Why is Embedded Finance the Future of Financial Services?

May 19, 2023 12:06:00 PM

Why embedded finance is the future of financial services

FinTech solutions have been revolutionizing financial services as we know them, thanks to their pairing with AI, the blockchain, IoT, and other inventive technologies. The latest technological entrant that is disrupting the FinTech paradigm is Embedded Finance. Embedded finance is increasingly helping simplify the payment processing workflow and opening up newer opportunities for better customer service.

Embedded banking, embedded lending, embedded insurance, and embedded payments are some innovations grabbing the attention of top business leaders in the banking and financial services domain. Embedded finance is especially changing the integration of personal financial services for non-financial entities and institutions.

In this article, we will first declassify everything there is to know about embedded finance. Then we will get to the core of the article, describing various ways in which embedded finance is really changing the FinTech and allied industries.

What Is Embedded Finance?

Embedded finance is a technology enablement that allows non-financial companies to integrate or offer payment and banking services. This FinTech innovation is helping bridge the gap between consumers and businesses by bringing payment processing services to where the consumers really are.

For instance, the Starbucks app integrates embedded payments allowing users to pay through the app and also aggregate points to redeem rewards using them. Another example involves ride-hailing apps offering the option of cashless payments through your wallet or linked bank account.

In the embedded finance landscape, companies who integrate embedded finance solutions in their products and workflows become the distributors. The distributors of embedded finance include software firms, traditional retailers, telecom companies, and other platforms. They work with two essential entities, technology providers and balance sheet providers to leverage embedded finance technologies in the following ways:

1) Technology Providers: These companies facilitate the integration of financial services such as payment, lending, and banking for distributors through APIs that they expose via cloud access or simply through a URL. The maintenance and configuration of these APIs are completely handled by the technology provider, and the distributor does not have to allocate a whole technological team to carry out the integration part. The technology providers in this equation tend to usually be FinTech organizations or technology-forward banks and financial institutions.

2) Balance Sheet Providers: The technological solution needs to be paired with a balance sheet provider, usually a bank or finance institution. The distributor is then fully equipped to offer financial services such as accepting payments, allowing investments, as well as insurance to the end users. The distributors do not have the need to set up their own financial infrastructure and can still boost sales and improve the customer experience.

The distributor provides its users with financial services by placing the technology layer, i.e., the API, on top of the balance sheet provider.


Source: Qentelli

The Types of Embedded Finance

Embedded finance helps streamline financial processes which is an important aspect of closing the gap between consumers and the businesses they interact with. A third-party dependency in the form of a bank or any non-banking lending entity was always necessary to carry out payments on behalf of the business. This dependency is eliminated with embedded finance, in turn enabling some of the following financial tasks:

Embedded Banking

By leveraging technologies that enable embedded banking, even non-financial institutions can offer their consumers the sort of services previously offered exclusively by banks and financial institutions. Components of embedded banking such as digital wallets are meant to serve as a viable replacement for traditional checking and savings accounts. Shopify is an instance of putting embedded banking to good use wherein small business owners can set up independent bank accounts for their companies. The companies' consumers can then carry out transactions and also maintain savings accounts directly with them instead of a third-party financial institution.

Embedded Payments

Issues faced when making the payment for a purchase can leave businesses in dire straits due to customer attrition. But if consumers are enabled to make the payments directly from the business's website or app adds up so much towards repeat visits from customers, brand loyalty, and overall customer satisfaction. An example of this convenience can be seen wherein ride-hailing apps such as Uber and Lyft allow passengers to load money into their wallets or pay on the go through embedded payment gateways without getting out of the app.

Embedded Lending

Embedded lending allows users on websites or apps run by non-financial entities to apply for and receive a loan in minutes directly with the merchant. Several large e-commerce platforms such as Amazon offer Buy Now Pay Later schemes right on their platforms enabling loans for users right at the point of sale without any third-party dependencies. By integrating lending APIs right into their platforms, merchants are equipped to offer microfinancing options directly to their users helping build customer relationships that go beyond their primary offerings.

Branded Payment Cards

Instead of issuing direct deposits, companies can deliver payments to their users via branded debit or credit cards. The card issuer is paid a nominal interchange or processing fee by the company in exchange for a white label transactions card. White-label cards are branded with the logo of the retailer while it is issued by a third-party financial institution, for example, the MakeMyTrip ICICI Credit Card that allows users to redeem rewards, discounts, and other benefits directly on their website or retailing application.

Embedded Insurance

Embedded insurance helps users to bypass the need for an insurance agent or broker to purchase an insurance policy. This comes in handy especially when making big purchases such as vehicles, or booking flights, as these purchases need to be covered with airtight insurance policies. The insurance policies offered by companies such as Tesla or Booking.com allow users to apply for policies that are in most cases cheaper than those offered by third-party insurance companies. 

Where is the Demand for Embedded Finance?

Enabling payments can come with its set of challenges, especially for Small and Medium Businesses (SMB) as it can be time-consuming, prone to several errors, and a process full of friction. Therefore, there is growing industries-wide demand for embedded finance solutions that can allow companies to unlock financial savings also helping them dedicate considerable time to innovative and more crucial pursuits. 

Here are some embedded finance distributors that are creating positive demand for these technologies:

1) Mainstream Retailers: Traditional retail companies have been generating demand for embedded finance primarily to offer their customers a more seamless and connected shopping experience. They can be enabled to increase sales by offering interest-free financing options allowing customers to make high-priced items. 

2) Software Conglomerates: Software firms are developing in-house embedded finance solutions primarily to gain more control over the development of their products. This allows the product design in conjunction with embedded finance to be more focused on the specific needs of the customers. Additionally, customers can be incentivized to make more purchases through reward programs designed around the software products on offer.

3) Telecom Companies: Integrating capabilities for money movement on platforms and websites run by telecom companies can help them engage their customers for longer durations on their applications. So, telecom giants like AT&T and Bharti Airtel have developed modules for embedded finance within their web and mobile apps. Customer engagement across these platforms also enhances the value of the smartphones that these telecom companies come integrated with, leading to more long-term associations between smartphones and telecom enterprises.

4) Financial Platforms: The demand for embedded finance is also being driven by financial platforms that have traditionally relied on serving their customers in person. They have been partnering with FinTech startups and investing in the development of in-house solutions that enable embedded payments, and customizable offerings for better customer satisfaction.

5) OEM: As every company today is turning into a FinTech company in one way or another, Original Equipment Manufacturers (OEM) in the automotive, agricultural, logistics, and other supply chain-linked fields are also entering the embedded finance fold. Wholesale purchases can become more streamlined with embedded payments, encouraging customers to connect directly and transact without the need for middlemen, retailers, or brokers.

ALSO READ: Why Vendor Management Systems Are Essential In Finance?

Embedded Finance is Essential for Businesses Today

Embedded Finance is undeniably the future of financial services. Its integration into non-financial platforms offers unparalleled convenience and accessibility to users. By removing barriers and streamlining financial transactions, Embedded Finance empowers businesses and individuals alike. With its potential for innovation and disruption, this technology is poised to reshape the financial landscape and revolutionize the way we interact with money. You can explore the Financial Software Development Services provided by Daffodil Software to know how you can implement digital enablements for your FinTech solutions.

Topics: Fintech

Allen Victor

Written by Allen Victor

Writes content around viral technologies and strives to make them accessible for the layman. Follow his simplistic thought pieces that focus on software solutions for industry-specific pressure points.