The boundaries between industries are blurring, and non-financial companies are embracing the potential of embedded finance to reshape how we interact with money and businesses.
This blog post delves into the transformative concept of embedded finance, its impact on traditional financial services, and its potential to revolutionize the future of finance. So, let’s dive into the embedded finance industry.
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What does embed finance mean?
Embedded finance refers to the integration of financial features within the offerings of non-financial companies.
This integration allows businesses from various industries to incorporate banking and finance products into their platforms, providing a seamless user experience for their customers.
Traditionally, services such as loans or payments were only accessible through traditional banks.
However, the rise of embedded services has disrupted the role of traditional financial institutions by enabling non-financial companies to provide financial services through partnerships with fintech companies and digital banks.
By leveraging Application Programming Interfaces (APIs), a non-financial organization can connect with fintech and banking providers to offer embedded finance services.
What is an example of embedded finance?
Here are common areas where embedded finance services are mostly in use. Embedded finance examples include:
Embedded payments refer to the integration of payment technology within the infrastructure of an application or e-commerce site, streamlining the payment process for users.
A prominent illustration of embedded payment is found in rideshare apps like Uber. By incorporating payment technology directly into their digital platform, customers no longer need to manually enter their credit card details for each transaction.
Instead, when the ride is completed, the payment is automatically processed through the app, eliminating users needing to dig for cash or retrieve their credit cards.
Another manifestation of embedded finance via payments is through digital wallets, which enable contactless mobile transactions and instant online purchases. These wallets, such as Apple Pay, introduced in 2014, allow users to securely store payment information on their mobile devices.
With a simple tap or click, customers, can complete transactions swiftly and conveniently without manually inputting their payment details every time.
Embedded payments provide a seamless and hassle-free payment experience, benefiting both businesses and customers. Businesses can enhance customer satisfaction and increase conversion rates by eliminating the friction associated with traditional payment methods.
Additionally, embedded payments reduce the risk of errors and fraud, providing a secure and reliable payment solution.
Embedded payments offer convenience, speed, and a streamlined checkout process for customers. They eliminate the need to carry physical wallets or repeatedly enter payment information, making transactions effortless and efficient.
This not only enhances the customer experience but also encourages repeat purchases and fosters customer loyalty.
Embedded lending is another example of how finance is integrated into non-financial services, enabling customers to access credit or financing products conveniently and seamlessly.
This integration allows buyers to enjoy deferred payment options right at the point of sale, eliminating the need to approach conventional banks or lenders.
Embedded lending, often referred to as Buy Now Pay Later (BNPL), has gained significant popularity in consumer-focused embedded finance.
Major players in this space, such as Klarna and Clearpay, have revolutionized how consumers make purchases by offering flexible payment options.
Customers can split their payments over time without incurring interest or fees when shopping with participating retailers or marketplaces. This eliminates the financial barrier that upfront payment may pose and provides greater affordability for buyers.
Notably, the growth of embedded finance in lending is not limited to the consumer market.
There is also a burgeoning market for Business-to-Business (B2B) BNPL, which enables businesses to access improved digital versions of traditional trade credit.
This advancement removes the need for cumbersome paperwork and lengthy approval waiting times associated with traditional financing options. B2B BNPL streamlines the credit process, giving businesses more flexibility and agility in managing their cash flow and inventory.
Integrating embedded finance into non-financial services offers significant benefits to businesses and consumers. It can boost sales for businesses by making products more affordable and accessible to a wider customer base.
Additionally, it simplifies the payment process, reducing cart abandonment rates and increasing conversion rates.
On the consumer side, embedded lending provides greater purchasing power and flexibility. It allows buyers to make immediate purchases without the burden of upfront payment, enabling them to manage their finances more effectively.
By spreading payments over time, customers can align their expenses with their cash flow and budget more efficiently.
This is a transformative concept that simplifies and streamlines the process of acquiring insurance by integrating it directly into the point of purchase or need.
In the past, individuals seeking insurance coverage for a new purchase would face a cumbersome journey of researching and securing the best insurance product available, often involving interactions with brokers or insurance agents.
However, this process becomes significantly more convenient and efficient with embedded insurance.
Insurance products are seamlessly offered and added to purchase with just a single click, eliminating the need to independently search for insurance options from various providers.
This integration saves time, effort, and the hassle of navigating through different insurers’ offerings.
A common illustration of embedded finance in insurance can be observed in the travel industry. When purchasing flight or train tickets, customers are frequently allowed to include travel insurance during the booking process.
With a simple click, travelers can add insurance coverage specifically tailored to their trip without consulting an insurance agent or exploring multiple insurance providers independently.
The integration of embedded insurance delivers several advantages to both consumers and businesses. For consumers, it offers convenience and peace of mind, as they can easily obtain insurance protection at the point of need.
This streamlined approach ensures that their purchases are safeguarded without requiring extensive research or engaging in separate insurance negotiations.
On the business side, embedding financial services can enhance customer satisfaction, increase conversion rates, and potentially generate additional revenue streams.
Embedded insurance exemplifies how embedded finance solutions are reshaping traditional insurance processes. By seamlessly embedding insurance options into the purchasing journey, individuals can obtain tailored coverage with minimal effort, enabling a more efficient and customer-centric insurance experience.
What is embedded finance in banking?
Embedded banking refers to integrating banking and account infrastructure into non-financial institutions, expanding the scope of financial services beyond traditional banking institutions.
It enables businesses to provide banking services to their customers, such as storing and transferring money in their own accounts, without the need for complex setup processes.
With account infrastructure, such as virtual International Bank Account Numbers (IBANs), businesses can quickly create many accounts capable of receiving and sending funds in multiple currencies.
Embedding financial banking eliminates the manual reconciliation process and saves time for operations and finance teams. Additionally, funds received in virtual IBANs can be automatically transferred or “swept” to a master account, ensuring a centralized balance for the customer.
This not only reduces the risk of reconciliation errors but also allows businesses to manage their funds more efficiently.
Integrating embedded finance in banking provides several benefits for businesses and their customers. It eliminates the need for complex and time-consuming reconciliation processes for businesses, reducing human errors and improving operational efficiency.
By leveraging account infrastructure, businesses can streamline their financial operations and allocate more time and resources to core activities. Moreover, the centralized nature of virtual IBANs allows businesses to have better control and visibility over their funds.
On the other hand, customers benefit from the convenience of banking functionality within non-financial platforms. They can easily store and transfer money, making transactions more seamless and efficient.
Integrating embedded finance in banking gives customers a more comprehensive and unified experience, where they can access banking services alongside other non-financial offerings.
What is the future of embedded finance?
The future of the embedded finance market is highly promising and poised to bring about significant changes in the financial services landscape.
Its flexibility and adaptability make it applicable to various industries and businesses with transactional elements, offering possibilities for innovation and revolutionizing payment systems.
Even established players in the financial industry, known for their traditional practices, have recognized the potential of embedded finance and are beginning to embrace its opportunities. However, the transition to embedded finance is not without challenges.
Legacy systems and processes designed for conventional banking and insurance may not be equipped to handle the real-time decision-making required for embedded finance products.
Consequently, many financial institutions have partnered with agile startup fintech companies to leverage their expertise and achieve the necessary transformation.
The shift to embedded financial services requires a fundamental change in thinking. The financial product becomes ancillary to the primary transaction, and the focus shifts to meeting the customer’s underlying needs.
For instance, when a consumer visits the British Airways website, they primarily intend to book a flight rather than purchase travel insurance, even though they might acquire both.
Traditional financial institutions often rely on distribution networks that prioritize pushing products, while embedded finance operates on a “pull” logic, where consumers obtain financial products at the point of need.
As a result, providers of embedded finance must view their financial products through a technical lens. They recognize that the financial product is a digital offering that combines the underlying financial service with an Application Programming Interface (API) to make it available to partners.
Traditional banks and insurers may not be inherently equipped to develop, document, and promote an API to an ecosystem of partners.
They need to realize that the API is as crucial as the contract itself and acknowledge that they have two clients: the developer or partner responsible for embedding the product and the end user who will ultimately utilize the financial product.
In conclusion, embedded finance is revolutionizing the financial landscape by seamlessly integrating financial services into non-financial platforms.
From embedded payments to lending and insurance, this game-changing trend offers flexibility, convenience, and enhanced customer experiences.
As traditional institutions partner with agile tech companies, the future of finance is being reshaped, creating new revenue streams and broadening innovation horizons.
Embracing embedded finance is crucial to stay ahead in the evolving financial market landscape.