5min read
Published on: May 8, 2024
#Financial Markets
The embedded finance market is quickly growing as the demand for more integrated and user-friendly financial solutions increases. The concept has led to efficient financial services, personalised consumer experiences, and new business revenue streams.
Key Takeaways
➔ The concept of embedded finance is growing rapidly due to the increasing need for people to access financial services conveniently across various industry.
➔ Embedded finance integrates financial services into non-financial platforms, improving customer engagement, loyalty, and engagement through convenient experiences.
➔ Companies can use the embedded financing model to provide customers with targeted financial products and services within their ecosystems.
➔ Embedded finance aims to increase financial accessibility by providing digital financial services to those who are excluded from the conventional financial system.
➔ Embedded decentralised finance (DeFi) comes with additional characteristics, such as transparency, low charges, and transaction efficiency, making DeFi a strong partner in the future of fintech.
Financial services have advanced in the last couple of years, changing how we shop, pay, and handle finances, with embedded financing leading the change. Insurance offerings in e-commerce platforms, one-click payments via a coffee shop’s app, and branded credit cards are all real-life examples of embedded finance that most of us use daily.
Embedded finance dramatically alters when, where, and how people engage with financial services and opens excellent market opportunities for financial and non-financial companies. Such companies have benefited from improved customer engagement by 88% and customer acquisition trends by 85%. This article will explore the definition of what is embedded finance, how it works, and real-world examples of what is currently disrupting it.
Embedded finance is a concept that involves integrating financial services into non-financial platforms. Using APIs that link with finance partners, organisations in diverse industries are now integrating banking, lending, insurance, and investment functionalities directly into their apps and services.
Image: The embedded finance graph
This is not a new concept, but one can think of the seamless buy now, pay later (BNPL) schemes at the checkout. However, the ubiquity of smartphones and application programming interfaces (APIs) have changed the dynamics of where and how consumers can access them. Today, users can quickly get insured on an e-commerce site or easily make one-click payments.
The benefits of embedded finance include convenience, strong customer loyalty, new revenue opportunities for companies, and more. This is a major departure from traditional models, where financial services exist separately from other consumer experiences.
Previously, embedded financial instruments have been present in our transactions, such as airline co-branded credit cards or insurance options with car rentals. But the digital age has gone a bit further. E-commerce platforms embed banking functionalities on the site, made possible by banking-as-a-service (BaaS) providers linking these services directly into the user experience.
Embedded finance has a transformative effect, improving customer experience and opening up enormous new market opportunities. According to projections, embedded financing can reach $384.8 billion by 2029, compared with only $22.5 billion in 2020. This shows the impact this model will have on the financial environment.
Image: How embedded finance works, by Decentro
Embedded finance incorporates services like loans, insurance, and investments into non-financial companies’ platforms by partnering with tech partners and traditional banks. This is not an entirely new trend – car manufacturers have offered financing for years, and retailer-branded credit cards are a staple.
Yet, embedded financing gained traction in the late 2010s, spurred by shifts in fintech, evolving consumer expectations, and new market opportunities, as noted in Peterson K. Ozili's study in the "Journal of Internet and Digital Economics." Critical drivers of embedded finance growth include:
• E-commerce expansion: As commerce moves online, businesses embed financial tools into their platforms, improving the customer experience. This involves providing a “buy now, pay later” facility, branded credit cards, and rewards at checkout, all of which contribute to improved consumer experience and sales revenue. Ride-hailing and freelance services have also introduced wallets and financial management tools to lure users.
• Technological developments: Fintech and APIs, which develop rapidly, allow for the fast-paced integration of financial services with non-financial applications. Digital onboarding, electronic Know Your Client (KYC) procedures, and real-time data are some of the features that contribute to transaction effectiveness and user comfort.
• Changing consumer demands: Today's consumers, used to digital solutions, lean toward non-traditional providers of convenient and seamless financial services.
• Financial inclusion: The benefits of embedded finance can be accessed by the unbankable, whom conventional financial institutions have shunned. It provides the possibility of better financial inclusion through insurance integration in transactional applications or assisting the less fortunate in accessing the needed financial products.
Embedded finance refers to various financial products and services non-financial companies offer. Such solutions allow businesses to offer financial products and services directly to their customers, including processes that previously needed the help of several applications or stages. Below is a closer look of some popular types of embedded finance and how they are gaining ground in different sectors.
Integrated payments allow customers to process payments within an application or website. This makes it easier for users to perform transactions and does not require them to be directed to other payment gateways, saving time when checking out. Some examples include click payment systems, which have been used in e-commerce sites, and in-app purchases, which provide convenience, security, and ease when making transactions. Major tech companies and small startups are adopting embedded payments to eliminate friction and abandonment rates at the checkout, resulting in increased conversion rates and customer satisfaction.
Embedded lending allows customers to get financing directly from non-financial companies. This is especially relevant to Buy Now Pay Later (BNPL) facilities offered at the point of sale, where customers can make payments via multiple installments. Such features allow consumers to get credit without visiting a bank, which improves their convenience.
Embedded insurance offers insurance solutions at the point of sale of other goods and services. For example, customers can often include travel insurance or rental coverage with a simple click when purchasing a flight ticket or a car for rent. This integration streamlines the buying process, increasing the chances of consumers purchasing insurance that they would have otherwise bypassed.
This banking model enables businesses to directly provide classic banking products like savings accounts, deposits, and financial management features within their platforms. This allows businesses to retain users within their own platform and offer a comprehensive service that may include everything from the daily administration of finances to long-term planning.
Embedded investing enables companies to offer investment options as part of their service offerings and provides a convenient way to invest without visiting brick-and-mortar financial institutions. Such an approach makes access to investment markets easier, pushes daily consumers, and decreases the complications generally linked to investing, thus making it more approachable.
Examples of embedded investing are robo-advisors or applications that round up purchases to the nearest dollar and invest the change. This is an impactful example of how investing is made accessible to more people and more people are encouraged to participate in wealth generation.
The wallets are integrated within non-financial applications and offer consumers a digital place to store their money and assets, for example, in ride-hailing or food delivery applications. These wallets enable users to store, transfer, and receive currency within the platform without connecting to a bank account or any payment gateway.
Image: Payment through embedded finance-enabled POS system, by Freepik
Embedded banking allows companies to offer customised financial solutions, including account management, direct deposits and financial planning. This unity enables businesses to maintain power in managing the customer’s experience and collect significant data on spending behaviour and financial needs. For example, integrated financial management solutions allow the company to simplify operations and provide in-depth services to clients.
The underpinning of the embedded financing ecosystem involves embedding financial solutions into diverse platforms. For example, companies like Stripe provide potent APIs that allow businesses to integrate secure payment processing in their apps. Plaid acts as a channel for connectivity between bank accounts and financial applications, which increases the integrity and security of financial information communication.
DriveWealth is another example of an embedded finance company that offers the tech needed to operate investment services in apps, which brings financial markets to consumers everywhere.
Integrating decentralised finance (DeFi) into embedded finance is a much-needed shift in fintech. Such integration has multiple benefits, including fast transaction speeds, lower transaction fees, increased transparency, and strong immutability. Such characteristics of decentralised platforms complement embedded finance.
Blockchain technology allows embedded finance applications to seamlessly interoperate with decentralised services, including gaming dApps, staking pools, metaverses, etc. Within these virtual worlds, companies can set up digital shops or similar premises and conduct trade in both digital and physical products. This integration enables smooth transactions for various products and services, making it increasingly popular with businesses entering the growing market of virtual asset users.
Embedded finance is displayed on platforms like crypto exchanges and betting Dapps. PayPal is a typical example of this trend, where Bitcoin has been embraced and hence a union of DeFi principles and mainstream financial transactions.
The embedded finance market is quickly growing as the demand for more integrated and user-friendly financial solutions increases. The embedded financing concept is set to revolutionise the way businesses interact with consumers. As the space grows, it ensures easier customer transactions and constant innovation in financial service delivery and experience.
The future of embedded finance relies on the adoption of digital financial services from non-financial services. This transformation is part of a more general trend towards a user-centred and integrated financial system that aims to bring more personalisation and inclusiveness that would create a market environment that is more accessible to a broad customer base.
Efficient financial services, personalised consumer experiences, and new revenue streams for businesses show that embedded finance is here to stay and will only get better from here.
This is the concept of embedded finance, which is revolutionising the economy by incorporating finance into various platforms to make financial transactions smoother, tailored, and convenient.
The advantages of embedded finance are as follows: convenience, customer retention, new income streams, inclusive finance, and the provision of customised financial services and products.
Some drawbacks of embedded finance include data privacy issues, regulatory issues, and difficulty transferring financial services to non-financial platforms.
Thus, embedded finance is the next step in the evolution of fintech, through which financial services are woven into the fabric of daily life.
A good example of the concept of embedded finance is the availability of the ‘buy now, pay later’ (BNPL) options to customers at the checkout of an e-commerce platform.
In their current state, embedded finance enhances the customer experience through one-click access to financial services, financial products tailored for the client, and simplified access to solutions such as payments, lending, and insurance.
APIs are highly significant in embedded finance as they help to incorporate financial services on other platforms that are not necessarily financial, with secure and reliable data-sharing mechanisms.
It increases financial inclusion by offering convenient access to financial services through technological platforms, especially for people with limited or no access to conventional banking systems.
For instance, e-commerce, retail, fintech, and ride-hailing industries benefit greatly from embedded finance, as customers enjoy integrated financial services that can help retain clients while boosting revenues.
Incorporating decentralised finance (DeFi) in the embedded finance model improves the system by providing faster, more efficient, cheaper, and more convenient financial transactions and improving access to digital assets.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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