What embedded finance means for Nigeria’s retail lending

As consumer loans occupy the waking hours of regulators in Nigeria and Africa, experts say adoption of embedded finance can further increase credit access for businesses.

After years of being ignored by banks, the Central Bank of Nigeria’s intervention appears to be yielding for small businesses in need of loans to expand their businesses. As at October 2021, data from the apex bank showed that consumer loans rose by 37 percent year-on-year (YoY) to N2 trillion, driven by improved credit appraisal and product diversifications offered by banks and other lenders.

However, there is still a huge gap to be filled. As of 2020, Nigeria’s credit gap was at N1.7 trillion, data from the CBN shows. Leveraging embedded finance can bridge this gap significantly.

Embedded finance can be defined as the seamless integration of financial services adopted by non-financial companies. Many Nigerian companies are already adopting this service such as Onepipe, Lendsqr, Klump, etc, with banks like fidelity also engaging in it.

Experts say the embedded finance market is estimated to be worth $3,5 trillion today and is expected to grow to $7 trillion in 2030.

According to Adedeji Olowe Chief executive officer, Lendsqr “embedded finance is still at its infancy and significantly low compared to loans being granted the traditional way”.

Obtaining a loan traditionally from a bank is time-consuming, in order for a bank to make a credit decision, they need information from the small business owner (SMB) in the form of multiple financial documents. This is usually prepared manually by the business owner by gathering, scanning, or printing financial data and handing it to the bank via email or face to face.

The credit team then analyses the information of the business owner, and this process doesn’t guarantee that the loan will be given out.

Online lenders, on the other hand, make decisions using fewer data, Ideally, those that are available immediately and digitally. They understand that time is money for the small business and that with quick decisions and efficient digital customer experience they can win business.

Read also:  FastCash supports Nigerians with digital loans disbursement worth N59bn

BNPL

Faith Njoku, a boutique owner at Oshodi market told Businessday that if you are a well-known customer she can easily give out her goods to you without a doubt that payment will be made at a future date, with an agreement on how payment will be remitted.

Buy now, pay later (BNPL) options offer consumers the ability to purchase an item and pay the amount due over a period of time. BNPL is an attractive option for those who do not have the financial means to purchase but can afford to make payments in increments over a short period of time.

BNLP means you walk away with a product while agreeing to make payment later, especially for consumers who are buying smaller items. This requires a credit check. Most businesses will do a soft inquiry on the customers’ ability to pay later. This lending option offers a zero percent interest during the qualifying payment period.

POS Lending

Point of sale lending is a convenient lending option that allows consumers to make purchases with incremental payments over time, POS lending may be offered by traditional banks, credit unions, and online lenders.

Consumers typically sort for POS lending options when they are purchasing big-ticket items such as furniture, vehicles, home renovation projects, and travel expenses. Payments and interest rates may vary based on the loan amount offered to an approved shopper.

In other to get a POS lending option, consumers must be able to make the payments required, have a fair to high credit score, and such lending must have a low-interest rate.

A credit check is required in other to ascertain the customer’s ability to pay later. This check has to do with your bank verification number (BVN) being investigated to ensure you are creditworthy and free from online debt.

BNPL and other embedded finance are smart propositions for borrowers or users because they can find loans just at the time, they need cash to make their purchase.

Lenders are also able to make smarter decisions because they have insights into what borrowers are using the loans to finance. On the flip side, it’s easy for it to be abused as some may get loans for items they ordinarily shouldn’t be buying, he said.