How people interact with financial services is transforming significantly in the current era. Technology integration in the financial sector presents us with new opportunities, such as embedded finance.
What is embedded finance? Why is it gaining traction, especially among non-financial companies? In this article, we’ll explore its types, benefits, and future trends bound to take the business space by storm.
What is embedded finance, and how is it revolutionizing the financial sector?
Embedded finance refers to the seamless integration of financial services into non-financial platforms, products, or services. It enables users to access banking, payments, insurance, and other financial functionalities without directly interacting with traditional financial institutions.
The digitization of commerce and businesses has given rise to the applications of embedded finance. With the acceleration in digital transformation, embedding financial tools allows businesses to create more customized financial solutions for their end users. Cloud computing and application programming interfaces (APIs) are two enablers in integrating financial services.
This evolution has also been enabled by changing consumer behaviors, as users consistently pursue quicker access to financial services, and businesses seek to capitalize on this behavior. Any industry with a transactional element can implement embedded finance, which comprises a myriad of industries such as banking, financial institutions, insurance (BFSIs), regtech, automotive, healthcare, eCommerce, and others.
To understand embedded finance in a simple way, picture this: a cafe offering 1-click payments or a supermarket offering its very own branded credit card. According to Plaid, 88% of companies implementing embedded finance reported increased customer engagement and agreed that it helped them acquire new customers. Another example can be a ride-sharing company offering digital wallets for storing, sending, and receiving money. Buy Now, Pay Later options available at eCommerce stores are another popular example nowadays.
Embedded finance can be broken down into three categories.
| Regulated Entities | Banks, payment specialists, fintechs, insurance companies, and consumer finance players. |
| Distributors | Retailers, telecommunications firms, real estate communities, fintechs, and OEMs. |
| Users | Retail and business customers. |
What are the benefits of embedded finance that can enable businesses to broaden their horizons?
The digitization of the finance sector has pushed businesses from all sectors to rethink their strategies. This applies to both financial and non-financial companies, especially post-COVID-19, where the appetite for frictionless online services witnessed a huge increase, thereby increasing the market for embedded finance, which is expected to grow up to $US248.4 billion in 2032, fivefold that from US$54.3 billion in 2022.
Benefits of embedded finance that can assist businesses include the following.
Enhanced user experience
Seamlessly integrating financial services into non-financial platforms improves user convenience, providing a smoother and more comprehensive experience.
Increased accessibility
Embedded finance broadens access to financial services by incorporating them into daily activities, reaching users who may have been underserved by traditional banking. An example of this is banks developing fintech apps, increasing ease of access for users as they can perform transactions regardless of their location.
Cost savings
Reduces the costs associated with traditional financial transactions and services by optimizing processes and limiting the involvement of intermediaries.
Data-driven insights
Embedded finance platforms generate valuable data, offering insights businesses can leverage to enhance data-driven decision-making and customer experiences.
Scalability
Embedded finance models can easily scale to accommodate growing user bases and evolving business requirements, ensuring flexibility and adaptability.
Real-time transactions
Accelerates the speed of financial transactions, allowing for real-time processing and settlement, contributing to a more dynamic and responsive financial environment.
Innovation and customization
Enables businesses to innovate and customize financial offerings, tailoring solutions to the specific needs of their users. An example is creating fintech apps with features like personal finance.
Wrapping up – key considerations for market entrants
Though already occupied, the market for embedded finance still has a lot of white space for new entrants, and we suspect that players amping up their expertise, technology, and industry relationships will emerge as leaders, especially in the next five years.
Financial services and fintechs aiming for their foothold in the embedded finance market should start by strategizing where to compete and choose from the numerous opportunities presented by the market. Second, modernize their existing legacy infrastructures that must be equipped to handle processes.
Last but not least, distributors of embedded finance should uphold the importance of regulatory-compliant and risk-controlled delivery of services, especially when they have not previously had the capabilities to build, sell, and serve financial products. As such, it is crucial to partner with a technology provider that assists with creating a risk management framework and helps determine if the distributor is working within their risk appetite.