Embed Your Finances With Embedded Finance

If you’ve shopped online recently, you must have been surprised by the plethora of payment options at checkout. From cash-on-delivery to BNPL (buy now, pay later), businesses have integrated various payment approaches to simplify and enhance the customers’ experience. There was a time when you paid either by card or cash! #GoodOldDays

Yet, have you ever thought about what brought about this financial revolution? Well, the answer is Embedded Finance!

Embedded Finance is a relatively new concept. However, it is gaining traction as every business aims to provide a more efficient and faster service to its customers. While non-financial businesses would earlier need to rely on third-party financial service providers, that’s no longer the case. Embedded Finance is a unique approach that allows startups, entrepreneurs and small businesses to integrate financial services and products into their own offerings, such as lending, payment processing, sales processing or insurance without relying on any third-party financial institutions.

In this blog, we will explore all about Embedded Finance, its benefits, applications, working and emerging trends. So, get ready to embed all the knowledge and read on!
 

What Is Embedded Finance?

Although Embedded Finance has been around for a while, it has only recently gained popularity in the FinTech industry. Its growth can be attributed to the growing demand for the integration of financial services into everyday solutions, apps and services.

Essentially, Embedded Finance is the process of incorporating financial offerings into goods and services that are not strictly financial. Think of Ecommerce platforms or ride-hailing apps that offer various financial services to enhance the user experience.

Embedded Finance benefits customers as they do not need to leave the platform they are using to access financial services such as banking, lending, insurance, investing, etc.

Embedded Finance improves user experience while speeding up financial operations for businesses. Additionally, businesses can gain detailed insight into customer spending patterns to personalize offerings and recommendations, as well as to process payments more quickly than conventional outsourced invoicing.

So, how did it all begin?
 

Evolution And Origins Of Embedded Finance

The concept of Embedded Finance gained traction when technologies such as mobile payments and online banking were introduced. However, Embedded Finance truly took off when consumers started adopting digital technologies and smartphones on a mass scale. As customer-facing businesses increased, so did the need to integrate financial services. Here’s a brief look at some major breakthroughs:

The roots of Embedded Finance can be traced back to the early 2000s when online platforms had become ubiquitous. Online businesses began integrating financial services to simplify day-to-day activities, especially within the Ecommerce and retail industry.

In 2007, PayPal pioneered the concept of embedded payment gateways on Ecommerce websites, revolutionizing online transactions and leading to an “online shopping” boom.

This system was adopted by ride-hailing service providers, starting with Uber in 2014, when it introduced in-app payment features by integrating financial services into its ride-hailing app. This made payments effortless for users and meant you could travel without a card or cash!

Then a decade later, in 2017, FinTech businesses such as Square and Stripe started allowing businesses to embed their payment systems into their applications, streamlining payments for store owners and merchants.

In 2019, the introduction of Open Banking initiatives led to the emergence of banking APIs. They enabled non-financial businesses to embed financial services directly into third-party applications. This revolutionized the finance industry – and gave us what we now call Embedded Finance.

As some said back then:


Yet, some people were skeptical – perhaps they did not understand how it all worked. Here’s a quick explainer.

Just read on!
 

How Does Embedded Finance Work?

Imagine you want to open a bakery but have no knowledge about creating a backend that can handle the payment for online orders. What do you do – give up?

No, you choose Embedded Finance! It allows any business to embed and manage innovative financial services without any technical knowledge. It has enabled small companies and teams to seamlessly integrate unique approaches to financial services such as payment processing, debit and credit invoicing, insurance and even investing, into their end-user experiences.

Consider the time you used a ride-hailing cab to book a ride. The ride-hailing service provider only manages the logistics of the ride. However, the payment options built into the app are examples of Embedded Finance applications. It makes sure that the customer is not overcharged and that the driver is paid the appropriate amount at the end of the trip. The ride-hailing service provider can also integrate payment options such as online payments, card payments, net banking, wallet points or even cryptocurrency payments! To reward customer loyalty and incentivize regular users, the business can also offer coupons and cashback offers.

Embedded Finance is becoming increasingly profitable for businesses as it allows them to manage their core business model while outsourcing financial aspects of the business.

Wayne Chang, co-founder of Digits, an AI-powered Embedded Finance platform said, “Companies that adopt embedded finance technologies are going to have an enormous competitive advantage over others in their market.”

So, what did he really mean?
 

Benefits Of Embedded Finance

There are several clear benefits of Embedded Finance. For non-financial businesses, it provides an avenue to expand their revenue, improve customer loyalty and streamline the overall customer experience. For consumers, Embedded Finance enables access to convenient, quick and secure financial services in day-to-day activities. Here are some of the key benefits:
 

• Increased Convenience

  Embedded Finance makes financial features more accessible to consumers by embedding them directly into products and services.

• Reduced Expenses

  Due to the ability to use their existing infrastructure, businesses that use Embedded Finance can frequently provide financial services at a lower cost than traditional outsourced approaches.

• Enhanced Customer Experience

  Embedded Finance can enhance customer experiences as it streamlines financial transactions by eliminating reliance on third-party services, leading to increased customer satisfaction.

• Personalized Offerings

  Businesses can better personalize their offerings to individual needs and preferences as they have access to more customer data when financial services are embedded.

• Secure Financial Interactions

  Embedded Finance can be more secure than traditional financial services as every transaction is shielded by the native platform's security protocols.

By integrating financial services right into their products and services, businesses can offer higher convenience, lower costs and a more tailored customer experience. This can be leveraged across industries and applications – to know more, simply scroll on!
 

Applications Of Embedded Finance

Embedded Finance can be used in a variety of diverse industries for applications needing unique financial requirements. Here are some examples:
 

• Retail

  Embedded Finance is transforming the retail sector by offering customers flexible payment options at the point of sale, such as "Buy Now, Pay Later" options that offer customers instant financing options without leaving the retailer's website. Or enabling customers to split a major purchase into smaller, more manageable payments through monthly installments.

• Insurance

  The insurance industry is also exploring Embedded Finance to enhance customer experience. For instance, insurance providers can offer instant on-demand financing for individuals facing unexpected expenses.

• Real Estate

  Embedded Finance makes it simpler for consumers to purchase property through fractional ownership and direct investment options. Some real estate businesses are also leveraging Embedded Finance to ease financing options for down payments, eliminating the need for traditional banking institutions.

• Healthcare

  The healthcare industry has adopted Embedded Finance to make medical bills more manageable by offering subscription-based services with automated billing. Many health tech startups are also using it to incorporate financial incentives in applications to promote healthier lifestyles.

• Gaming And Entertainment

  Game developers are increasingly using Embedded Finance to integrate virtual currencies and in-game purchases with in-built payment gateways.

• Travel And Tourism

  Many travel agencies are offering travel insurance as an add-on during the booking process, thanks to Embedded Finance. Even hospitality businesses are incorporating digital wallets with various payment options for smoother check-ins and check-outs.

These are just a few examples of Embedded Finance being deployed in real-life. As it continues to evolve, we expect to see many more benefits and opportunities emerge across industries. Want to learn more?
 

What’s The Future Of Embedded Finance?

The famous author William Gibson once said, "The future is here, it's just not evenly distributed yet." The same is true for Embedded Finance as some industries have embraced the trend, while others are still placing their trust in traditional approaches.

We are likely to see more innovative, game-changing products and services as the adoption of Embedded Finance increases. Here are some trends to keep an eye out for:

Cryptocurrencies: With the development of blockchain technology and decentralized finance, cryptocurrencies will play a larger role in Embedded Finance. Businesses across sectors will try to integrate them into different services to make them decentralized and globally accessible.

AI/ ML Personalization: Embedded Finance has the power to completely change how customers interact with financial services, thanks to artificial intelligence and machine learning. AI and ML are expected to play a significant role in Embedded Finance as the value of personal data increases. It will assist businesses in making smarter decisions and more accurate predictions, leading to personalized recommendations and offerings.
 

Conclusion

The seamless integration of financial services into a platform that traditionally does not offer financial services is known as Embedded Finance. It enables users to access financial services through a native app or platform, such as an online platform for grocery delivery or a ride-hailing app. Non-financial companies can monetize their customer bases, grow their customer lifetime value, and offer convenience to users thanks to Embedded Finance. So, have you embedded financial services the smart way yet?