Introduction
Embedded finance is a relatively recent trend in current financial technology that involves the integration of loans, insurance, debit cards, and investment instruments with almost any non-financial product. It is critical for e-commerce because the consumer’s profit and loyalty are contingent on transaction speed. Embedded finance, or embedded banking, is the seamless integration of financial services into a platform that was formerly non-financial. It allows clients to access financial services within the app while they are using it. Embedded Finance helps organizations in the SME, B2C, and B2B categories to raise the lifetime value of their customers, monetize their client base, and vertically grow their product offerings.
Embedded Finance – What Is It?
Today, the financial industry is constantly evolving under the impact of various causes, including competition from new firms, commodity payments, government regulation, and new client expectations. Recent technology and commercial realities are continually evolving, necessitating rapid adaptation – not only for banks but also for FinTech enterprises. Currently, banks are buying start-ups and expanding their digital services aggressively, whereas FinTech companies are applying for licenses to conduct financial services. FinTech’s meteoric rise highlights the incumbent banks’ inability to adapt rapidly to market shifts and provide access to the new age financial offerings with embedded finance. The rise of FinTech via embedded finance offers more channels to incumbents and new entrants to provide access to their financial products via many non-financial platforms, which has increased the business potential of the current financial offerings.
Compared to incumbents, there are several FinTech startups that may provide financial services at a substantially lower cost. However, they lack the necessary infrastructure to promote their products and services. Embedded finance provides businesses a new mode to sell their offerings without the need to build their own technology stack. In general, embedded finance should be seen as a shift in the way financial services are made accessible to end-users, not as the creation of new financial products. These types of solutions provide more opportunities to the financial businesses, enabling them to target bigger market size, and scale their business with minimal efforts.
Embedded Finance Examples
Businesses are increasingly cooperating with organizations that specialize in embedded finance to provide financial services. Embedded Finance manifests itself in the following ways:
- Payments Embedded: Embedded Payments is a term that refers to the integration of payment infrastructure into an app or a platform in order to provide a smooth payment flow. Payment solutions were the first financial services to be integrated with non-financial products.
- Credit Embedded: Embedded Credit is a term that refers to credit solutions that are integrated into non-financial digital platforms. This enables clients to apply for, get, and repay loans directly via the site.
- Insurance That Is Embedded: Embedded Insurance is a term that refers to insurance that is included as part of the purchase of a product or service.
- Investments in Embedded Systems: Embedded Investment, in its simplest form, enables platforms to include stock market trading within their sector products. Embedded Investing has been pioneered by API-based brokerage businesses.
Working of Embedded Finance
Embedded finance services, in a nutshell, enable any firm to manage and promote novel financial products. Every business can now incorporate innovative banking products such as payment, debit, credit, insurance, and even investing into end-user experiences easily.
As customers go from payments through debit, credit, insurance, and investment, the solutions become more complex in nature. However, as a marketer or a brand in any area, customers want their goods to be as appealing as possible to buyers. When purchased in physical locations, customers need to communicate with their banks in order to get debit and credit cards, as well as furniture, car, and house loans, and several disagreements may arise between the client, the bank, and the vendor. It’s a tedious process, which needs a lot of manual effort and time to close a deal. All such issues can be mitigated easily by standardizing the offerings and making use of embedded finance to provide access to customers at their fingertips.
Though the merits of embedded finance are quite high, it’s not so easy to set up these solutions on legacy systems. For instance, British Airways provides travel insurance when a person books a journey on their website. However, integrating these goods has not been a simple or cost-effective process for brands and vendors. They are often generic and maintained by the insurer, rather than being personalized in real-time by the brand.
Eventually, it is expected that financial services will become indistinguishable from the solution supplied to the customer.
The Benefits of Embedded Finance
Embedded finance offers a variety of advantages to consumers and organizations alike. Some of the prominent benefits are listed below:
- Access to huge customer pools: Financial institutions may tap into a variety of borrower pools with varying characteristics. They do this by exploiting the distribution capabilities of platforms (companies) that include finance.
- Increase the profitability of firms: Through enhanced underwriting and efficient loan lifecycle management, financial institutions may boost their profits and lower expenses to their clients.
- Customer activation increases: Typically, merchant-oriented organizations have very high acquisition costs. They give lucrative offers/incentives in exchange for the merchant’s activation on the platform. Credit addition has been shown to enhance merchant activity on a platform in a variety of ways.
- Stand out from competition: Adding financial services enhances the platform’s product offering, vertically grows it, and helps it differentiate itself from competitors.
- Acquire valuable data to aid in the understanding of customers: Offering financial services enables the collection of important data on clients and their behaviour that may be analysed in novel ways.
- Access to more inexpensive financial services: Users have access to a variety of flexible, simple, and affordable financial services. They are accepted for a broader range of financial services and on more favourable conditions.
For whom is embedded finance intended?
Embedded funding is available to all businesses – regardless of size or industry. It enables non-financial firms to provide fresh and interesting options to tech-savvy clients. These integrated financial services facilitate transactions, provide new income streams, and strengthen the business-client relationships.
Integrated finance not only bridges the gap between companies and customers; it also helps bridge the distance between businesses and other enterprises. Numerous FinTech firms specialise in facilitating payments and loans between customers and suppliers.
Embedded finance is not limited to payments; it also encompasses insurance, lending, and investing. It has enabled Small and Medium-scale Enterprises, the engine of our economy’s development, to access various sources of finance with lowered efforts. The FinTech and embedded finance industries’ expansion is being matched by the expanding advantages they provide to companies and consumers alike.
Conclusion
Payments, debit cards, loans, insurance, and even investment instruments may all be integrated into practically any non-financial product using embedded finance. For instance, anyone may get integrated loans straight via an online retailer or a supply company’s digital platforms even though it’s not their primary business. Additionally, users may send money via platforms that may have nothing to do with financial services. This strategy will provide Financial businesses more channels to target their relevant customer segments and increase their market share with minimal efforts. Most importantly, such solutions will increase financial inclusiveness, allowing everyone irrespective of their financial status to access different services and lead an improved quality of life.
