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Updated 15 min read

Embedded lending in 2027. Credit inside someone else’s app

Shopify bought $4.2 billion of merchant loans and cash advances in 2025. What 17 reports and the lenders’ own numbers say about 2027

Adam Brooks

Startups and B2B SaaS

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Shopify bought $4.2 billion of loans and cash advances to its own merchants in 2025, up from $3.0 billion a year earlier. A partner bank wrote some of those loans first. The merchant deals with Shopify, and the bank stays behind it.

That is embedded lending: the credit decision happens inside someone else’s app, at the moment of need.

Of the 65 reports we read, 17 from McKinsey, BCG, Deloitte, PwC, Visa and Mastercard say something useful about it. We compared them with what Affirm, Klarna, Shopify and Stripe report about themselves.

For a bank, the loan is not the whole prize. McKinsey warns that UK banks could keep the loan and still lose the daily contact with a business, and the data that comes with it.

Six shifts decide who owns that moment in 2027. New UK rules took effect in July 2026, and EU rules follow in November.

The first shift has already happened, and it began at the checkout.

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The short version

  • Pay later is now a scaled lending business. Affirm handled $50.2 billion of volume in the year to June 2026. Klarna handled $36.6 billion in one quarter.
  • Losses stay low because the loans stay short. Klarna’s average balance is $124, repaid in about 40 days. Its credit provisions were 0.52% of volume in the second quarter of 2026.
  • Small business credit moved into the software. Stripe Capital’s funding volume grew 45% in 2025. McKinsey finds that the small business lenders who last are mostly the ones built into a platform.
  • Banks already sit behind much of it. Celtic Bank and Lead Bank issue Stripe Capital loans in the US. Deloitte puts US embedded finance revenue at $51 billion in 2026.
  • Regulation splits by region. The UK began regulating interest-free pay later on 15 July 2026. The EU’s new consumer credit rules apply from 20 November 2026. US federal policy went the other way in 2025.

1. The checkout already became a lender

Affirm and Klarna stopped being a button at checkout some time ago. They are lenders with bank-sized volume.

Affirm reported $14.1 billion of gross merchandise volume for the quarter to June 30, 2026, up 36%. For the fiscal year it was $50.2 billion. It now counts 27.8 million active consumers. About half of its volume growth came from direct integrations into merchants’ checkouts.

Klarna reported $36.6 billion of volume for the second quarter of 2026, up 18%, and up 27% in the US. It counts 120 million active consumers. Its longer, interest-bearing product, Fair Financing, grew 82% to $4.7 billion in the quarter.

Investors noticed early. BCG’s payments team finds that pay-later providers returned an average of 88% a year to shareholders from June 2022 to June 2026, the best of any payments segment it tracks. Acquirers and processors went backwards over the same years.

The product is the credit decision itself. Deloitte uses pay later as its example of an AI-native bank product. The customer applies at the point of sale, and automated underwriting decides instantly, with no person involved.

What surprised me is how far the lender has moved beyond the checkout. Affirm Card volume grew 124% to $2.8 billion in the quarter, and 5.2 million people now hold the card. So the loan now follows the customer into the store too.

What to do in 2027. If you are a bank, treat the checkout as a lending channel you either serve or lose. If you are a fintech, the edge is the speed and quality of the decision, not the button.

2. Short loans keep the losses small

The obvious worry is credit quality. So far, the lenders’ own numbers are calm.

Klarna’s provisions for credit losses were 0.52% of volume in the second quarter, down from 0.56% a year earlier. The model explains why. The average balance is $124. The average loan lasts about 40 days. The book turns over about 10 times a year, so every repayment feeds the next decision.

Affirm’s 30-day delinquencies on monthly installment loans were 2.5% at June 30, 2026, up 19 basis points on the year (this excludes its short interest-free Pay in X loans and Peloton loans). Its allowance for credit losses was 5.9% of loans held.

Business credit inside platforms carries more tail risk. At Shopify, 91.3% of loans and cash advances were current at June 30, 2026, while 5.7% were more than 180 days past due.

Funding is the quieter story. About 90% of Klarna’s funding sits in consumer deposits, which Klarna calls a durable advantage. Affirm funds itself through warehouse facilities, securitizations and forward-flow loan sales. BCG’s fintech team expects fintech lenders to keep leaning on private credit and securitization.

This is the opening for banks. A lender that owns the moment still needs a balance sheet. The cheapest balance sheet is a deposit base.

Banks have also run their own version of this for years. McKinsey’s Global Banking Annual Review recalls how American Express and JPMorgan Chase, between 2017 and 2021, let cardholders turn balances into installment plans inside their apps. By 2022, US consumers had about ten million such plans, up roughly 60% in a year, with about $9 billion in balances. The average rate was about 5.8%, against 20% or more on regular card debt. McKinsey still calls it a niche: US card balances were about $1 trillion in October 2025.

What to do in 2027. Price risk on the transaction as well as on the customer file. Short duration plus repeat data is what keeps the pay-later lenders’ losses low. Banks already hold the repeat data.

3. Small business credit moved into the software

The bigger shift for banks is in small business lending.

Shopify bought $4.2 billion of loans and merchant cash advances to its merchants in 2025, against $3.0 billion in 2024. In the first half of 2026 it bought $2.8 billion, up from $1.8 billion a year earlier. Its annual report says some of these are originated by a bank partner and then bought by Shopify. Interest and fees from lending earned Shopify $258 million in 2025.

Stripe tells the same story. Its 2025 annual letter says Stripe Capital’s funding volume grew 45% from 2024 to 2025 and supported more than 81,000 businesses. Businesses repay as a share of their later sales. In the US, the loans are issued by Celtic Bank or Lead Bank.

Stripe also ran a randomized trial over two years. Businesses that accepted financing grew revenue on Stripe 27 percentage points faster than comparable businesses that did not. Even businesses with low credit scores grew 11 to 18 points faster.

McKinsey’s fintech team explains why this works where stand-alone lenders struggled. Fintech lending revenue is about $120 billion, growing 19% a year. Yet it is the least concentrated vertical: the top three lending fintechs hold only 16% of it. Small business lending stays hard, because customers churn and costs do not fall fast enough as the book grows. Where it works, McKinsey says, it is tied to distribution the lender owns, such as lending built into a platform.

BCG’s payments team reaches the same point from the merchant side. Embedded finance needs proprietary data and direct integration into the flow of commerce. That makes it a better fit for marketplaces and platforms than for most merchants.

McKinsey’s UK team names the risk for banks. Embedded-finance platforms and software providers now sit between banks and their business customers. Incumbents might keep the credit relationship and still lose the daily interaction, along with the transaction data that drives the next decade of revenue. And 67% of large corporations say transaction banking is a primary reason they work with a bank.

Visa Consulting and Analytics suggests the counter-move. Banks can partner with ERP systems, marketplaces and logistics platforms, then offer inventory-linked working capital and invoice financing inside them. Visa names Shopify Capital as the model to copy.

Figure 1. Credit at the moment of need, April to June 2026 ($ billion)
LenderValue
Klarna, gross merchandise volume36.6
Affirm, gross merchandise volume14.1
Shopify, loans and cash advances bought1.4

Source: Klarna, Q2 2026 results, August 2026; Affirm, FQ4 2026 shareholder letter, August 2026; Shopify, Form 10-Q for Q2 2026, August 2026. Gross merchandise volume counts purchase value and Shopify’s figure counts loans bought, so the bars show scale, not like-for-like lending.

What to do in 2027. Pick verticals. In small business credit, the winning bank will be the balance sheet inside two or three platforms where it can read the cash flow every day.

4. Banks choose: balance sheet, rails, or neither

Deloitte’s payments team describes the pattern behind all of this. Big Tech wants the customer interface and lets a regulated partner carry the risk. The largest tech firms launched branded credit cards and in-house pay-later services. Deloitte notes that these were later reshaped with established partners or shut down.

Mastercard calls the bank side Banking-as-a-Service. Banks power deposits, cards and lending programs for others, keep the economics and stay central to compliance. Mastercard cites two numbers for it: 84% of fintechs partner with incumbent institutions, and 71% of consumers walk away from a purchase that sends them to another app to pay.

The partner model has a known failure mode. Deloitte puts US embedded finance revenue at $51 billion in 2026, up from $40 billion in 2025, on roughly $7 trillion of transactions (an industry estimate it cites). It also retells Synapse. When that middleware provider collapsed in April 2024, more than 100,000 people lost access to over $265 million held across fintech apps. No one could say for sure who was responsible.

Deloitte’s advice is specific. Reconcile every partner’s ledger yourself, in real time. Agree liability in the contract before onboarding, not after a dispute. Treat the strictest state licensing standard as the floor.

Some fintechs are leaving the partner model altogether. Deloitte notes that Revolut filed for a US national bank charter on March 10, 2026 and won conditional approval in September. Nubank won conditional approval in 121 days.

Banks have a third option: build the installment moment into their own rails. McKinsey’s payments team shows how Brazilian banks answered Pix. Several introduced Pix Parcelado, where the merchant is paid instantly and the customer repays in installments. That kept an important source of lending revenue as instant payments replaced debit cards.

McKinsey’s 2026 banking review places embedded finance in the middle tier of a bank’s innovation portfolio. These are ventures run outside the core, and McKinsey expects about 50% of them to succeed. So plan for some partnership bets to miss.

What to do in 2027. Choose a role per segment. Being the invisible balance sheet is a real business if you price the risk, control the ledger and own the compliance. Serving the moment yourself means owning the interface. Doing neither means another firm makes the loan and keeps the data.

5. The rules arrive in 2026 and 2027

For years, interest-free pay later sat outside most credit rules. That ends now, but not everywhere in the same direction.

UK. From 15 July 2026, the FCA regulates interest-free pay later from third-party lenders, which it calls deferred payment credit. Lenders must check affordability, give clear information up front, support customers in difficulty and accept complaints through the Financial Ombudsman Service. Merchants that lend their own credit stay exempt. The FCA says the market grew from £0.06 billion in 2017 to over £13 billion in 2024. 20% of UK adults, 10.9 million people, used it in the 12 months to May 2024.

EU. The new Consumer Credit Directive applies from 20 November 2026, says the European Commission. PwC’s Strategy& team notes that it brings mandatory credit checks and disclosures to pay later and small loans, which puts fintech lenders closer to bank rules.

US. Federal policy moved the other way. On May 12, 2025, the CFPB withdrew its 2024 interpretive rule that treated pay-later lenders as card issuers. Deloitte counts nearly 70 interpretive rules, policy statements and similar documents rescinded since 2025. States are filling the gap. New York’s financial regulator published proposed rules in February 2026 under a 2025 law, covering licensing, fee limits, disputes and data privacy, and filed a formal proposal in July. The law takes effect 180 days after the final rule is adopted.

What to do in 2027. Design the affordability check into the flow so it runs in seconds. In the UK and the EU, the check is now part of the product. The hard part is a check that stays strict and still feels light.

6. AI agents will pick how you pay

The next moment of need may not involve a person at the checkout.

BCG’s AI-first payments perspective sketches the sequence. An agent captures what the customer wants, compares merchants, then presents payment options with negotiated terms, such as card, wallet or pay later. Tender choice becomes programmable. Visa Consulting and Analytics expects embedded finance at scale, sped up by agents that transact on behalf of businesses, and product ideas such as smart credit line tuning.

Credit decisions have to keep up. McKinsey describes one large universal bank whose legacy core held credit-line changes back by up to 24 hours. After modernizing, it cut credit decision times from hours to seconds, raised approved lending volume by 12% in targeted segments and cut fraud losses by 18% in the first year.

BCG’s Future of Finance report goes further in its bull case. AI-enabled embedded credit, secured against tokenized assets, could let people borrow in real time without a traditional loan origination at all.

What to do in 2027. Make credit offers readable by machines: terms, limits and eligibility that an agent can query and compare. A bank whose offer an agent cannot parse will not be shown.

Where the reports disagree

  • How big it is. BCG estimates the global embedded finance market at more than $320 billion by the end of the decade. Deloitte puts US embedded finance revenue at $51 billion in 2026. They count different things, and both lean on earlier estimates rather than their own surveys.
  • Niche or mainstream. McKinsey calls bank installment loans a niche next to $1 trillion of US card balances. The pay-later lenders’ own numbers show volume growing 18% to 36% a year.
  • Who keeps the economics. Mastercard argues that banks keep them through Banking-as-a-Service. Deloitte shows Big Tech handing the risk to banks while keeping the customer. McKinsey’s UK team warns that banks may end up holding only the loan.

What I’m watching in 2027

  • UK approval rates after July 2026. If affordability checks cut approvals sharply, the UK becomes the test case for every other market.
  • New York’s final rule. It could become the template for other US states while federal rules stay light.
  • Agent checkouts. Whether agents offer pay later by default, and whose credit they pick.
  • Bank-built installments. Pix Parcelado and card installment plans show banks can own the moment on their own rails. I want to see a bank do it at Klarna’s scale.

When we worked with Deserve, we cut a sales flow from 9 steps to 4 in 8 weeks. Embedded lending pushes the same idea further: the whole product is a few seconds inside someone else’s screen. I expect the banks that win in 2027 to make those seconds simple, and to stay trusted behind them.

Sources

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