By AJ Dhaliwal,Contributor

Copyright forbes

Happy entrepreneur uses a cellphone for online shopping and payment in a cozy café. Technology and business seamlessly combine in this real lifestyle moment.

For most of the twentieth century, lending was simple. Borrowers visited bank branches, submitted paperwork, and waited for credit committees to decide. Banks owned every step from customer acquisition to underwriting and servicing.

That model is breaking down fast. Today’s lending journey is decentralized, technology-enabled, and increasingly invisible to users. In 2025, Shopify merchants can offer installment loans at checkout, QuickBooks users can tap working-capital credit inside their accounting software, and car buyers in Texas can get instant dealer-financing approvals without ever visiting a bank branch. Credit has slipped the leash of traditional banking. Three forces are driving this shift: embedded finance, Lending-as-a-Service, and alternative data.

Embedded Finance As Table Stakes

Community banks and fintechs are treating embedded finance as a survival strategy. A recent survey of 300 banking leaders found that virtually all community institutions are launching or exploring embedded programs. Ninety-nine percent view them as essential to long-term survival. These programs let banks reach far beyond their traditional territories by integrating credit and payments into platforms customers already use.

Embedded lending is becoming the top priority. By placing financing options directly in non-financial platforms, lenders capture demand in real time. Consumers get approvals at checkout instead of waiting days—think Klarna at H&M or Apple’s installment plans for devices. Businesses get faster access to working capital through procurement or payroll flows, much like Square or Intuit extending credit within their ecosystems.

Even community banks are moving in this direction. According to the survey, more than half are exploring Banking-as-a-Service or embedded lending capabilities, with many piloting credit products inside regional marketplaces or payroll systems. Some credit unions are testing instant small-dollar loans delivered through local employer benefit platforms, showing that embedded finance isn’t just the domain of tech giants—it’s becoming a lifeline for smaller institutions as well.

MORE FOR YOU

Underwriting Beyond FICO

Distribution isn’t the only thing moving closer to customers. Underwriting is moving beyond credit scores. Cash-flow analytics, open banking, and behavioral signals enable more dynamic credit assessments. These tools help lenders approve thin-file consumers, price risk better, and intervene earlier when repayment problems emerge.

For banks seeking growth, alternative data isn’t a buzzword anymore. It’s necessary. Surveyed community institutions ranked digital loan approval speed and automation among their top innovation priorities. Using transaction-level data to generate instant decisions is becoming table stakes. Consumers now expect decisions as fast as BNPL apps deliver them, and small businesses expect loan approvals as quickly as Amazon extends working-capital credit to its marketplace sellers. Local banks are feeling this pressure too—40% of community bank leaders say instant credit and loan approvals are now a top priority for their business customers.

What Regulators Are Watching

The same factors that make embedded lending powerful also create new risks. Several high-profile fintech partnerships collapsed in 2024, showing what happens when data visibility and reconciliation break down. Regulators responded with heightened scrutiny. More than a quarter of FDIC enforcement actions last year targeted sponsor banks in embedded programs.

Proposed rules now emphasize real-time reconciliation, daily visibility into third-party ledgers, and stronger continuity planning. Banks are getting reminded that regardless of technology layers, they remain accountable for safeguarding consumer funds.

For technology providers and distributors, this means higher expectations. Compliance can’t just be the bank’s responsibility—it has to be designed into product architecture. Governance, reporting, and consumer disclosures need to work as seamlessly as the credit experience itself.

Hidden Pitfalls For New Players

Embedded lending gets championed as a frictionless revenue generator for non-financial businesses. But companies unfamiliar with financial regulation often underestimate the risks.

The pitfalls are significant:

Regulatory uncertainty. Laws governing embedded credit are still evolving. Responsibilities get shared across banks, fintechs, and platforms. Even when a partner bank handles underwriting, platforms may still face liability for compliance failures.

Data security. Sensitive consumer data moves across multiple APIs, creating vulnerabilities. A weak vendor or misconfigured integration can lead to breaches and regulatory exposure.

Operational fragility. Embedded finance stacks typically involve several partners—each one a potential point of failure. A single outage or error can disrupt the entire credit experience. The bankruptcy of middleware providers like Synapse showed how platforms depending on a single integration layer can face catastrophic disruption. When key infrastructure fails, entire embedded lending programs can go offline overnight.

Reputational exposure. Consumers often assume the platform offering credit is the actual lender. When something goes wrong, they blame the brand they see—whether that’s a retail store, a ride-hailing app, or an online marketplace—rather than the unseen partner bank.

These risks don’t eliminate the value of embedded lending, but they highlight the need for a compliance-first approach. Businesses entering lending should think like regulated institutions, not just distributors of financial features.

What Success Looks Like

The future of lending belongs to those who can orchestrate ecosystems responsibly:

Design compliance in. Real-time reconciliation, clear disclosures, and strong consumer protections must be part of the product, not afterthoughts.

Choose partners carefully. Banks and platforms are raising standards for technology maturity, governance controls, and operational resilience.

Use data strategically. Consent-driven cash-flow analytics and behavioral insights can unlock underserved markets while strengthening risk management.

Prepare for scrutiny. Whether from regulators or customers, transparency and accountability are becoming competitive advantages.

The End Of The Bank-Centric Era

Banks aren’t disappearing from lending, but their role is changing. Rather than owning every step, they’re becoming anchors in broader networks of technology, data, and distribution partners. That includes small and mid-sized banks, which increasingly view embedded partnerships as their best path to growth in a digital-first world. For lenders, fintechs, and businesses embedding finance, the approach is clear: combine innovation with discipline.

The winners won’t be those who move fastest, but those who move responsibly. Meeting consumers where they are, expanding credit access, and building the infrastructure for trust in a world where financial services are embedded everywhere but visible nowhere.

Editorial StandardsReprints & Permissions