management.

Increasing conversions and loyalty, reducing risk

On the flip side, CaaS brings the fintech to the relatively stale lending business. Flexible, and easy-to-use credit payment solutions can increase conversion rates for B2C lending firms. For example, merchants that provide Buy Now Pay Later (BNPL) options can lower short-term cost barriers for customers and drive sales for their business.

CaaS modules are designed to provide a superior user experience, which increases conversion. The easier it is to pay, the less likely shoppers are to abandon their purchase. In fact, Research by American Express found that 86% of buyers are willing to pay more for a great customer experience. CaaS also allows for significant cross and upselling opportunities, helping boost customer loyalty and retention.

By combining payments with credit, lenders remain close to their consumers and monitor their activity, improving sales, and risk management. It provides lenders with unique insights into the purchase patterns and financial behaviours of costumers.

Based on this new holistic approach to evaluating the creditworthiness of clients, lenders are able to set different limits and controls, customized hierarchy, multiple products, and different pricing levels. Thereby strengthening and complementing the traditional credit scoring models.

Scaling up cross-border lending

Through facilitating cross-border lending, CaaS enables businesses to expand and scale their operations globally.

While flexible fulfilment options such as BNPL are replacing some traditional functions of credit cards for younger consumers, these payment options currently have limited usability. Conversely, credit cards are universally accepted, but they’re far more expensive for businesses and their customers.

This is where CaaS can offer the best of both worlds.

By enabling a digital wallet with a debit card, companies can offer a credit function within the context of an e-wallet. This can then be legitimately passported across borders, without the need for costly additional licenses. This is why CaaS encompasses so much more than just BNPL and can be priced more attractively for merchants and customers alike.

Through the digital capabilities of virtual cards, CaaS supports merchants to scale their offering, while letting consumers spend in more places.

The future of CaaS

Looking forward, CaaS will support companies to bring new and innovative services to their customers by marrying credit with fintech – free from the limitations of the current relatively segmented way of lending and the high costs of traditional credit cards.

Companies benefit from improved customer insights and are better able to offer tailored services and discounts. So, it’s likely we’ll see a new hybrid product emerging via digital wallet solutions in the near future. By embedding the credit function into new environments, CaaS has the power to bring businesses and their customers closer together than ever before, whilst generating sustainable revenue streams.

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