In recent years, embedded finance has been a buzzword in the financial industry. Embedded finance refers to the integration of financial services into non-financial products or services. With the rise of digital platforms, companies can leverage their customer base and offer financial services that were traditionally provided by banks. One such financial service that can be embedded into non-financial products is debt collection. In this blog post, we will discuss how debt collection can be offered in the form of embedded finance.
What is Debt Collection?
Debt collection is the process of recovering unpaid debts from borrowers. Debt collectors work on behalf of lenders or creditors to contact debtors and arrange for repayment of their debts. Debt collection is an important process for lenders as it helps to recover money that they have lent to borrowers.
Why Debt Collection is a Good Candidate for Embedded Finance?
Debt collection is an ideal candidate for embedded finance because it involves a direct financial transaction between the borrower and the lender. By integrating debt collection into non-financial products or services, borrowers can easily repay their debts without the need for a separate debt collection agency. This makes the debt collection process more convenient for borrowers, reduces the risk of default for lenders, and provides an additional revenue stream for the platform offering the embedded finance.
Examples of Embedded Debt Collection
There are several examples of embedded debt collection in the market. One such example is Klarna, a Swedish fintech company that offers a “buy now, pay later” service. Klarna allows customers to split their payments into installments over time. If a customer fails to make a payment, Klarna offers a debt collection service to recover the unpaid amount. This is an example of how debt collection can be embedded into a non-financial product to offer a more convenient payment option to customers.
Another example of embedded debt collection is Square, a US-based payment processing company. Square offers a lending service called Square Capital to its customers. Square Capital provides loans to small businesses that use Square’s payment processing service. If a borrower fails to repay their loan, Square uses its debt collection service to recover the unpaid amount. This is an example of how debt collection can be embedded into a financial product to provide a more complete lending solution.
Benefits of Embedded Debt Collection
Embedded debt collection offers several benefits to borrowers, lenders, and platforms offering the service. Some of these benefits include:
- Convenience for Borrowers: Embedded debt collection offers borrowers a more convenient way to repay their debts. By integrating debt collection into a non-financial product or service, borrowers can repay their debts without having to deal with a separate debt collection agency.
- Reduced Risk for Lenders: Embedded debt collection reduces the risk of default for lenders. By offering a debt collection service, lenders can recover unpaid debts more efficiently, reducing the risk of losses.
- Additional Revenue Stream: Platforms offering embedded debt collection can generate an additional revenue stream by charging a fee for the debt collection service. This provides an additional source of income for the platform and makes it more attractive to investors.
- Improved Customer Experience: Embedded debt collection improves the overall customer experience by providing a more seamless and integrated financial service. This can lead to increased customer loyalty and retention.
Embedded finance offers a new way to provide financial services to customers. By integrating debt collection into non-financial products or services, borrowers can repay their debts more conveniently, lenders can reduce the risk of default, and platforms can generate an additional revenue stream. Embedded debt collection is an example of how financial services can be integrated into everyday products and services to provide a more complete financial solution. As the market for embedded finance continues to grow, we can expect to see more examples of embedded debt collection in the future.
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