How Non-Bank Lenders Can Build a Complete Banking Ecosystem with Embedded Finance

Non-bank lenders play a key role in the ecosystem by filling financing gaps that traditional banks often leave unserved. They often provide industry-specific solutions, operate with more flexible underwriting criteria, and ultimately foster innovation and competition in the lending space.

The impact of this model is already evident in the market. OnDeck has disbursed over $25B in funds to small businesses that likely wouldn’t have had access to capital otherwise. Upstart has grown into a multi-billion dollar public company by providing loans and debt consolidation products to consumers. AgAmerica has taken a verticalized approach to become a leading lender for American farms.

The traditional non-bank lender business model is in no way broken, but it does have a persistent blind spot baked in. The moment the funds hit a borrower's bank account, the lender loses visibility into these funds entirely and must have faith in their underwriting, collateral (if any) and the borrower’s ability/willingness to pay.

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Thanks for the cash. Now, goodbye.

Once the loan terms are finalized the funds are typically disbursed to an external bank account via ACH or a wire. This introduces some blind spots for the lender, including:

Financial visibility is next to zero. Once the funds leave, the lender has no insight into how borrowers are using the funds. They can't see whether the capital is being deployed productively or wastefully. They can't tell if a borrower is thriving or starting to struggle.

Revenue is one-dimensional. The only way to make money is through interest or upfront fees. Revenue is directly tied to credit risk.

Customer relationships are limited. Once the customer receives the loan, there is little to no additional value the lender can provide. Customer LTV is limited to the amount of funds they need to borrow at any given time.

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The flywheel effects of embedded finance

When non-bank lenders embed additional financial products into their existing product set the use cases are clear:

1. Offer bank accounts to store the funds that are deployed. This enables lenders to earn interest on deposits, have greater visibility into the financial health of borrowers (cash-in/out), and utilize a new customer retention lever.
2. Offer credit cards to serve more borrowers through a higher APR / less capital-intensive credit product. Lenders will then earn interchange on all associated card spend, and gain unique insights into how exactly those funds are spent.

Non-bank lenders have a unique flavor of embedded finance since their core business value prop is already in financial services. This makes it even more interesting because by adding banking and cards to their existing lending products, non-bank lenders can create a complete financial ecosystem for their borrower. Lenders can equip their customers with what they need to access, store, and spend capital while generating valuable data that improves their competitive advantage.

Offering a complete financial ecosystem through embedded accounts and cards creates three powerful flywheels for lenders: revenue, risk, and data. Let’s dive into each of these.

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The revenue flywheel

When a lender disburses funds to a borrower, that cash is stored and spent elsewhere, earning those other institutions revenue streams. For the lender, it's just money out the door.

When a lender expands their financial ecosystem, they can realize additional revenue from interest on deposits and interchange from card spend.

Credit card interchange in particular can be a significant driver of revenue, with issuers earning anywhere from 1.5-2.5% of every transaction. This additional revenue stream is payment driven, not risk driven. If for example a lender’s portfolio averages a 4-5% default rate, a ~2% interchange take rate helps offsets credit losses.

Additionally, lenders can use these new revenue streams to offer more favorable terms on their core lending product, further differentiating themselves from their competition.

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The risk flywheel

By better understanding customer behavior and financial health, lenders can more effectively manage risk. Using bank account data and credit card products, the lender can monitor cash in/out, as well as where exactly that money is spent, all in real-time. A company channeling capital into equipment and capex is investing in its future, which is very different from one spending heavily on travel or non-operational expenses.

Lenders who understand use of proceeds can build smarter underwriting models and dynamically adjust credit limits to get ahead of delinquency before it happens. The result is better data driven risk-adjusted returns, not just a gut feel about creditworthiness.

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The data flywheel

Offering banking and credit cards unlocks a wealth of new data for non-bank lenders, including real-time spend behavior and specifics on a borrower’s cash position. While this data can be used in a variety of ways, there are two specific use cases to highlight:

1. Smarter cross-selling. Understanding a borrower’s spend and account balance behavior can be productized to introduce compelling offers at the right time. Additionally, by better understanding their borrower’s financial behavior, non-bank lenders can expand into new product lines to continue adding value and expanding LTV (ex: revenue-backed financing, invoice financing, etc.).
2. Tailored partnership opportunities. Non-bank lenders typically focus on specific industry segments. If for example their end users are acquiring $50 million per month in equipment from a specific vendor, that's an insight that the lender can leverage to negotiate cash back or preferred pricing arrangements with those vendors. These savings can then be passed along to borrowers as an incentive.

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The lender of the future doesn’t just lend

The non-bank lender model has always been built on a fundamental tension: take on credit risk, deploy capital, and then hope for the best outcome. That model isn't broken, but it is incomplete.

Embedded finance closes the loop. By offering bank accounts and credit cards alongside their core lending products, non-bank lenders transform a one-dimensional transaction into an ongoing financial relationship. The borrower gets a more complete, integrated experience. The lender gets visibility, data, and revenue streams that didn't exist before.

The three flywheels – revenue, risk, and data – are mutually reinforcing. Better data leads to smarter underwriting. Smarter underwriting reduces defaults. Reduced defaults, combined with interchange revenue and deposit interest, improve unit economics. And stronger unit economics give lenders the flexibility to offer more competitive rates, which attracts better borrowers and generates even more data. The cycle builds on itself.

The disbursement of funds doesn't have to be the end of the value a lender provides. With the right embedded finance strategy, it can be just the beginning.