Embedded finance is the second wave in the financial industry after the first wave of going mobile. While the topic is gaining attention and industry leaders and everyone around is talking about it, this concept of embedded financing is still new or confusing to many.
The smooth integration of financial services into a platform that is typically non-financial is known as embedded finance, or embedded banking. It enables customers to access financial services within the app and in-context instead of going to a separate banking app. For example, customers can make cashless payments within the app. Businesses in the B2C, B2B, and MSME sectors may monetize their client base, grow their product offering vertically, and enhance customer lifetime value with the help of embedded finance.
A chain of embedded finance participants consists of an end customer, an online platform where the transaction is made, an enabler of financial services, and a regulated entity that is the subject of supervision by authorities. Let’s look at an example; A customer purchases a book from amazon (online platform). Amazon integrates PhonePe (enabler of financial services) as one of the payment methods at checkout. PhonePe facilitates the transaction and the balance is facilitated by the regulated entity and is held in a deposit account at a partner bank. A successful embedded finance strategy is centred around customer experience and technology enablers to help propel growth.
Financial services, such as payment methods, finance, insurance, banking, and investment, are becoming more and more integrated into non-financial businesses' digital client experiences. They work hard to provide the appropriate services at the appropriate times to advance transactions smoothly, develop pertinent cross-sells, and raise conversion rates.
Below are some examples of embedded finance:
Embedded Payments
The term "Embedded Payments" indicates the process of integrating payment infrastructure into an app or platform to provide a smooth payment flow. The first financial service embedded into a non-financial product was payment processing. Now, payments are a crucial component of the value proposition of any SaaS platform or E-Commerce software, and end users using this feature regularly. Embedded payments have ‘n’ number of use cases to boast about, such as, in-game purchases in video games, payroll automation software, e-wallet integration in e-commerce applications, payment via ERPs in educational institutions, subscription-based payments for SaaS, and more are made possible by embedded payments.
My Starbucks, the app for Starbucks loyalty, has a successful in-app mobile payments system, making it another example of embedded payments. Customers that participate in the program receive "stars," or points, which may be exchanged for goodies like free coffee, baked goods, and retail goods. A user receives one star for each $1 spent through the app. A consumer receives two stars if they preload money into the Starbucks app and utilize it to make payments. Starbucks has outperformed 85% of US banks with a US$1.628 billion source of free financing, thanks to this incentive. Source : LinkedIn
Embedded Card Payments
In addition to using debit and credit cards, embedded cards can also be used for payment. With embedded cards, end users may make purchases up to the entire cash amount stored on the card and transfer monies electronically onto the card. Smart cards, virtual cards, or expenditure cards are issued by several systems. These cards can be a practical substitute for cash. Payments using embedded cards are safe since all data is encrypted. In comparison to standard cards, they are also less expensive and enable quicker processing.
Embedded Banking
Embedded banking is also known as banking as a service (BaaS). Non-financial businesses can provide clients with accounts under their brand by using embedded banking. Customers use the company's platform for business. It enables them to make payments using it without ever leaving the main platform. Such banking opportunities are the most beneficial for sellers or service providers that use the platform to conduct business. For instance, business owners may avoid creating a separate account by using Shopify Balance. The goal of embedded banking is to improve platform adherence. Additional advantages include speedier payments.
Embedded Investments
The term "embedded investments" describes how investing services are seamlessly included into widely used financial products. This concept allows individuals to invest in various financial instruments directly through platforms they use for everyday banking or transactions. The aim is to make investing as easy as paying a bill or transferring money from one bank account to another. By incorporating embedded investments in everyday banking, financial service providers are opening a world of investment opportunities.
Fintech companies are blending investment options into regular financial activities using advanced algorithms and user-friendly interfaces to present investment opportunities in a simple and digestible format. This is rapidly changing how consumers approach investments, making the process more accessible and less intimidating for the average person.
Apps you may be acquainted with—such as Grow, and Acorns—are all examples of embedded investment technology. Without leaving the app or interacting with an investment advisor, users can sell, buy, and exchange stocks. Embedded Investments allow users to invest in the stock market, mutual funds, retirement plans and many more.
Embedded Credit
Embedded Credit or lending categorically refers to the embedding of credit products into non-financial digital platforms, allowing consumers to apply, obtain, acquire, and repay loans directly through the platform. The seamless integration of this lending type into the customer experience facilitates simpler and more accessible financial availability for customers in times of need. A rising trend that is poised to change how companies provide financial services to customers and how they use credit.
Customers may now obtain credit more easily thanks to integrated lending, which offers a more simplified and comfortable experience. For instance, while checking out on Amazon, a consumer buying a kitchen equipment can choose to turn their purchase into an EMI without ever leaving the website. Embedded lending helps in increase in sales, customer loyalty, streamlined user experience, access to data helping business analyse creditworthiness and buying behaviours of customers.
Embedded Insurance
An innovative approach to insurance, where insurance products and services are integrated into a business's offering. This implies that clients won't need to deal with a different insurance company to get insurance as a component of the item or service they are purchasing. For example, you would have observed, when a customer is booking a flight in any of the travel apps, MakeMyTrip or ixigo, they may be offered the option to purchase travel insurance as an add-on at the time of purchase. This is integrated into the buying experience, facilitating customers to easily get the coverage without having to look for it and buy it in another platform.
Embedded Insurance companies offer transactional APIs and technologies that allow insurance solutions to integrate with mobile apps, websites, and other partner ecosystems. Platforms prefer to partner with external insurance companies rather than building the complex capability internally. Through their software stack, embedded insurance infrastructure firms offer a simple means of connecting with insurance companies.
Embedded Fintech
Fintech solutions are integrated into a financial institution's website, app, or other business operations; most embedded finance refers to embedding financial services into non-financial business activities. A bank may, for instance, offer to assist customers in cancelling unwanted subscription services or making bitcoin investments from within their banking app—instead of requiring them to download or sign up for a separate app.
From eCommerce to healthcare, embedded consumer finance is a trend that is impacting several industries. B2B markets, ride-sharing applications like Uber, and several more businesses display it. How does that affect those who make decisions? When making decisions about how your business will grow in the future, think about adding integrated finance capabilities to the goods you sell. This will boost income, enhance consumer engagement, and strengthen the competitiveness of the brand.
Businesses are being forced to fundamentally alter the way they do business due to embedded finance. Financial services will be distributed mostly through digital channels. It will produce a fresh batch of creative and useful financial goods. To maintain their market leadership, lenders and businesses across all industries need to take advantage of embedded finance infrastructure. Better margins will be enjoyed by lenders. To reach the wide range of consumers in the market, they must collaborate with digital platforms. For the customers, this is the most thrilling part. Customers from various socioeconomic and economic backgrounds will be able to access financial services that are easy to use, customized, and reasonably priced thanks to embedded finance.
A wide range of industries might be impacted by embedded finance, from small businesses integrating payment processing to huge platforms providing a whole range of financial services. Effective scale and differentiation are essential. Financial institutions need to establish complete capabilities, define target markets, and evaluate viability with a defined road map. Integrated finance is more than just a fad; it's an effective instrument for expanding market reach, improving client experiences, and boosting revenue. For those hoping to stay ahead of the curve as the financial landscape changes, embracing embedded finance is a strategic need, not simply a choice.