In India, embedded lending is rapidly emerging as a preferred method to access credit, a trend that’s expected to accelerate in the coming years.
A study conducted by Visa, reveals that about two-thirds of consumers and micro and small businesses (MSBs) in the country are strongly inclined to switch to providers that offer embedded lending solution, an interest that’s particularly pronounced among those who have used embedded lending in the past, indicating that positive experiences are fueling continued engagement.
The research, which polled 693 MSBs and more than 1,065 consumers in India, found that 65.9% of consumers and 69.6% of MSBs in India would be very or extremely likely to ditch their current financial services provider for one that offers embedded lending solutions.
These proportions are even higher for consumers and MSBs with prior experience with embedded lending. Among local consumers who used embedded lending recently, 79% would be highly likely to switch to providers offering embedded lending options.
For MSBs, the share is even higher at 82%. These data suggest that familiarity with embedded lending enhances the likelihood of continued use, signaling positive customer experiences but also a need for industry players to build familiarity to win and retain customers.
Across India, lenders are waking up to the opportunities presented by embedded lending. 44% of the financial institutions surveyed for the research said they are very or extremely interested in rolling out new embedded lending products for consumers. 41% indicate the same for MSBs. About two-thirds of the lenders not currently offering embedded lending expressed strong interest in beginning to do so, indicating that these providers see embedded lending as an important part of remaining competitive.
Adoption of embedded lending in India
PYMNTS Intelligence, which conducted its study across six global markets, found that India has one of the highest adoption rates for embedded lending worldwide. In the prior three months, 15% of consumers in India reported using embedded lending, ranking second among the surveyed countries, just behind the US with 17%.
Adoption is particularly strong among several key segments, with Gen X (born between the mid-1960s and the early-1980s) and Gen Z consumers (born between 1996 and 2010) leading the charge. Among Gen X consumers, 20% reported using embedded lending recently, a proportion that stands at 18% for Gen Z. These rates are higher than the national average.
Adoption among Indian MSBs is even more remarkable, with 37% of respondents reporting using embedded lending in the prior year, the highest rate across all countries in the study. More specifically, usage is particularly high for smaller businesses, with those generating between INR 46 million (US$547,000) and INR 832 million (US$10 million) in revenue emerging as the most prominent business users of embedded lending at 52%.
PYMNTS Intelligence attributes this high adoption rate to India’s rapid and widespread adoption of smartphones and the Internet, as well its relatively underdeveloped traditional financial services sector. These factors have allowed the country to leapfrog more advanced markets in the adoption of embedded lending, the report says.
The study also highlights the influence of cash flow stability on embedded lending usage for both consumers and MSBs. For consumers, 21% of respondents with unstable cash flows said they had used embedded lending in the past three months, 38% higher than the consumer average. For MSBs, this trend is stronger, with 49% of those with unstable cash flows using embedded lending in the last year, 34% more than the MSB average and the highest across the six markets studied.
This finding suggests that embedded lending is becoming a lifeline for those dealing with unstable revenue streams or fluctuating income, allowing them to maintain operations or meet financial obligations when traditional banking solutions might not be as accessible or timely.
Challenges and barriers
Despite growing interest and adoption, the study uncovered several challenges that consumers and MSBs face when using embedded lending.
For consumers, the most frequent issue with embedded lending is irrelevant offers, which were reported by 73% of those who recently used embedded lending. Other common issues for consumers include concerns about privacy and security (35.3%), and friction with the application process (30.5%).
For MSBs, the application process was the most frequently cited pain point, experienced by 65.1% of local MSBs that recently used embedded lending. This is followed by concerns about credit options and availability (62.4%), cost (51%) and repayment issues (49%).
Featured image credit: edited from freepik