A new wave of tech is reshaping the financial services industry: embedded finance. It’s a seamless and more practical way for businesses to offer products and help consumers manage their finances. It incorporates financial services with non-financial products and services. Businesses and their merchants can access financial services like loans, insurance, and investments through embedded finance without having to switch from the platform or application they are currently using. Here’s what you need to know about embedded finance, how it works, the different shapes it might take, and its impact on the larger ecosystem.
What is embedded finance?
Embedded finance is when any organization provides financial products and services via platforms and application programming interfaces (APIs) that they do not or cannot host by themselves. Through embedded finance, businesses can use and access financial services offered by other parties. Typically, embedded finance operates via an API, which enables safe communication between a digital platform and a financing processing system. Merchants can purchase/ get financed/ pay in instalments using this method without leaving the retailer’s website or mobile application. Instead of leaving the merchant’s website, they can submit their business information and complete any transaction within the same platform. You can read more about the specifics of embedded financing here.
While this concept is not novel, what’s new about embedded finance these days is its technological capabilities. Embedded finance is a lucrative option for both businesses and their consumers due to its quick and simple integration into user-friendly digital interfaces including apps, digital wallets, rewards programs, insurance, and more. For instance, retailers can now integrate financial lending services into their platforms and offer their consumers the opportunity to divide online purchases into monthly instalments, or “buy now, pay later” (BNPL) such as with Scalapay. Viceversa provides this tech to help finance Qonto merchants and gives them access to growth capital. Read more here.
Benefits of embedded finance
In recent years, the popularity of embedded financing has shot up. And some of its great possibilities include:
1. Drives business growth
The advantages of embedded finance are becoming increasingly obvious since it is a major force behind both business expansion and customer satisfaction. Payments or access to funding may be made considerably more easily for both customers and enterprises with the help of embedded finance, which streamlines the procedure for everyone.
2. Boosts profitability
Businesses frequently gain from embedded payments or embedded lending because they have quicker access to consumer monies, giving them extra cash to enhance their services or continue to build their product. This directly results in greater profitability and decreased expenses related to onboarding new clients and the transactions they carry out. This helps businesses get access to newer revenue streams.
3. Increases convenience
The advantages of embedded financing extend far beyond financial gain and apply to both B2B and consumer transactions. When adopting embedded payment or lending solutions, customers get a high level of ease because they can make payments or get access to funding that can help them grow their businesses without ever leaving their current digital location.
4. Improves security
Another benefit of employing this approach is increased security, as users do not need to maintain any sensitive information and can be confident that the company they are working with would securely store their data and are GDPR compliant at every step.
How does embedded finance work?
Since embedded payments led the way in this industry, let’s talk about this use-case for a minute. Making a payment in the past often meant pulling your wallet out, searching for your card, and then swiping or putting it into a card reader. Similar to how technology has changed, so have our payment options. A user, for example, submits their payment details on a digital platform or application, which is subsequently communicated to a payment processing system for authorization and processing. Typically, the process starts with the client and ends with a business/ banks/ fintech firm working in the background to keep everything running smoothly.
Let’s apply the same to embedded lending. If you are a marketplace that handles a lot of merchants who invest in digital marketing inside and outside of the platform, embedded lending can provide these merchants with fast capital that they can invest in their operations, especially to run deals, discounts, and ads. This opens up potential revenue streams and strengthens the ecosystem of the marketplace.
This method facilitates a seamless experience for both customers and businesses. Additionally, because they are not handled by a third-party processor, embedded financing is frequently more secure than conventional Internet payments or loans. They, thereby, provide an additional layer of security for both consumers and businesses.
Is it better than traditional financing?
Post-pandemic there was a stark change in many consumer habits like purchase preferences, willingness to access financial services on non-financial platforms (like Amazon) and need for customized financial curations. While these newly emerged needs have not been properly met through conventional financing, more advanced models like embedded finance have proven to be more successful.
Some embedded finance use cases
Embedded finance is increasing in popularity and can be found in several industries. The use of embedded finance is expected to grow steadily over the forecast period, recording a CAGR of 28.5% during 2023-2029 as mentioned in this report. As integrated finance continues to change how we interact with technology daily, here are some significant use cases:
1. Embedded payments
Through the integration of payment infrastructure, embedded payments allow for frictionless transactions within platforms. The first financial service to be integrated into non-financial products was payments.
Users can access varied use cases with embedded payments, such as in-game purchases in video games, payroll automation, e-wallet connections in e-commerce apps, payments through educational ERPs, subscription-based payments in SaaS, and more. For example- Starbucks allows users to order and pay using their phone app using embedded payment mechanisms.
2. Embedded investments
There’s a good chance that many investors are unaware of safe investment options. But it’s a crucial component of wise money management. Making integrated investments makes sense since it simplifies the investment process by giving investors and money managers access to a single platform. Customers can invest in a variety of financial assets without leaving the platform thanks to this safety feature.
For instance, by rounding up purchases, businesses like Acorns allow customers to invest their extra cash.
3. Embedded lending
In order to give clients the option of getting revenue-based financing or credit at the time of purchase, many non-financial institutions have entered the financial industry. Merchants don’t need to rush to the banks to apply for a loan right away. It eliminates the need for middlemen, lengthy processes, and paperwork. Companies like Viceversa and Klarna are just a few examples of embedded lending use cases. These companies enable customers to split online payments into more manageable monthly instalments or allow for getting more funds for business needs such as online marketing and ad spending.
4. Embedded insurance
Embedded insurance describes the practice of putting insurance at the price of a good or service. For instance, both in-person and online transactions at Tesla include auto insurance. Or travel insurance at airline companies. Platforms prefer to work with external insurance carriers rather than creating advanced capabilities inside.
Customers can easily interact with insurance providers via the tech stack of businesses that provide embedded insurance infrastructure.
Impact on the ecosystem
The concept of integrating one company’s UX with another company’s UX to drive revenue is not new. For instance, more than 20 years ago, companies like eBay began integrating contextual auction adverts into affiliate websites. However, this trend has accelerated in recent decades due to the widespread adoption of digital technologies, which has allowed companies to make these linkages more smooth than ever.
Access to financial services has changed thanks to the ever-expanding popularity of smartphones. This has raised customer expectations for integrated experiences and boosted the prospects for integration.
Along with supporting innovation and accelerating industry growth, the rise of embedded finance has also opened up new possibilities for collaboration between established financial institutions, fintech startups, and non-financial companies.
The boundaries between traditional banking and other industries are predicted to become even more blurred as the embedded finance movement continues to gain traction and more companies look to incorporate financial services into their platforms. As they navigate the quickly changing fintech landscape, this transition offers incumbents and new entrants alike problems as well as possibilities.
Learn more about our embedded finance solution: Bridge
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