Embedded Finance — Types, Benefits and Challenges
I used to think that the only thing more boring than finance was watching paint dry. But then I discovered embedded finance, and my life was forever changed. Okay, maybe that’s a bit of an exaggeration, but seriously, embedded finance is pretty cool!
This is also known as “White label banking,” refers to the integration of financial services into non-financial products and platforms. This means that companies in industries outside of finance can offer financial products and services to their customers without having to build their own financial infrastructure from scratch or overhauling their systems
This can be as simple as offering a credit card checkout option on an e-com website or as complex as embedding insurance services into a ride-sharing app.
It kind of say goodbye to app-switching fatigue whenever you need to access a financial service.
In other words, it’s like having a mini-bank built into your favorite apps and websites. No more logging in and out of multiple apps just to pay for your morning coffee.
By embedding financial functionality directly into products and services, companies are able to offer their customers a seamless and convenient experience. For users, it becomes easier to access financial products at the same source instead of diverging to other vendors.
You may be familiar with the concept of embedding technology into everyday objects to make them more functional and convenient. Well, the same concept can be applied to finance and then it becomes embedded finance.
These advancements have opened avenues for non-financial entities to offer financial services with APIs as the driving force. Expectations are for Fintech offerings to revolve around ease and embedded offerings over the next few years.
Categories of Embedded finance
- Payment:- Complete ECom space, peer-to-peer payment on social media, WhatsApp and a lot more
- Lending:- Loan for employees in an HRMS tool, Ola’s Credit line(lending) for Drivers, BNPL
- Insurance:- Acko’s insurance in on-demand taxi apps, general insurance in IRCTC, travel insurance in flight booking checkout flow
- Wealth/Investment:- Jar and Spenny’s invest the change in expense management solution
- Banking:- Platforms such as Open Financial Technologies and Razorpay to set up a separate bank account for business revenue instead of using their personal accounts.
But how does it work ?
There are a 2 types of integrations that may help you understand embedded finance better:
1. Vertical integration :-
This refers to the integration of financial products or services into a single non-financial product or service. For example, a ride-sharing app offering insurance coverage to its riders/drivers.
2. Horizontal integration:-
This refers to the integration of financial products or services into multiple non-financial products or services. For example, a payment platform offering credit and insurance options to its users across multiple e-commerce websites.
I hope this help clarify how embedded finance works and the various stakeholders involved.
How it affects different industries ?
Embedded finance has the potential to positively affect a wide variety of industries :
1. E-commerce:
By integrating these APIs into their platforms, companies are able to offer a streamlined checkout experience and reduce the friction that often comes with traditional online payments. Another example is the use of financing options within e-commerce platforms, allowing customers to make purchases and pay them off over time. This not only increases sales for merchants, but it also provides more flexible payment options for customers.
2. Transportation:
Ride-sharing or car rental apps, can make it easier for customers to pay for and access these services. It can also create new revenue streams for transportation companies through the sale of financial products and services.
3. Retail:
These companies can benefit from embedded finance by offering financial products and services, such as credit or loyalty programs, to their customers. This can lead to increased customer retention and sales.
4. Hospitality:
Hospitality companies, such as hotels and vacation rental platforms, can use embedded finance to offer financial products and services, such as travel insurance or currency exchange services, to their customers. This can create new revenue streams and improve the customer experience.
5. Finance :
Another example is the use of personal finance management tools that are integrated into popular budgeting apps. These tools allow users to track their spending and make financial decisions with real-time data and insights, all without ever leaving the app.
6. Messaging app :
One example of embedded finance is the integration of payment APIs into messaging apps, such as WeChat or WhatsApp. This allows users to make payments directly through the app, without the need for a separate banking or payment app.
7. Others :
For example, a car manufacturer could offer financing options for their vehicles through a partnership with a financial institution, or a social media platform could offer peer-to-peer payments to its users.
Overall, any industry that has a customer-facing component and can benefit from offering financial products and services is likely to be positively affected by embedded finance.
Benefits of Embedded Finance :-
It has now become a buzzword as it offers businesses new revenue streams and elevates customer experiences. In the post covid world, combining integrated finance experiences into an offering or an app has become imperative driven by consumer demand for improved experiences. This trend is not only convenient for users, but it also has the potential to expand the reach of financial services to those who may not have traditional bank accounts.
1. Accessibility :-
One key benefit of embedded finance is increased accessibility. By embedding financial products and services into everyday products and services, companies can reach customers who may not have had easy access to traditional financial products. This is especially important for underserved communities or individuals who may not have a traditional bank account.
2. Customer Loyality :-
By offering a seamless financial experience, companies can create a more comprehensive and convenient service for their customers. This can lead to increased customer retention and brand loyalty.
3. Partnerships
Typically, when a non-financial company wants to offer a new financial product or service, they have three options: build, partner, or buy. Today, the embedded finance revolution has largely been about partnerships and that trend has definitely taken over the world. Financial and non-financial operators collaborating with themselves and even traditional banks, insurers, pension funds, etc. showing that financial providers and brands can forge lasting (and highly beneficial) partnerships. These partnerships providing the experience and skill sets that brands need to offer without hiring whole teams of financial experts and software developers.
4. New revenue streams
— By integrating financial services into established buyer journeys, many new revenue streams have already been established. Additional revenue streams are likely to continue popping up as companies, particularly enablers, (Startups, Telco, banks, etc) find new and creative ways to add value through embedded finance.
5. Automated bookkeeping
Keeping the financial books in order is the primary responsibility of every business. Unfortunately, this process is manual, time-consuming, and error-prone, resulting in mismatched entries, loss of receipts, and other serious errors. But, by embedding financial APIs, businesses can automate record-keeping, enhance operations strategy, free up resources for strategic initiatives, and deter fraudulent activities.
6. Reduced cost and increased margins
Embedded finance gives financial institutions access to the most lucrative set of customers. They can tap into the distribution capabilities of the e-commerce platforms by offering niche payment and credit experiences. Additionally, the process of underwriting and the effective management of credit’s lifecycle will lead to a significant increase in margins and reduced costs for customers.
7. Affordable, customized, and niche
Today’s customers are always on the lookout for choices that are affordable yet customized. Embedded finance offers the user an assortment of user-friendly, flexible, and cost-effective financial services. Moreover, they can be further modified to fit the requirements by making it a contextual finance offering.
But it’s not just companies that stand to benefit from embedded finance.
According to a recent report, the embedded finance market is expected to grow to $7 trillion by 2025, with a compound annual growth rate of 36%.
Convenience is a key driver for consumers willing to adopt embedded finance and the breadth of data will need to be harnessed to yield earnings for service providers.
Example in India :-
Here are a few examples of embedded finance in India:
- Paytm: Paytm is a digital wallet and payment platform that has integrated a variety of financial products and services into its platform, including mutual funds, insurance, and loans.
- Ola: Ola, the ride-sharing app, has also entered the embedded finance space by offering insurance products to its drivers.
- PhonePe: PhonePe is a digital payment platform that offers a range of financial services, including credit, insurance, and mutual funds, through its app.
- BharatPe: BharatPe is a fintech company that offers a variety of financial products and services to merchants, including loans, insurance, and working capital.
- Yono: Yono is a digital banking platform from SBI (State Bank of India) that offers a wide range of financial products and services, including credit cards, loans, and insurance.
Overall, embedded finance is becoming increasingly popular in India as more and more companies look to offer financial services and products to their customers.
Stats to remeber
Here are a few statistical facts about embedded finance in India:
- According to a report by McKinsey, the embedded finance market in India has the potential to reach $1 trillion by 2025, with a significant portion of that growth coming from the unbanked and underserved populations.
- The embedded finance market is expected to reach $7 trillion by 2026, according to a report by Bain & Company.
- According to a report by the World Bank, the global market for embedded finance is expected to reach $6.7 trillion by 2025.
- A survey by PwC found that 43% of consumers and 62% of businesses are interested in using embedded finance services.
- 46% of millennials say they would be interested in opening a bank account with Amazon, and more than 30% would be willing to do the same with companies like Starbucks, Uber, Facebook, or Google.
Adoption challenges
There are a number of challenges that companies may face when adopting embedded finance:
1. Regulatory barriers:
It often involves the integration of financial products and services into non-financial products and services, which can be subject to different regulatory frameworks. Navigating these different regulations can be a challenge for these companies.
2. Customer trust:
In order for customers to adopt financial products and services offered through embedded finance, they need to trust the company offering them. Building and maintaining customer trust can be a challenge, especially for companies that are new to the financial industry.
3. Data privacy:
Embedded finance often involves the collection and use of customer financial data, which can be a sensitive issue. Companies adopting embedded finance need to ensure that they have strong data privacy and security measures in place to protect customer data.
4. Integration with existing systems
Integrating financial products and services into existing non-financial products and services can be a technical challenge. Companies need to ensure that the integration is seamless and does not disrupt their existing systems or processes.
5. Competition
As the embedded finance market grows, companies may face increased competition from other companies offering similar products and services. This can make it challenging for companies to differentiate themselves and stand out in the market.
Overall, the adoption of embedded finance can present a number of challenges for companies and financial institutions. However, with careful planning and a focus on building trust with customers, it is possible to successfully implement and benefit from embedded finance.
As builders, there are many opportunities to get involved in the development and implementation of these solutions. Whether it’s working on the integration of financial APIs into a company’s product, developing new technologies to support the delivery of financial services or creating the user interfaces that make those transactions possible the possibilities are endless.
