In the world of finance, yet another emerging and rapidly growing field is Embedded Finance which has the potential to revolutionize how financial products and services are delivered.
According to a forecast by Lightyear Capital, the global market for this new form of finance was approximately $22.5 billion in 2020 and is estimated to grow more than tenfold to around $230 billion by 2025. But what is it exactly?
The Meaning of Embedded Finance
The definition of Embedded Finance has evolved over time, but it essentially refers to any type of service or product that enables people or businesses to access, manage, or deploy their finances outside of traditional banking systems and institutions. It basically integrates conventional financial services into non-financial businesses, platforms, and technology providers.
This means that non-financial businesses can now offer financial products and services without relying on traditional financial institutions. This way, this new form of finance enables companies to provide their customers with access to an array of different types of financing options in the same way they provide other goods or services — as part of their everyday operations.
For example, a business may integrate an embedded payment system so that customers can pay via their mobile device without ever leaving the store or website they’re on. In 2019, the ride-sharing app Lyft announced the Lyft debit card, which allows app users to pay for their rides with the total cash value stored on the card. These embedded cards offer users access to a range of financing products, allowing them to purchase items and services without going through a traditional financial institution like banks.
By doing so, individuals can benefit from more tailored solutions for managing their money, while companies can offer broader solutions for customers than they could through solely relying on banks. It also allows non-financial companies to provide their customers with powerful analytics insights and payment options.
Embedded Finance is made possible by technological advancements such as digital transformation, secure banking solutions, and digital transactions. It also involves machine learning, process automation, and big tech to provide a whole new spectrum of services that were previously unavailable.
The new form of finance will likely significantly influence how people interact with their finances in the future. It could mean the emergence of invisible banks in which customers are able to use integrated services without ever having to visit a physical bank branch or use online banking systems.
The Ecosystem of Embedded Finance
The concept of Embedded Finance has been around for some time now, but it’s only recently that businesses have started offering these products and services in earnest. By embedding their own financial products within an existing service or product, companies are able to provide customers with more options when it comes to paying for goods and services.
With Embedded Payment applications, users can conduct transactions without having to open an account with many banks or even share their financial information with the company they’re shopping with.
This secure payment method is becoming increasingly popular among online shoppers and businesses alike as it enables users to save time and money while getting access to the same type of financial services that would normally be available only at a bank branch or through traditional payment methods, allowing for a more seamless experience.
Vendor relationships are key when it comes to Embedded Finance since it focuses on creating an ecosystem of different value chain players in order to provide the best customer experience possible. This strategy enables businesses to offer financial services directly to their customers via APIs. This can help businesses in many different sectors, such as retail, e-commerce, travel, hospitality, and more, to offer customized banking solutions.
Financial services organizations, tech companies, B2B vendors, etc., all come together here in order to provide the best customer experience innovation within the platform.
In the ecosystem of Embedded Finance, banks are the providers who hold financial licenses providing financial products and services. They provide distributors with access to regulated licenses, funds, risk frameworks, and a place to hold deposits.
Then comes the enablers, which are technology providers linking Embedders-Providers, enabling them to exchange data, information, and services. They maintain and configure technology for delivering financial products to distributors via APIs. These can be entirely new businesses or new verticals in existing Big Techs.
Embedders are finally brands that provide products and services to the end users. These non-FinTech companies own a customer-facing digital platform and deeply understand target audience segments. As such, they can offer customized financial solutions to customers ’embedded’ within their platform.
The future of Embedded Finance will be greatly enhanced by new players, such as neo-banks which provide services beyond e-commerce sites by creating powerful platforms that integrate with banks, existing companies, and other financial institutions.
In addition, the emergence of BaaS (Banking-as-a-Service) platforms which allows customers to access banking products from different providers within a single platform, has enabled financial companies and banks alike to offer more tailored services for their customers within commerce environments. Therefore, this has given rise to more customer-centric models designed around customer needs rather than the traditional one size fits all approach taken by many banks in the past.
Different Forms of Embedded Finance
As technology becomes more advanced, so do the possibilities of what can be accomplished through Embedded Finance, which comes in several forms.
Buy Now Pay Later
One of Embedded Finance’s forms is the ‘Buy Now Pay Later’ (BNPL) trend which is becoming popular on online retail platforms. It is a financial arrangement under which the user gets the product immediately but pays the purchase amount in monthly installments, usually free of interest.
This option is presented during mobile checkout, and customers often get charged if they fail to pay. Sezzle, Afterpay, and Amazon Pay are some popular examples of BNPL providers.
The BPNL industry is growing so rapidly in part because it’s giving consumers more freedom and flexibility to shop but also because of its ability to extend credit to consumers who might not qualify for traditional financing.
Embedded Payments
An Embedded Payment is the integration of payments infrastructure into a web page or app such as Google Pay, Apple Pay, Venmo, Amazon, Uber, and DoorDash. This is to create a seamless payment flow within an app or a platform. They can also be used for in-game purchases in video games and subscription-based payments.
This type of integration makes it easy for customers to check out as they don’t need to provide their credit card information every time they make a payment and trust a third party with their personal information.
Embedded Credit
This one is a layer of ‘Buy Now, Pay Later’ under which businesses offer loans through their embedded finance offerings without requiring the customers to go to a traditional financial institution.
Through this form of Embedded Finance, consumers can apply for, acquire, and repay loans right within the platform. For instance, the EMI option at the checkout on Amazon.
Embedded Insurance
In Embedded Insurance, insurance is bundled within the purchase of a product or service. Companies providing this option offer transactional APIs and technologies that allow insurance solutions to integrate with mobile apps, websites, and other partner ecosystems. These companies provide an easy way to connect with insurance companies without requiring consumers to meet with an insurance agent to get coverage.
For example, Tesla offers auto insurance at the online point-of-sale as well as in-showroom purchases. Another example is traveling websites offering the option to purchase insurance coverage during the checkout process when booking a flight.
Embedded Investments
Popular applications like Robinhood and Cash App are examples of Embedded Investment companies that allow their users to buy, sell, and trade stocks without ever leaving the platform or working with an investment adviser.
This trend was started by API-based brokerage firms that have built APIs to reflect every microservice ranging from opening an account, funding, trading, portfolio management, and market data.
Future of Embedded Finance
The future of Embedded Finance looks promising, with more companies turning towards this technology to enhance customer convenience as well as increase revenue streams from non-traditional sources such as distribution platforms and service providers. It further allows for more personalized customer experiences and improved efficiency for businesses.
Traditional financial institutions are now also looking for ways to embed banking into their app offerings to differentiate themselves from competitors and grow their customer base.
As more companies adopt this technology, customers will be able to benefit from it even further by getting access to various types of financial products within one platform or website from different providers. Meanwhile, companies and banks alike can expand the reach of financial services beyond the traditional models.
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