In recent years, we have seen a rise in the popularity of embedded finance. This not-entirely-new form of lending has the potential to revolutionise the way we access credit and drive healthy growth in the Indonesian economy.

For a long time, we’ve seen HomeCredit master this type of lending by financing offline consumer purchases. Nowadays, more advanced embedded lending models involve integrating financial services directly into online platforms, such as e-commerce, ride-sharing, and supply chain management. This trend is not new, with companies like Apple, Amazon, and Ant Group already offering embedded lending services to their users.

One example of embedded lending that’s already well-known in Indonesia is GoPay Later. It allows GoJek to drive volume on its platform by offering accessible credit to its users. This allows leveraging the data of GoJek to make better lending decisions.

Similarly, in China, Ant Group provides small loans to merchants on the Alipay platform, allowing them to grow their businesses. Similar, more productive lending-focused use cases are expected to become more popular in Indonesia as well.

Embedded finance is revolutionising lending

There are several benefits to embedded lending, and it has the potential to significantly impact the Indonesian economy. First and foremost, it allows lenders to use platform data sources to provide cheaper credit to the right borrowers. By integrating financial services directly into other products, lenders can access a wealth of data on user behaviour and spending habits.

This allows them to better assess risk and provide credit to those who are likely to pay it back. This benefits both lenders and borrowers, as lenders can offer lower interest rates while still maintaining profitability, and borrowers can access affordable credit they may not have been able to before.

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However, there are challenges to implementing embedded lending in Indonesia. Many lenders and platforms lack the technological infrastructure needed to effectively integrate financial services into their products.

While many of Indonesia’s fintech lenders claim to be doing exactly this – it is mostly operated via excels, taking days to approve the credit and not utilising the value of platform data. This will be developing rapidly as the lenders that can handle the technological challenge to integrate with various platforms, utilise unique data sources, and make smart decisions fast – will define the market.

Another benefit of embedded lending is that it improves lenders’ unit economics, as they don’t need to acquire each user separately. By integrating financial services directly into other products, lenders can access a large customer base without having to spend as much on marketing and user acquisition.

This can lead to greater profitability and stability for lenders, which in turn can lead to more affordable credit for borrowers with smaller fees that need to cover operational costs.

Final thoughts

Embedded lending has the potential to drive healthy growth in credit in Indonesia by improving lender unit economics and gradual improvement in technology. With the rising popularity of embedded finance globally and a growing digital economy in Indonesia, we can expect to see substantial growth in embedded credit in the coming years.

While challenges remain, the benefits of embedded lending are significant, including cheaper credit for the right borrowers and a larger potential customer base for lenders. As technology improves and more use cases appear, embedded lending could have a major impact on the Indonesian economy, paving the way for a more financially inclusive and robust future.

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