What is “Embedded Finance”?

Embedded finance has morphed and evolved over the past decade or more. Ever since the advent of the internet and especially mobile devices, the popularity of embedded finance has exploded. Embedded finance is essentially the ability to purchase goods and services at the point of purchase.

The different types of Embedded Finance

One of the commonly known and popular types of embedded finance is BNPL or Buy Now Pay Later. It’s a shorthand and took on an almost meme-like quality in popular media. Buy Now Pay Later is essentially a reflection of how today’s consumers spend money, look at money and their outlook on life.

Buy Now Pay Later signifies that the consumer either can’t afford the total price of the goods and services but believes that they will over time. By dividing up the total MSRP (Manufacturer’s Suggested Retail Price) over 4, 6, 9 or 12+ payments, they can enjoy the product and services now and worry about everything else later.  

Almost all types of Embedded Finance take on some forms of BNPL attributes. That consumers can walk away with the product without having to pay the full sticker price. Some might argue that BNPL is just another way of saying installment payments or installment loans.

Whether you think BNPL is one of the many signs of late stage consumerism or a great way for consumers to buy without having to use their expensive credit card, BNPL or Installment Payments are here to stay!

Why has the BNPL become so popular?

We need to take a look at all of the BNPL alternatives and formulate a comprehensive framework of why BNPL became so popular both for merchants and consumers 

One of the many reasons is the consumer’s cash flow. Consumer cash flow has always been an issue for two thirds of Americans. By some study, most (median) Americans household total savings is below $8,000. The keyword here is household, most individuals have less than $3,000 in their bank account at any given time.

Therefore, a large ticket item such as computers, household electronics and perhaps a visit to the mechanic puts enormous pressure on average consumers in America. Anything that can alleviate a larger than usual hit on the consumer’s wallet is generally welcomed.

In the United States and in its post COVID state, the global supply chain was essentially halted and created a huge issue in meeting American’s consumption demand. When supply dwindles, consumer prices go up. Everything from household goods to auto parts became extremely hard to come by and created an inflationary scenario that we are still feeling in 2025.

When manufacturers, retailers and consumer producers pay higher prices for supply, they have to pass the hiked up processes to average consumers. Adding to mass layoffs and an inflationary (caused by many other reasons besides what this article stipulates) macro environment, it became harder for consumers to afford items they would have otherwise pay by other means besides installment payments or BNPL.

The US central bank or  “the Fed” controls interest rates or borrowing rates. This means that when banks want to borrow money to lend out to the greater economy, the Fed will charge the bank a base rate. When inflation is high, the Fed will increase the borrowing rate to slow down bank’s borrowing activity and therefore slowing down the overall economy.

When the overall economy is cooled, demand is also cooled. When demand is cooled, the consumer price is then lowered. At least that’s the theory.

Since COVID and in order to cool down the economy, the Fed has raised the borrowing rate multiple times to slow down bank and consumer borrowing and therefore, again, in theory cool down the US economy to lower consumer prices.

By all measures, this hasn’t happened, or at least the consumer price is not going back to pre-COVID era, although by some measures the inflationary pace has slowed down somewhat.

All of this means that the consumers are already paying an elevated price at the checkout counter, layered in high interest rates which supposedly to lower the inflated consumer price, it became even more difficult to afford…anything.

And therefore, anything that can help consumers to afford their purchases will surely enjoy a surge in popularity and the BNPL is the catch phrase that dominated our vocabulary for the better part of this decade.

What about Credit Cards and Loans?!

We often ask our clients, what was life before Affirm? Well, it was VISA/Mastercard and a number of other private labeled credit card companies that dominated the scene. 

These credit card companies essentially footed the bill at the point of purchase and provided consumers an invisible wallet to spend and spend. 

Some of these consumers’s line of credit or spending limit on their credit cards are not a function of their earning potential. And most American consumers, according to research, have 4 active credit cards.

The credit card companies do a decent job of screening for overleveraged consumers that may have potential for credit exposures that could get them into financial trouble, but driven by profit, credit card companies will offer 0% interest rate balance transfers in order to stop consumers from using their competitor’s credit card. We know that seldom happens. Consumers will still keep their credit cards active and available in case of an emergency.

According to research most American consumers carry $6,400 credit card debt and almost half of American consumers can’t pay off their credit balance at the end of their statement cycle. This means that credit card companies get to charge the consumer an interest to let them carry their balance forward.

In 2025, the credit card interest rate is anywhere from 21% to 25% annualized rate. This interest rate is a compounding interest rate and not a simple interest rate. This means that if you aren’t able to pay off your credit card balance, the accrued daily interest is added to your balance and the following day, interest is accorded on top of your unpaid principal balance as well as the previous interest. This compounding effect of the compounding interest calculation forces millions of Americans deeper in debt.

The newer generations of American consumers are increasingly frustrated with using credit cards as a means of payment and traditional media and even some of the fintech companies are out there educating consumers about the pros and cons of using credit cards.

In addition, credit card companies do not give out credit cards to anyone. Only a portion of the population gets approved for a credit card. The credit card companies also want to assess the creditworthiness of the US consumer and they, at the end of the day, would like to get paid back.

Now what about loans?

Loans are typically issued by the banks and traditionally banks only offer secured debt. Whether it’s a car loan, mortgage, home improvement loan, there’s always an asset backing these loans. And when consumers are unable to repay their loans, the bank will repossess the consumer’s collateralized assets such as a car or their home.

Sometimes the banks will issue educational loans such as a tuition loan. This loan is somewhat unsecured and we’ve seen this type of loan being publicized by politicians. Banks are already shy about making these loans and now they know the chances of getting these loans wiped clean with legislation, more banks will stop issuing these loans going forward.

So, what about average consumers buying stuff they need on a daily basis to get through their days? Grocesors, auto repairs, medical procedures, where is a high deductible and other life's episodes such as caring for a pet or a death in the family? 

There are a number of non-bank lenders out there meeting these types of consumer demands. Consumers can easily search online and find these lenders. Often, these lenders have an online application, pull consumer’s credit report and perhaps have the consumer log into their bank account or supply bank statements to make a quick credit check.

A few thousand dollars may appear in the consumer's bank account in a few days. Sometimes these loans, although term loans with a fixed interest rate, carry high interest rates and fees. Some lenders have different means to bypass state regulated interest rate caps to charge high interest rates that become unaffordable to average consumers.

Sometimes the consumers need additional credit at the point of purchase and these loans might take a little longer to appear in their bank account which can’t address the immediate need of credit at the point of sale.

The Age of Embedded Finance and BNPL 

With credit card’s compounding interest rate, and mismatch between need and speed of unsecured personal loans, these embedded credit products are becoming ever more popular.

So how does it work and why do some of the BNPL products offer 0% interest rate?

There’s definitely sizable users of BNPL products that don't pay back. So who’s really at a loss when it comes to defaulted BNPL “loans”? Typically, the credit card companies or personal loan lenders carry all the risk when someone doesn’t pay back their credit card or loans.

However, in the space of BNPL or Embedded Finance, the merchants are almost always on the hook as well. The term is called "Merchant Discount Rate”.

Merchant discount rate is a pre-negotiated discount merchant will offer to financing companies to help them to move more goods and services. For example, if a product costs $100 MSRP, their merchant will ask the financing company to only pay them $80 to cover the cost of the product.

How does this work? Why would merchants do this? Well, first of all, the merchant’s “cost of goods”, e.g. how much did it cost to procure that product is much less than the MSRP, “$100”. Their cost of goods might just be $50, and their market up is $50. So even if they discount their margin by $20 in exchange to sell more products, they are willing to do this.

The discount rate, or that aforementioned $20, is to help lenders to hedge that risk when consumers don't pay back. Of course the $20 MDR or Merchant Discount Rate doesn’t cover catastrophic losses when consumers stopped paying right after they walked away with their product, but it does help. And in the grand scheme of things, not everyone would stop paying right away, the majority of borrowers or BNPL users still pay back which covers the small percentage that does not. Therefore the lender’s profit is secured.

Some BNPL products even carry a small interest rate, far less than the credit card companies compounding interest rate and personal loan interest rates. This additional interest rate, in addition to the merchant discount rate, helps BNPL lenders to cover their losses and make a profit.

BNPL financing doesn’t work with all verticals. It works well with high margin products where merchants can afford to give up their margin in order to move more product and services. Products with tiny margins aren’t suitable for BNPL, the potential loss rate is too great and to justify the offering, the interest rate has to be high and therefore becomes less competitive to credit card and loans.

BNPL Technology and Infrastructure

Some merchants and retailers have gladly engaged with Affirm, Sezzle and Klarna. They offer technology and financing. This makes it easy for merchants and retailers to adopt and get more consumers to buy their products and services.

There are drawbacks.

One of which is that the retailers and merchants have no control over any aspect of these independent operators. Whether its technology, user experience, right to information and post funding treatment, the merchants are completely in the dark and often have to answer complaints that weren't caused by them to begin with.  

These financing companies have their own underwriting criteria and are very rigid when it comes to working with the merchant. Their pricing, merchant discount rate, underwriting criteria has to work with everyone. Addressing specific needs or merchants are completely out of the question. Often merchants have to change their processes to work around the idiosyncrasies of these large lenders.

And then there is a giant conflict of interest. The lenders and the merchants are operating separate businesses and both parties are trying to find ways to maximize their profit. This polarizing force causes friction when it comes to negotiating terms and these negotiations often end up with unfavorable terms to the merchants and cause unintended consequences especially when higher costs are passed down to their consumers.

So what’s holding back merchants from running their own BNPL programs?

The answer is technology infrastructure. Merchants and retailers are not in the business of running technology infrastructure and complex user interfaces both consumer and administrative facing. LendAPI is that solution.

Prior to the arrival of these large BNPL lenders, merchants were using tools such as Microsoft Excel to underwrite and offer financing products through their bank partners. Transmission of applicant information is often slow and cumbersome.

That has changed. LendAPI offers an enterprise grade user interface that works with any merchant’s website with a seamless integration. We have a number of tools that help merchants to underwrite the applicant, collect necessary consents and signatures. LendAPI will also integrate with the merchant’s bank partners and make it a real time decisioning process to disburse payments from their bank partners directly to the merchant’s bank account.

LendAPI has commoditized the BNPL experience so every merchant can own their entire BNPL experience. We work with all of the credit bureaus, identity verification tools as well as easy to use underwriting tools for merchants to manage their embedded financing themselves. We have dedicated engineers to work with your bank partners to integrate payments so merchants are always paid.

The benefit of using your own BNPL platform will give you back control over the entire process. You can underwrite and offer payment options to everyone that walks through your door. You can control your own pricing and keep all the margins. The total cost of ownership of running your own embedded financing platform is near zero once you get started. You can finally work with your bank partners again.

With margins getting compressed in every way for merchants, retailers and small business owners, having your own tools, processing your own payments and owning your customer again will give you an immediate return on investment. No more paying merchant discount rates and watching someone else earning interest income from your clients.

Check out LendAPI’s private labeled BNPL platform and own your own destiny.