- Key insights: NMI is offering embedded lending for small businesses.
- What’s at stake: Nearly 70% of small businesses want their technology partners to provide more financial services, according to S&P Global 451 Research.
- Forward look: The payment processor will need to recruit other large institutions to support the lending product.
Given the
Business payment processor NMI is joining the fray, betting that loans can solidify and grow relationships with small businesses. NMI on Tuesday launched NMI Business Capital, an embedded lending product that enables software companies, independent sales organizations, payment facilitators and merchant service providers to offer financing within their merchant portals, which mostly serve very small independent businesses.The Emeryville, Calif.-based NMI has a large addressable market but a lot of competitors.
Sixty-nine percent of small- to medium-sized businesses want their software partners to offer integrated financial services, according to S&P Global 451 Research. But many payment firms that target small businesses also offer loans, including
Galvin said the difference between NMI and the other large payment companies is NMI’s track record with its existing clients, which provides easier access to data to lend faster. He also said NMI will look for opportunities to target small businesses as the larger payment firms sell to enterprise clients.
NMI’s loans
NMI has been adding more merchant products to its core payment technology, hoping to address a trend among small businesses to
NMI’s challenge will be to scale its product, according to payment experts.
“NMI/Parafin would need to compete without the data provided by a full-service merchant processing platform,” Aaron McPherson, principal at AFM Consulting, told American Banker, noting NMI could carve out a niche with ISOs and payment facilitators that lack lending capabilities. “ISO partnerships help, but are typically not as full-featured,” he said.
There’s also pressure for small business technology firms to diversify. Software platforms have become operating systems for small- to medium-sized businesses, providing a single control center to manage every aspect of their business, according to Jordan McKee, research director at S&P Global Market Intelligence 451 Research.
“The expectation is that verticalized software packages will have payments and adjacent financial services such as lending embedded within them,” 451 Research’s McKee told American Banker. “This creates a one stop shop for small to medium sized businesses to run their operations.”
Alternative to banks
These payment software platforms are in a unique position to offer embedded lending given how deeply integrated they are in these business’ operations, according to McKee, noting these firms have a view into sales performance, customer demand patterns and other business metrics, enabling them to serve up targeted lending offers at the moment of need and simply repayment by collecting a percentage of sales.
“NMI already serves software platforms and other types of intermediaries with embedded payment capabilities. Its move into lending signals a deeper commitment to embedded finance and further evidence of the opportunity for software platforms to own more of their small business customers’ banking needs,” McKee said.
As an example, NMI’s Galvin gave a small plumbing business that faces an unexpected truck repair and doesn’t have the time to make a formal application for a loan. “This helps them avoid putting that repair on a credit card.”
Banks and ISOs cannot compete effectively in this market because they do not control the daily sales review where the “one button capital” offer appears, according to Richard Crone, a payments consultant, adding NMI can reach thousands of small- to medium-sized businesses through independent software vendors, payment facilitators, banks and independent sales organization, but “It must embed directly into the reconcilement flow to match PayPal and Square conversion rates.”
Crone Consulting LLC’s estimates show embedded capital can triple margins for payment facilitators and increase small- to medium-size businesses’ lifetime value by 25% to 55% while reducing churn 30% to 60% because underwriting and repayment flow through daily card settlements.
“NMI’s challenge is not distribution but visibility, because embedded lenders win only when they sit at the moment merchants settle the day’s sales,” Crone said.