All About Embedded Finance

The idea of embedded finance is rooted in the fact that finance is closely associated with the products and services that are a part of our daily lives. It aims to make financial transactions more fluid. The resulting economic system will be able to adapt more easily to the ever-changing social and economic norms.

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It is clear that the pandemic has made many businesses rethink their digitization strategies. It has also accelerated the pace of digitization in the fintech sector. The experts are predicting that the era of embedded finance is upon us.

Consider this: the market for embedded finance can surpass over $7 trillion in ten years’ time. No wonder it is the future of financial operations in the coming days.

Today, businesses are willing to take the extra step to offer tailor-made solutions for customers. The goal is to make financial transactions seamless and user-friendly.

What is Embedded Finance?

The idea of embedded finance – Embed is rooted in the fact that finance is closely associated with the products and services that are a part of our daily lives. It aims to make financial transactions more fluid. The resulting economic system will be able to adapt more easily to the ever-changing social and economic norms.

In the past, multiple factors like stringent regulations, lack of technology, etc. have made banks the sole channels for regulating financial transactions. As the outlook of the industry changed, it led to the breakdown of the regulatory barriers. This allowed non-financial organizations to connect with banks and “embed” financial services into their trading platforms.

Basically, embedded finance integrates financial services with traditional non-financial services. It allows non-financial companies to use financial tools. This allows them to provide services like payment processing, or lending. Thie result is more ease for the customers by making the payment process smoother

The reality is, non-financial players like Amazon, and Google are taking giant steps in this sector. They are playing a big role in popularizing embedded financial services.

Here are a few examples that will help you to understand the process.

  • While buying a product from an e-commerce platform like Amazon, buyers can choose a “Buy Now, Pay Later” option. Transactions can be done without connecting with a lending institution. This gives consumers more freedom and flexibility.
  • Vehicle brands like Tesla are offering integrated insurance plans along with the vehicle. It allows customers to opt for hassle-free monthly payments.
  • You can purchase parking through the Google Maps app platform without having to use any other app interface.

To ensure the smooth functioning of the embedded finance ecosystem, three key players are necessary.

  • The various financial institutions including banks play the first role. They use their networks to manage requests along with the regulatory and credit risks.
  • The businesses and non-fintech companies come second. They offer financial solutions through their customer-facing digital platforms like apps and websites.
  • The fintech companies that develop the APIs and SDKs connect the two main players. They allow the system to work smoothly.

All in all, embedded finance is set to transform the manner in which the economy operates. With a steady rise in the number of online transactions, this evolution is set to create new and exciting opportunities in the coming days.

The Various Types of Embedded Finance

Embedded finance services are usually classified into a few types. Here are the primary ones.

Embedded Payments

At present, embedded payments are an integral part of every e-commerce platform. From in-app purchases to paying for groceries, customers get a seamless payment experience from a single app. In addition, users can also send or receive money through the service.

One example of this is Apple Pay. It offers a payment gateway that acts as a digital wallet and supports all payment networks and credit cards. In other words, you will get embedded banking services without the need for checking or savings accounts.

Embedded Insurance

This is a service that is becoming hugely popular as it eliminates the need for the customer to deal with a third party. The customers can also avoid the complex methods of buying insurance plans. Quite simply, the insurance plan is integrated with the product or service that is being purchased. Since the customers deal with a business that they can trust more easily, this makes them more comfortable.

Embedded Credit

This form of service allows non-financial digital platforms to provide a credit service to the customers. The customers can apply for loans, repay them, and pay EMIs for products purchased. It eliminates the need for third parties or any lengthy paperwork at the point of purchase. The buy first and then pay later through installments approach is a win-win situation for both parties,

Embedded Investments

Embedded investments provide users with a single digital platform for investing and managing their funds. This allows them to invest in stocks, mutual funds, or retirement plans from the same platform. The process makes managing one’s portfolio simpler and more secure.

The Main Features of Embedded Finance

Before you plan to embed financial tools into your business, take a look at some of the main features of embedded finance.

  • Embedded finance allows digital platforms to boost their revenues and improve customer retention. Since it improves the product offering, embedded finance allows businesses to stand out from their competitors.
  • Financial institutions can leverage the large pool of customers connected with digital platforms. This helps in extending their business outreach.
  • Customers can get access to affordable and user-friendly embedded banking services at the click of a button. The overall user experience on a digital platform is also improved.
  • Digital platforms can address customer needs in better ways than traditional financial institutes. By making the best use of customer data, they can ensure better customer satisfaction. The insightful data also allows financial services can be distributed more effectively. Besides, this data can also be used to boost business growth.
  • Customers can expect better services and more accessibility from powerhouse brands in the future. With the rise in market competitiveness, customers will also get faster services at cheaper rates.

Frequently Asked Questions

  • How is embedded finance related to BaaS?
    BaaS, or Banking as a Service, is a system that allows non-bank businesses to connect with a banks’ systems by using APIs. Embedded finance is an extension of the concept of BaaS. It allows the full integration of financial services into the product or services delivered by a non-financial business.
  • How to incorporate Embedded Finance infrastructure in a business?
    The first step is to identify your company’s goals and frame an appropriate embedded finance strategy. If you have the necessary resources, you can develop the infrastructure for incorporating embedded finance on your own. Otherwise, you can make use of the expertise of a reputed embedded finance company and allow them to develop the complete solution for you. By collaborating with a brand like EMBED, you can get a custom-made package that perfectly suits your business. That way you can let your in-house talent focus on the core business. The external specialists can handle the complex infrastructure required for developing the foundations of embedded finance services.
  • What are the areas of opportunity for embedded finance?
    Healthcare and financial services are closely linked. That makes the health and wellness sector a major area of opportunity for embedded finance. As media creation and consumption plays a major role in the digital world, media is another potent zone for developing embedded finance
    applications. Other promising areas include education, agriculture, real estate, logistics, and energy.
  • Is embedded finance the future?
    It is. As more corporate houses invest heavily in digitization projects, embedded fiancé has emerged as the next big thing. In fact, 75% of the top brands are expected to launch products based on embedded finance in the coming two to three years.
    For brands, the choice is clear. Consumer expectations rising at a fast rate. So, they need to embrace embedded finance or risk losing business to their competitors.
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