In the past ten years, technology has advanced significantly. People can now pay for a ride before they get there or pay their utility bills without leaving their homes. During 2020 and 2021, the pandemic quickened up digitisation even more. This forced companies to find new ways to speed up execution, which seemed impossible a few years earlier. Instant payment systems are now an important part of our everyday lives. But have you ever wondered what goes on behind the scenes when you buy something online? Embedded finance is the simple answer. The next essential query is, “What is embedded finance?” Continue reading to find out.
What is Embedded Finance?
The flawless integration of financial services into non-financial services is referred to as embedded finance. It is intended to simplify financial procedures for customers and provide a better user experience, enabling them to obtain what they require at the precise moment that they require it.
For instance, instead of visiting a physical bank to apply for credit and then make the purchase, embedded finance, enables customers to make a purchase and acquire credit in one location. Embedded finance technology is essentially used by customer-facing digital platforms to provide financial services in their own offers.
The embedded finance revenues in India would rise from US$4,801.8 million in 2022 to US$21,127.5 million by 2029, according to studies by Research and Markets. To put it another way, the market is predicted to expand at an amazing rate, led by the growing accessibility of financial services APIs. For embedded financial firms, a sizable addressable market potential will lead to significant revenue growth.
Examples of Embedded Finance
Several individuals may be absolutely unfamiliar with the idea of embedded finance, therefore today we’ll look at some examples of embedded finance that will have a major impact in the near future:
1. Embedded Payments
With Embedded Payments, customers can pay by pressing a button. They may pay without navigating between apps, which allows fast checkout and payment settlement procedures and provides a great user experience. Embedded payments are a common feature of payroll automation software and many food delivery applications.
2. Embedded Cards
For routine purchases between a customer and their seller, embedded cards can be used in place of credit cards and debit cards. It enables users to electronically transfer money to cards and make purchases that are only allowed to be made up to the amount of the transferred money, which may also be activated. Compared to standard cards, these cards are less expensive and more secure. Smart cards, expenditure cards, virtual cards, corporate cards, etc. are a few examples of these cards.
3. Embedded Lending
Today, individuals don’t have to rush to banks to get a loan. Numerous non-financial companies have entered the financial sector to allow customers to obtain credit at the time of purchase. It does away with the need for intermediaries, drawn-out procedures, and a ton of paperwork.
For example, Instant Settlements for Marketplace Sellers is an example of embedded lending whereby marketplace sellers can receive loans based on their sales data fetched directly from the marketplace platform utilising safe and secure APIs within seconds.
4. Embedded Investments
It’s possible that many investors are unaware of safe financial investments. However, it is a crucial component of efficient money management. Integrated investments are rational because they simplify the investment process by providing a single platform for investing and money management. It is a security feature that allows consumers to invest in a variety of financial assets without leaving the platform.
5. Embedded Insurance
Technical integration is now essential for selling insurance products since consumers are growing more tech-savvy. Embedded insurance is a far better choice than the difficult standard insurance purchasing process. It enables insurance providers to communicate with clients on a safe platform that they are more likely to see as reliable.
6. Embedded Banking
The process of integrating financial solutions with a company’s platform or app through APIs is known as embedded banking. It serves as a catch-all phrase for various financial services, including lending, wearables, contactless payments, card issuing, and bank transfers.
Having integrated financial solutions on a platform or app enables businesses to reap the benefits of having them without having to engage a whole staff to execute them.
Advantages of Embedded Finance
There are various advantages for different embedded finance industry stakeholders, including digital platforms, financial institutions, and end-users.
1. Digital platforms
- It increases their average order value, customer retention, and customer lifetime value, hence increasing their revenue.
- It enables an alternative source of income in the form of revenue sharing without assuming any financial risks.
- By delivering financial services, a digital platform can gain a competitive advantage.
- It enables the platform to collect significant client data that can be exploited in many ways to decode their purchase behavior.
2. Financial institutions
- Financial institutions can exploit the distribution capabilities of digital platforms to gain access to a vast pool of borrower data, which can be used to provide potential borrowers with customised financial solutions.
- It improves underwriting and credit lifecycle management, hence increasing their margins.
3. End-users
- End-users have access to a variety of accessible, flexible, and less expensive financial services.
- They have access to individualised financial solutions that precisely meet their needs.
- It results in an enhanced platform experience for end users.
Process of Embedded Finance
Before attempting to comprehend the back-end process of integrated finance, it is essential to identify the parties involved. There are essentially three important parties:
Consumer: This refers to the individual who purchases the non-financial product and thus becomes a prospective customer for the embedded financial service. Although in rare instances, due to latency, a client may not be able to identify themselves clearly.
Business: The entity that is selling you a non-financial good or service.
Financial Institution (banks, non-banking financial companies or NBFCs, fintech, etc.): Companies/institutions selling/supporting embedded financing products. These corporations do not sell their financial products directly, but rather indirectly, through other businesses.
Process to offer Embedded Finance products and services
When a non-financial company desires to provide a new financial product or service, it has three options: build, partner, or purchase. Build and buy were the only options prior to the emergence of fintech and embedded finance providers, and they are far more expensive and time-consuming than partnering.
Impact of Embedded Finance
1. Digital platforms will be a key part of getting financial services to people
Digital platforms are in a unique position to service their consumers in a way that traditional financial institutions cannot do better than ever before. Customers increasingly anticipate that digital platforms will more fully satisfy their wants. They can encourage innovation and play a crucial role in the distribution of financial services to consumers thanks to their extensive client knowledge.
2. Banks will collaborate with tech companies
Financial institutions may make use of enormous amounts of consumer data by collaborating with digital platforms. With the help of this information, banks may increase their customer base, better understand their current client, customise their financial solutions, and encourage repeat business.
3. Data-driven financial products will be developed
Banks can customise their financial offerings to the end user by using data. They will be able to approve customers thanks to new data sources, like platform data, which will make advanced underwriting possible. As a result, a fresh wave of cutting-edge financial products will emerge.
4. Vertical SaaS will keep expanding
SaaS enterprises now have the option to integrate financial services within their core software product thanks to embedded finance infrastructure. Customers in vertical markets use software that is specifically designed to address the vast majority of their issues. As a result, the customer uses that business for all of their software requirements. One dominating operator often serves the broadest variety of customer needs in the Saas industry.
5. Improved financial services unit economics
Financial organisations can increase their customer base more effectively and economically while also encouraging repeat business. By increasing their margins, businesses may provide the same financial solutions to customers at a cost-effective price.
6. Better consumer experience when using financial services
Customers are now spoiled for choice as a wide range of Embedded Finance companies emerge and some of our favourite brands start to offer financial services. Accessibility is set to get better while already existing services continue to get better.
7. Buy Now, Pay Later (BNPL) will gain popularity
By 2026, this service’s revenue will represent more than 50% of the market for embedded finance. In part, the rise in customer expectations for convenient and frictionless payments is reflected in this growth. As a result, all-in-one apps where users can shop, pay bills, and apply for credit will soon stop being the exception and start being the rule.
What is the Future of Embedded Finance? Four ways it will change Fintech
According to Plaid and Accenture’s research report, embedded finance could affect the business practices of both financial and non-financial companies in four key ways.
1. Restructured relationships between financial service providers and consumers
Financial service providers will need to become more accustomed to sharing customers with non-financial companies for services that were previously their exclusive domain.
2. New revenue channels
Numerous new revenue streams have already been established by integrating financial services into established buyer journeys. It is likely that new revenue streams will continue to emerge as companies find novel and inventive ways to add value through embedded finance.
3. Novel forms of competition
As embedded financial services become more pervasive and more non-financial companies enter, financial services firms will need to rethink their business models in order to compete for new frontiers.
4. A new era of collaboration
The relationship between financial institutions and brands will be long-lasting and mutually beneficial. Without hiring entire teams of financial experts and software developers, these partnerships will provide the expertise and skill sets necessary for brands to offer embedded finance.
The potential for financial services to expand into formerly non-financial areas is unprecedented and still in its infancy. As more businesses adopt embedded finance and consumers become accustomed to these services, this financial transformation will continue to gain traction in nearly every industry. The moment to start creating is now for businesses that want to be a part of the embedded finance revolution.
Conclusion
Companies are being driven to modify the way they conduct business by embedded finance because they are forced to work together and use it to maintain market dominance. Additionally, it provides tons of accessibility and convenience that, in a world where transactions are increasingly going digital, is too hard to ignore. So, the largest winners from embedded finance are the end users, or customers, who have access to a wide range of low-cost, individualised, and convenient financial services.
FAQs
1. What is Embedded Finance?
Ans: The flawless integration of financial services into non-financial services is referred to as embedded finance. It is intended to simplify financial procedures for customers and provide a better user experience, enabling them to obtain what they require at the precise moment that they require it.
2. How are Embedded Finance and BaaS related?
Ans: An end-to-end architecture known as BaaS, or banking as a service, enables third parties to connect with bank systems via APIs. Due to its regulated infrastructure, this enables third parties to provide banking services. The term “embedded finance” describes integrating financial services, specifically within non-finance contexts and ecosystems, using BaaS.
3. What steps should I take to integrate Embedded Finance infrastructure into my company?
Ans: Businesses can incorporate Embedded Finance Infrastructure using one of three methods:
- You might build internal Embedded Finance infrastructure using the skills and assets of your business.
- The full solution (or components of it) could also be purchased from a third party. Technology and service licensing are a part of this.
- However, to benefit from their experience and significantly reduce time to market, we advise collaborating with an embedded finance company. It is also a cost-effective idea to have a lender in place as part of the Embedded Finance solution because the costs are shared among several stakeholders.
4. What is the full form of OCEN?
Ans: OCEN Stands for Open Credit Enablement Network. It is a collection of standardised tools that offers a framework for integrating lending into the platforms of non-financial enterprises.
5. What does the term “Embedded Company” mean?
Ans: A business that provides services for developing embedded software is an embedded design services company. Also, engineers at the business have experience creating embedded software and can perform embedded development services for both small and large embedded systems.
