Traditional financial institutions, FinTech companies, businesses, and consumers benefit from lending as a service (LaaS) offerings, which have altered the digital lending landscape.
What’s great about LaaS solutions is that they enable non-financial institutions to offer customers lending solutions at the point of sale. In addition, LaaS providers are impacting business loans and the broader financial services sector for the better.
This post will explain lending as a service so your organization can make informed decisions about using a digital lending platform to offer customers financial services or access additional business loans outside the traditional lending sector.
What Is Lending as a Service?
Lending as a Service is an extension of credit that occurs outside of traditional financial services providers like banks, credit unions, and other lending channels. Lending as a Service is closely related to Banking as a Service (BaaS), embedded finance, and marketplace lending.
The lending process is often time-consuming and complex. A LaaS platform simplifies complex lending models and makes them consumable through new digital channels and integrated financial experiences.
The most visible LaaS solution is the buy now, pay later offering on most eCommerce sites. These financial services delight customers and offer them an affordable payment option that is often interest-free as long as the loan is repaid on time.
There is also a growing demand for small business lending. Financial service providers partner with a LaaS provider to serve small business customers. Small business owners apply for and receive business loans through the LaaS provider.
This arrangement simplifies the lending process for small business owners and offers financial services providers an opportunity to access new lending models, reduce operational costs, and grow their loan book.
Typically, LaaS and other embedded credit options are made possible through application programming interfaces (APIs). However, LaaS is not exactly a new concept. The idea of embedded credit or indirect lending has been around for a while.
One of the best examples of this is auto loans through a dealership. The digital lending shift has enabled more businesses to embed digital banking and lending services into their existing products and applications.
Key Aspects of LaaS for Your Organization to Consider
LaaS should not be approached as a new way to monetize your customers. Instead, LaaS should complement the core competencies of your existing business model and drive customer satisfaction engagement.
If you are interested in adding lending options to your website or application, here are some important aspects to consider:
- Combine banking services
- Offer the right credit product
- Interest rates
- Support model
- Contextualize offers
An important facet of LaaS that your organization should consider is pre-approval. A good LaaS option will enable your organization to prescreen and approve customers to ensure the only people getting lending offers are those who will ultimately be approved.
If a customer has to endure a lengthy credit application and grant access for their credit scores to be pulled only to get rejected, this might anger them and reflect poorly on your organization and brand image.
The last thing your business wants is to offer services that are not available. As a result, pre-approval features are important when comparing LaaS providers to partner with.
Combine Banking Services
Are you able to combine LaaS services with other embedded banking services? Banking as a Service is a broad service category that often entails interrelated financial products and services.
You can add value to your loan offerings by combining them with additional financial services. When evaluating LaaS service offerings for your business, consider if the provider will enable you to offer additional services or if the service can be integrated with other digital banking services.
Offer the Right Credit Product
Ensure that you offer your customers the right credit product for their needs in relation to your business offerings. For example, if you have an eCommerce website, the best offering is a buy now, pay later option.
Failing to offer customers the right credit product will contribute to a poor customer experience, and it will likely get less use. To ensure that your business benefits from adding LaaS features to its products, you must identify the most valuable credit products to your customers.
Your customers will likely accept a higher interest rate for the sake of speed and convenience. First, however, you need to ensure that the interest rates offered through the LaaS platform embedded in your product are aligned with the current market.
In addition to interest rates, you should carefully review the origination fees that might be charged to your customers. Exorbitant fees and exceedingly high-interest rates will leave customers feeling taken advantage of. In addition, this can hurt your brand reputation since the offering is coming through your brand.
Where do customers turn when there is an issue with a loan product? Will they call your business first or the originator of the loan? Understand how the customer support model works before choosing a LaaS provider.
Once again, a poor customer support experience will hurt your business. The customer trusts your business, and the lending service is being offered through your brand. Issues with that product will ultimately come back to your business.
Failing to have an adequate and clear customer support model will hurt your brand’s reputation and could hurt your business.
Ensure that lending offers are always relevant to the customer. Out-of-context loan offers will not only appear spammy and hurt your customer experience, but they will also fail to deliver the benefits LaaS can provide.
For example, a buy now, pay later option should be offered at checkout or on detailed product pages, not during product searches or informational content. Properly contextualizing LaaS offers is vital to delivering a quality customer experience.
LaaS and other embedded banking services are gaining popularity and momentum. However, if your organization has yet to consider how these products could benefit its customers and business operations, it is time to look closer.
If you need help finding the best banking products and services to embed in your digital products, reach out to an experienced FinTech development partner like Koombea.