Small businesses starting today or consumers who are using online payments for the very first time may never need to interact with a conventional bank.
Over the last couple of years, embedded finance as a technological offering has amassed such leaps and bounds that today, businesses can simply log in to their eCommerce partner profiles and open a bank account or apply for a credit line without leaving the platform.
Along the same line, new customers can apply for a credit card or open a savings account simply by downloading one application on their phone. Yet so, embedded finance as an offering is still new to many stakeholders even today, and thus in today’s article, we will take a deep dive into understanding more about embedded finance and the potential it harbours to change the future of fintech.
What Is Embedded Finance?
One of the first aspects we need to understand is the actual meaning of the term embedded finance.
Simply put, embedded finance is the process of incorporating and offering a financial product in a non-financial environment, platform or journey to holistically connect both the experiences for the customer.
As a concept, embedded finance is nothing new. For instance, supermarkets have partnered with conventional banks for decades to offer private-label retail credit cards and other gift cards. In other cases, retail chains such as automotive dealerships often have point-of-sale financing, such that the customer can comfortably complete their entire purchasing journey without needing to step out of the dealership.
Such traditional uses of embedded finance have for long enabled conventional banks to reach customers at their convenience and thus facilitate additional revenue channels. However, although these traditional use cases have been beneficial, what makes the new generation of embedded finance so powerful is its ability to integrate into digital interfaces and surpass the inherent barrier of offline platforms.
Often referred to as embedded finance 2.0, this new generation arrives with a new world of possibilities starting from customer loyalty apps and accounting softwares to digital shopping carts and wallets – the list is endless. Harnessed properly, its ability to integrate into digital interfaces frequented by billions of consumers and businesses daily empowers it to change the future of fintech for the better.
Key Stakeholders in the Embedded Finance Ecosystem
As embedded finance matures as an offering, so are its stakeholders. Today, any embedded finance setup has three key stakeholders, and all of them work together to facilitate a seamless journey for the end consumer. These are,
The Platform
Sometimes referred to as the “anchor platform”, this can simply be understood as the nonfinancial environment where the offering will eventually be integrated. These can either be offline or online platforms such as websites, apps or desktop applications which inherently do not feature any financial offerings.
The Financial Institution
The next stakeholder in the equation are financial institutions such as banks, NBFCs or SFBs, which have a two-fold function. On the one hand, they provide financial services such as managing regulatory compliance and risk. On the other hand, they use their financial expertise to offer services such as facilitating payments, underwriting loans etc.
The Enablers
The last stakeholder of the equation and essentially the bridge between the earlier two are the enablers or the fintech companies which connect the non-financial platforms and the financial institution. At its essence, these technological companies arrive with the finesse and expertise of developing end-to-end software solutions, APIs and SDKs, which facilitates the entire embedded finance workflow.
Common Embedded Finance Solutions
Now that you have a fair understanding of embedded finance let’s look at some of its common applications.
Embedded Payments
The most common offering of embedded finance can be found in payments. As the name suggests, embedded payment solutions arrive with the infrastructure to orchestrate a seamless payment journey in any platform. Starting from in-game purchases to live streaming subscriptions, embedded payments allows both the consumer and the platform to seamlessly pay and collect payments for a wide array of services.
Embedded Credit
Commonly packaged with online payments, embedded credit enables platforms to extend part payment facilities to their customers, along with empowering them to seamlessly access capital on an ongoing basis. One significant use case of embedded credit is found in eCommerce platforms where customers can avail of an EMI plan right at checkout.
Embedded Insurance
A fairly recent use case of embedded finance is in insurance. Today most travel booking websites and holiday aggregators extend you the option of simply checking a box and availing insurance for your entire purchase at the click of a button. Thus, as can be understood from the example, embedded insurance is an offering which integrates insurance products in non-financial settings such that consumers can easily avail of their services.
Embedded Investment
Lastly, embedded investments, simply put, is an offering which enables the end user to invest in the global financial market without exiting their native application. A good example of this can be found in spare change investing applications. Applications such as Accorns rounds up the user’s recent purchases into the nearest whole number and then invest the spare change in an investment vehicle of the consumer’s choice. The best part about this is – the consumer can complete the entire process and automate its future occurrences in just a few taps without leaving the application even once.
Benefits and Impacts of Embedded Finance
Although modern advances in fintech have greatly benefitted many stakeholders, there are yet some frontiers which can only be realised by harnessing embedded finance as an offering. Some of the most significant of these are shared below.
Benefits for the Anchor Platform
1. Non-financial platforms leveraging embedded finance solutions can efficiently boost their average order value (AOV), customer retention, cart size and customer lifetime value.
2. As most embedded finance solutions work on a revenue-sharing model, platforms can use this to set up a new revenue channel for their business.
3. Today, both B2C and B2B platforms typically have very high customer acquisition costs in lieu of the discounts and promotions they offer to attract new customers. By leveraging embedded finance, platforms can efficiently decrease their customer acquisition cost by upgrading their USP while standing out from their competitors.
4. Lastly, platforms will be able to easily access a treasure trove of customer data which can be further used to generate insights and unlock new opportunities.
Benefits to the Financial Institution
1. One of the most crucial benefits to financial institutions is unhindered access to a large pool of customers. As embedded finance integrates into digital interfaces frequented by billions of consumers daily, lenders can seamlessly tap into borrowers with varying needs and personalities, thus diversifying their portfolios for optimum performance while furthering their goal of financial inclusion.
2. Along with this, with increased and unhindered access to a wider dataset, lenders can finetune their approach and enhance their offering, thereby facilitating a more profitable business.
Benefits to the Consumer
1. One of the most significant benefits of embedded finance to the customer is increased access to more affordable capital. With embedded finance in place, customers can access capital on an ad-hoc basis.
2. Additionally, customers can benefit from receiving a more tailored and refined customer experience, both of which match their needs and requirements.
Conclusion
As we progress into 2023, we will witness more advances in the field of embedded finance. From witnessing new applications of this technology to reaping benefits not yet thought of, embedded finance is opening the doors to a whole new world of opportunities previously unheard of. Now all that remains, is for us to keep innovating to maintain pace and prepare ourselves to witness the miracles that lie ahead.
Reach out to CrediLinq today, if you are looking to explore embedded finance solutions for your platform. At CrediLinq, we are pioneering embedded finance solutions for B2B marketplaces, eCommerce platforms and more. Reach out to us today to learn more.
