The economic stagnation in 2020-2021 led businesses to rethink their operational process. It heightened the need for digitisation in every domain, and the fintech sector witnessed a notable change in the form of Embedded Finance.
Embedded Finance, also known as Embedded Banking, refers to the seamless integration of financial services into a non-financial service.
It is the utilisation of financial services or tools (e.g. lending or payment process) by non-financial providers. For instance, an electrical shop offers point-of-service insurance for the goods offered at the store.
This model or infrastructure allows customer-centric digital platforms (i.e. anchor platforms) to ‘embed’ financial services into their operations.
Embedded Finance is primarily created to streamline financial processes for customers and allow them access to services whenever they need them. Few years back, consumers had to visit banks or financial institutes physically to apply for credit. With the launch of Embedded Financing, consumers can purchase and get credit in one place.
On the other hand, if businesses are willing to offer financial services, they have to establish a FinTech body within their organisation. The completion of this process can take years and the expenses are undoubtedly massive.
However, Embedded Finance makes this whole task easier. These new infrastructures can launch digital platforms and offer financial services to consumers natively. In addition, this infrastructure can offer a native FinTech experience within a non-FinTech digital platform that is very close to customers.
Working Procedure Of Embedded Finance
Embedded Finance enables businesses to manage and promote unique financial services. Now businesses can easily integrate innovative financial products, such as payment, insurance, credit, debit and investment, to increase user experience.
For instance, making payment for a ride with Uber, product designers at Uber has integrated a payment facility into the app. As a result, individuals can select a preferred payment method, and the driver will receive money at the end of the trip.
Another example will clear the idea. Let’s say a school offers online coding training with several payment options. This may include an income-sharing agreement where students will offer a portion of their future income rather than making an upfront payment. A student approaches that school with this option of Embedded Finance instead of taking a bank loan. This can benefit students and the like.
Key Players In Embedded Finance Ecosystem
There are three vital players in Embedded Finance. These are as follows:
1) Financial Institutions
Small finance banks, large banks and non-banking financial institutions fall under financial institutions. These entities use their network to keep track of requests from the Embedded Finance ecosystem and tackle them. In addition, these entities are responsible for managing credit, regulatory, and compliance risks.
2) Digital Platforms
Businesses and non-FinTech companies with access to customer-centric platforms, such as mobile apps, websites, etc., come under this variant. These players of Embedded finance offer tailor-made financial solutions to customers who are embedded within their digital platforms.
3) Embedded Finance Infrastructure Companies
The third player of the Embedded finance, i.e., Embedded Finance Infrastructure companies, includes FinTech companies that develop APIs and bridge the gap between the first two players. In addition, this third entity offers services, such as loan lifecycle user journey, customer services, alternate data underwriting engines and many other things.
Types Or Examples Of Embedded Finance
Currently, businesses are actively integrating Embedded finance companies into their operations. Following types of Embedded finances are available in the market:
In Embedded payments, involved parties can integrate payment infrastructure and create a manageable payment flow within a platform or app. Payments are the first financial services embedded into the domain of non-financial services.
Embedded payments have become a crucial part of the E-commerce app or SaaS platform, where end-users can easily use this innovative feature. When individuals opt for this type of Embedded Finance for business, they can truly enhance the shopping experience for consumers.
This is seen in cases like payroll automation softwares, subscription-based payments for SaaS, integration of e-wallets in E-Commerce apps, payment via educational institutions’ ERPs etc.
Embedded insurance refers to tying insurance with a purchase of a product or service. For instance, Tesla provides auto insurance both at online point-of-sale and in-showroom purchases.
Companies involved in Embedded insurance offer transactional APIs and technologies that enable the integration of insurance solutions with websites, mobile apps, and various partner channels.
Usually, platforms prefer to connect with external insurance companies instead of building a new one within their operations. In addition, insurance companies still work with the old model of tech stacks that can hardly be integrated. In such a scenario, Embedded insurance functions perfectly and helps connect with insurance company tech stacks seamlessly.
This type refers to the embedding of various credit items into non-digital platforms. Embedded credit enables consumers to apply for credit products, obtain items and repay loans via that platform.
For instance, a consumer purchases a laptop from Amazon and converts the purchase into EMIs at the payment gateway without leaving the shopping platform.
Through Embedded investment, individuals can integrate stock market investing into vertical offerings. As a result, individuals can decide by making an Embedded investment and managing their money.
These variants ensure a seamless investment experience. Without leaving the platform, investors can use a single platform and invest their money in the stock market, mutual funds, and retirement plans.
Benefits Of Embedded Finance
Embedded Finance offers a wide range of benefits to its entities. These are as follows:
For Financial Institutions
- Aids in building a more profitable business,
- Open ways for attracting new customers,
- Ensures improved underwriting
- Enables enhanced loan lifecycle management
- Allows more savings for customers
For Digital Platforms
- Increases the customer lifetime value,
- Multiplies customer retention,
- Helps create a unique position in the market,
- Provide companies with additional control over payment processes,
- Removes several intermediaries and helps cost optimisation,
- Helps scrutinise customer behaviours through insightful customer data and offers more customised services,
- Offer companies with an additional revenue stream
- Provides enhanced customer experience
- Ensures increased access to financial services
Buy Now Pay Later, And Embedded Finance
One of the notable uses of Embedded Finance can be found in the innovative line of credit known as Buy Now Pay Later. This credit facility provides modern shoppers access to a wide range of products without paying anything upfront. The remaining bill amount is converted into easy EMIs. This new-age point-of-sale credit facility is available for customers and B2B buyers or sellers and is offered by BNPL providers.
Sellers such as brands and enterprises willing to integrate this form of Embedded Finance can opt for Buy Now Pay Later solutions offered at KredX. This will help them receive payment for the products sold or services offered instantly. Simultaneously, customers obtain products or services immediately.
Only a shift towards technology can maintain a fine tune between financial services and end-consumers in this fast-paced world. As Embedded Finance allows easy access to financial services and increases customer satisfaction, more non-traditional players adopt this innovative financing option. In addition, the future will witness more data-driven financial products, the massive growth of vertical SaaS, and a robust dominance of Buy Now Pay Later.