Embedded Finance: Making Credit Accessible for All

Unbanked and underbanked consumers represent a significant segment of the U.S. consumer market. An estimated 22% of adults are unbanked or underbanked, according to the Federal Reserve – meaning that no one in the household has a checking or savings account at a bank or credit union – and many have no credit and little cash on hand. This could be attributed to barriers such as limited access to traditional financial institutions, poor credit or a lack of awareness about the options available to them. Moreover, many consumers fear rejection when applying for a loan, so they push it off or never get around to applying.

This trend is even more prevalent among the younger generations, with Gen Z and millennials making up nearly 60% of the unbanked and underbanked, according to a Morning Consult survey. These consumers are digitally-savvy and increasingly comfortable banking beyond traditional financial institutions; so they often opt for popular fintech companies or alternative finance products to meet their everyday financial needs. This not only impedes traditional community financial institutions’ growth and success, but can have a significant impact on consumers’ financial health as these options often charge higher interest rates.

Credit unions are regarded as highly trusted institutions and are uniquely positioned to drive financial inclusion in the industry. Not only do credit unions have competitive offers and rates, but they operate with their members top of mind, prioritizing personable, altruistic service. The “people helping people” philosophy is inherently a lifeline for people in need. However, credit unions are also perceived as more difficult to access due to membership requirements and a less prominent digital presence than banks or digital players.

Credit unions must adapt to reach and support these underserved communities, especially in this time of growing financial uncertainty. Credit unions that embrace modern, more efficient member-friendly technologies reduce the risk of losing potential members as digital accelerates and the rapid rise of diverse fintech startups redefine financial services, especially when it comes to financial inclusion.

The key is to provide easy access to information and opportunities, making important financial tools like financing more convenient. This means moving away from the traditional lending workflows that require consumers to first locate and identify a credit union that they may be eligible to join, and then complete a lengthy and often complex credit application with no guarantee of approval. And as consumers increasingly turned to e-commerce and online channels for all of their shopping needs, there has been a growing demand for this shift in strategy.

Embedded finance offers a transformative solution enabling credit unions to offer their trusted services beyond the confines of traditional banking – with lower costs and risk, removing barriers to access and expanding financial inclusion and equality. Credit unions can seamlessly integrate their credit options into e-commerce platforms, bringing their competitive offers and rates directly to consumers at the moment they need it most. Consumers can then select the credit union offer that fits their needs, apply for credit directly within the platform and complete the purchase, ultimately becoming a new credit union member.

An effective embedded finance strategy empowers credit unions to proactively “partner” with consumers, offering greater transparency into their borrowing potential as they shop. To harness the full potential of embedded finance and ensure they never have to deny a loan application again, credit unions must gain a comprehensive understanding of consumers’ financial profiles. This involves utilizing appropriate data sets and analysis to assess a person’s creditworthiness and determine the appropriate terms of the loan, such as interest rates and flexible repayment schedules.

Increasing knowledge about consumers allows credit unions to provide a diverse array of responsibly-granted credit options in front of consumers, ensures borrowers stay within their means and allows for a seamless and expedited lending process for all consumers in need of affordable credit without the fear of rejection. At the same time, credit unions attain credit-worthy members that breathe new life into their business.

Credit unions can also use these insights to keep newly engaged members in a perpetual state of approval, providing them with ongoing access to credit offers that align with their evolving financial circumstances and help prevent financial strain. They can start offering auxiliary products – such as insurance or warranties – establishing themselves as a one-stop shop for their members’ financial needs. Making product offers more visible to members builds deeper relationships, makes it easier for members to manage their financing, and ultimately leads to increased loyalty and brand trust.

Embedded finance helps reinforce credit unions’ community-focused values, paving the way for long-term growth, while staying true to their core principle of people helping people. By making credit more accessible and convenient, embedded finance has the potential to bring millions of people into a more secure, transparent and perpetually-present financial landscape. This, in turn, will help spur economic growth and increase financial stability.

Dave Buerger is Co-founder and CEO of the Santa Rosa, Calif.-based fintech startup Union Credit, which enables credit unions to make firm credit offers at the point of purchase.