Embedded finance is disrupting the financial world by reshaping financial services distribution model. Businesses that leverage embedded finance are not only providing exceptional services to their customers, but also improving their bottom line. Recently, Forbes confirmed this stating the examples of Shopify, that has gross payment volume of USD 14 Billion through its Shopify Payments Service (partnered with Stripe) in Q3 2020, and Uber, that is handling more than 70% of its driver pay-outs via Instant Pay.
While the statistics indicate that embedded finance is a great option for businesses, it is important to understand its fundamentals, benefits, use cases and players in the ecosystem before leveraging it.
Let’s begin by discussing what it really means.
What is Embedded Finance?
Embedded Finance (also known as embedded banking) is the seamless integration of financial services into traditionally non-financial services or products.
Many barriers, including stringent regulations in financial sector, readiness of industry and lack of supporting technology, have provided exclusivity to banks and prevented non-financial entities from providing financial services. However, recent push from the industry and change in the regulatory landscape (like the open banking movement and PSD2) have helped to break down the barriers and allowed non-financial organizations to connect with banks, regulated entities via APIs. As a result, organizations across the globe can “embed” banking products and financial services into their platforms.
Embedded Finance enables these businesses to monetize their customer base, increase their customer lifetime value, and importantly vertically scale their product offering. It reduces the challenges (costs, time, etc.) of building an entire FinTech solution.
Types of Embedded Finance
As there are several benefits of embedded finance (which we will cover later in this article), more and more organizations have been leveraging it to offer different financial services to their customers. Here are a few types of embedded finance:
Provision to make a seamless payment over a platform is made possible through embedded payments. Today, embedded payments have become an integrated feature of all e-commerce platforms and other applications offering paid services to their customers such as in-app purchases for video games, payments for everyday expenses like groceries, convenience stores and coffee shops.
One great example of embedded payments is Apple Pay which is a mobile contact payment system and digital wallet service that Apple Inc. introduced in 2014. Apple Pay is a secure and private payment method which supports major credit cards and payment networks. It allows customers to tap-and-pay using NFC-enabled point of sale terminals, or via online check-out. Whether you’re in a store, online, or sending cash to friends or family, you can easily send and receive money and make purchases.
Why is embedded insurance catching on? Simply, it puts today’s customers in control. It eliminates complexity of buying a traditional insurance plan by blending it with a product or service at the time of sale.
A notable example of embedded insurance is Tesla, which integrated flexible vehicle insurance plan within its POS machine to buyers in California. (Company plans to expand the idea to other U.S. states in the future)
It is the seamless integration of “lending-as-a-feature” that allows digital platforms to offer their customers credit services via a familiar interface. It can be used to acquire loans, repay them, and pay EMIs for products purchased online.
For example, several B2B e-commerce platforms including Amazon allow retailers to set up a line of credit to make their purchases, by setting up the Buy Now, Pay Later (BNPL) feature. This way, they can buy first and then pay later in instalments.
Embedded investments ease the process of investments by providing a single platform to manage their investments. These platforms allow users to invest in mutual funds, retirement plans, stock market and more.
A notable example is Acorns, which rounds up people’s purchases to invest their spare change.
Key players in the Embedded Finance Ecosystem
There are three key players in the embedded finance ecosystem which makes it possible to provide financial solutions to users:
- It includes large banks, small finance banks and non-banking financial institutions.
- They utilize their network to check requests from the embedded finance ecosystem and manage them.
- They manage regulatory risks, credit risks and compliance risks.
- It includes businesses and non-fintech companies that own customer-facing digital platforms like websites, mobile apps, etc.
- They offer customized financial solutions to their customers that are embedded within their platform.
Embedded Finance Infrastructure Companies
- It includes FinTech companies that develop APIs to connect financial institutions with the digital platforms (the other two key players).
- It offers services like loan lifecycle user journey, customer services, alternate data underwriting engines, etc.
Benefits of Embedded Finance
Embedded finance has a plethora of benefits for multiple entities and stakeholders. As a result, more and more people have driven towards it in recent years:
Benefits to digital platforms
Increases the customer lifetime value
Increases customer retention
Gives companies an additional revenue stream
Differentiates them from their competitors and helps them to stand out in the market
Allows companies to have more control over their payment processes
Removes several middlemen and helps in cost optimization
Helps them to analyze customer behaviors through insightful customer data and offer more personalized services
Benefits to financial institutions
Gives them access to a massive pool of new customers
Helps them to build a more profitable business
Offers enhanced underwriting
Allows better loan lifecycle management
Enables more savings for customers
Benefits to users
Increases access to financial services
Offers enhanced customer experience
Removes middlemen and simplifies onboarding procedures
Use Cases of Embedded Finance
There are several use cases of embedded finance as it solves multiple challenges across industries and offers enhanced solutions to its users.
Solution: Leveraging banking-as-a-service solutions provides organizations a cost-effective way to streamline payments.
Solution: Embedded finance has great opportunities in the healthcare sector, ranging from better coverage in health insurance to offering better services in terms of preventative medicine. It can also facilitate transparent pricing and offer multiple payment options for the consumers. At the same time, it can make healthcare industry more profitable by decreasing the costs.
Solution: With embedded finance platforms, the EdTech sector can use in-depth analysis to evaluate a student’s potential capacity to repay loans and lend accordingly.
Solution: With embedded finance lending, insurance, and mortgage processes can be integrated making the process of house buying seamless. Embedded lending can be used to transform the house mortgage market.
Applicable to a wide range of domains, embedded finance has begun disrupting the financial technology ecosystem and will continue to do so for a long time. Begin your journey of Business Transformation with trustworthy partners. Are you wondering how embedded finance can help your business?
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