Home Improvement Lending: The Next Frontier for Embedded Finance

The ongoing combination of elevated interest rates and rapidly rising housing costs are drastically shifting the homeownership landscape: Americans are now staying in their homes longer than ever before. Research shows that the average U.S. homeowner has now spent nearly 12 years in their home, up from 6.5 years two decades ago.

As homeowners stay in one place longer, spending on home improvement projects has skyrocketed. In the two-year period ending in 2023, American homeowners spent roughly $827 billion on home improvement projects, an increase of more than $200 billion over the previous two year period.

With home improvement spending increasing exponentially, there’s a significant market opportunity for business owners and lenders to offer financing solutions to support these projects. Savvy, tech-forward lenders can take advantage of the home improvement trend by working with a sponsor bank to create personalized, flexible, and easily accessible financing options that benefit both consumers and businesses.

Embedding Home Improvement Lending

Home improvement businesses and fintechs alike stand to gain from embedding loan options into point-of-sale platforms. Businesses such as contractors, HVAC specialists, roofers, solar energy providers and more can work with fintechs to seamlessly offer financing solutions to interested customers, increasing the odds of making a sale by making a large expense more affordable. Embedded financing options offered at the point of sale have been shown to increase conversion rates and, according to research from McKinsey, encourage customers to spend more (sometimes up to 20%) than they would otherwise.

Not only do embedded lending offerings increase the odds of a sale, they also offer the business significant upside once the loan is approved. With traditional financing, the lender will often either release all the funds to the business at once or wait until the job is completed and approved by the client to release payment. These methods are inflexible and often slow down projects by adding a layer of bureaucracy to the lending process.

Embedded lending platforms that follow current best practices will release funds to the appropriate parties as needed, ensuring greater flexibility and quicker progress. By integrating financing options and credit approvals at the point of sale, home improvement businesses can secure funding for projects in minutes, eliminating the funding complications that often derail deals.

Beyond looking to embed their lending offerings with a home improvement business, fintechs can also capitalize on the renovation boom by offering financing options directly to consumers. A recent study by Forbes Advisor found that many homeowners preparing to fund home improvement projects, even those who ultimately opted not to take out a loan, researched financing options online before committing to the project. Offering direct to consumer financing that’s easy to access and apply for online allows fintechs to take advantage of this trend.

Regardless of whether home improvement financing is embedded at the point of sale or offered directly to consumers digitally, fintechs must find a good sponsor bank partner to underpin the entire operation.

A Good Sponsor Banking Partner is Critical for Home Improvement Financing

Sponsor banks provide the infrastructure, regulatory compliance, and capital that power modern lending solutions. In an ideal embedded lending partnership, a fintech will provide the front end capabilities (such as a point-of-sale solution) while the sponsor bank will ensure the process of managing and facilitating funds operates smoothly on the back end.

The right banking partner fosters innovation in financing, ultimately driving growth for fintechs and home improvement businesses. Choosing the right sponsor bank ensures scalable, compliant, and customer-friendly financing options.

Fintechs should seek out sponsor banks that meet several criteria – namely, the ability to support point-of-sale transactions without delays. Point-of-sale solutions are critical because customers prefer to have payment plans offered before or at the time services are rendered, not later on.

Beyond point-of-sale support, fintechs should also look for partners that can offer competitive interest rates and monthly payments that are adjusted to the financial budgets of each individual. Finally, bank partners with a dedicated home improvement banking team make a notable difference in the long term. A long track record in the industry allows for quicker approvals in the short term and dedicated support and understanding as the partnership grows and evolves.

Capitalizing on the Market

The opportunity is ripe for fintechs and home improvement businesses to take advantage of the renovation market, but a strong sponsor bank partner is necessary to help embedded lending offerings reach their fullest potential. As embedded finance continues to evolve, a trusted sponsor bank can help ensure these solutions remain compliant while maintaining convenience.

Hatch Bank is purpose-built for lending, with an entrepreneurial approach that prioritizes flexibility, responsiveness, and speed to meet a wide variety of lending needs. Our Powered by Hatch® platform is guided by a leadership team with decades of experience in technology and banking, fueling seamless growth and integration.

Hatch offers flexible point-of-sale financing support and is trusted by industry leaders in home improvement lending, including Wisetack and Sungage. To learn more and hatch a partnership that goes beyond banking, contact our team.

‍