Traditional lending margins are shrinking, customer expectations are changing, and the market is getting more competitive. While challenger banks now command 60% of annual SME lending in the UK, traditional lenders face a choice: adapt or watch market share erode. 

The solution isn’t to abandon proven banking models, but to expand them through embedded lending. It is a rapidly growing market valued at USD 7.66 billion in 2025 and projected to reach USD 28.43 billion by 2032. This represents a fantastic opportunity for the traditional banks to diversify their revenue streams while meeting customers exactly where they need financial services most. 

Why Revenue Diversification Matters for Lenders Today

The traditional lending landscape is under siege from multiple fronts. Fintech companies and challenger banks are capturing market share through superior customer experiences and faster decision-making. The SME Finance Taskforce, led by the Centre for Finance, Innovation & Technology (CFIT), has already recognised that traditional lending is “too slow” for small businesses, which underscores the urgency of this challenge. Meanwhile, declining margins on core loan products are forcing banks to seek new revenue sources. 

Meanwhile, customer behaviour has shifted towards convenience-driven experiences. A McKinsey survey found that 40% of consumers now prefer online channels for auto financing, demanding instant access to financial services with minimal friction. 

This trend extends beyond consumers. Research by McKinsey shows B2B buyers would purchase four times more from suppliers if financing were built directly into websites. Unless traditional lenders adapt to this demand for convenience and speed, they risk losing relevance in a digital-first economy. 

Understanding Embedded Lending Opportunities

Embedded lending integrates financial services into non-financial platforms, such as retail checkouts, accounting systems or B2B SaaS workflows. Rather than seeing this as a threat, traditional lenders should see embedded lending as a distribution channel that extends their reach beyond branches and websites. 

The opportunities span multiple sectors. For instance, 

• In retail, embedded lending solutions drive 20-30% increases in checkout conversion rates and significantly boost basket sizes. One global retailer reported that customers using their embedded lending solutions spend 20% more per visit than traditional customers. 

• B2B software platforms present another avenue, where accounting software users can access credit seamlessly within their existing workflows. They can do this by leveraging Open Banking data that now serves over 10 million active users in the UK. 

Benefits and Strategic Advantages for Traditional Lenders

Embedded lending offers traditional banks four key advantages that align with their core strengths while addressing modern market demands. 

Enhanced Customer Acquisition: It enhances customer acquisition by allowing banks to reach borrowers at the very moment they need financing. For instance, when an SME applies for equipment finance directly through their supplier’s website, the intent to borrow is already strong, which makes conversion rates far higher than in traditional channels. 

Diversified Revenue Streams: Revenue diversification is also becoming more practical. Beyond loan origination, banks can generate fee income through partnerships with merchants and platforms while still protecting their traditional lending margins. Thanks to APIs and automated underwriting systems, loan decisions can now be made almost instantly at negligible marginal cost by tapping into tax records, account transactions, and other data sources. 

Improved Risk Management: Risk management, often viewed as a hurdle, actually improves under this model. Embedded lending platforms can access real-time financial data, creating richer underwriting data than conventional methods allow. 

Case Study: Traditional Bank Transformation with Pulse’s ULI

Challenge

A mid-sized UK bank, known for its traditional lending services, is facing growing competition from challenger banks and fintechs offering instant credit solutions. When a business requested short-term working capital for a seasonal demand spike, the bank’s reliance on outdated audited statements caused delays and risked inaccurate credit assessments. 

Solution

The bank adopted Pulse’s Unified lending interface (ULI) framework to modernise its lending operations without overhauling its entire infrastructure. Pulse’s embedded lending solutions allowed the bank to seamlessly integrate advanced solutions and automate workflows. 

Pulse’s ULI includes: 

• Loan Origination System (LOS), automates and streamlines applications while ensuring compliance with UK regulations and reduces application time to under 3 minutes.

• Einstein aiDEAL, an AI-powered underwriting tool that processes over 95% of deals in under a minute, analysing transaction histories and revenue patterns to give quick, and accurate credit decisions. 

• Loan Management System (LMS), enables repayment tracking and collections, ensuring loans are serviced efficiently and risks are minimised throughout the lifecycle. 

The Impact

For the businesses, the experience was transformative. Instead of waiting weeks for approval, the client received working capital quickly, enabling them to meet seasonal demand with confidence. 

For the bank, the benefits were equally significant: 

• Faster approvals with reduced risk of defaults 

• Lower operational costs by automating manual processes 

• Compliance assurance with FCA regulations 

• Ability to offer embedded lending directly within customer journeys 

The bank successfully retained its SME client while enhancing its competitive edge in a rapidly evolving lending landscape. 

Future Outlook

With Pulse’s ULI, the bank is now positioned to offer embedded lending directly within customer journeys, maintaining competitiveness in a rapidly evolving market. 

Learn how you can exemplify your services with Pulse. Book a demo now. 

Conclusion

Embedded lending is not a replacement for traditional banking but an expansion of it. For banks, it represents a path to remain relevant, diversify revenues, and align with customer expectations in a digitised economy. As the SME Finance Taskforce, CFIT, and government-backed initiatives push forward the embedded finance agenda, traditional lenders have a window of opportunity to lead rather than follow. Revenue diversification isn’t about chasing opportunities; it’s about placing your services where your customers already are.