Embedded Finance is transforming the world of FinTech. Be it e-commerce, ride-sharing apps, food ordering apps and the recent one, non-bank companies – embedded finance is changing the way consumers behave and organisations sell to them.
Even though the pandemic deeply affected financial markets, embedded finance continued to gain popularity as it made payments and access to credit easier than ever before. Seeing this massive success in such a short span of time, financial institutions and FinTech companies are rising to the occasion to collaborate and come up with innovative solutions in the embedded finance space.
What is Embedded Finance?
Embedded finance is an emerging software distribution model that integrates fintech with a non-financial product, solution or service. With embedded finance, nonfinancial companies offer financial products and services to their customers while retaining complete control over the customer experience. It allows enterprises to generate new revenue streams and expand the services they offer to their customers. This ecosystem is beneficial to both the enterprise and the users.
Current Market for Embedded Finance
Embedded finance offers a promising landscape to attract millions of customers in the years to come. It is estimated that profits in embedded finance will grow up to $230 billion by 2025, creating a value of more than $3.6 trillion by 2030.
The pandemic saw a boom in the embedded market as users who were stuck at home were opening up more and more to using services that allowed them to purchase everything from a single source, rather than scouting for permission from multiple entities. Embedded finance has unified the ecosystem, deleting any kind of third party or lender between the credit providers and the customer. This makes the entire experience seamless for all parties, and also opens up the probability for higher business.
Applications of Embedded Finance
Here are a few ways in which embedded finance is creating ripples in the FinTech space:
Pulling out your wallet for cash, credit card or debit card for every payment is no longer a preferred choice by consumers. They want quick streams that allow them to navigate smoothly – from the time they select a product to check after payment.
Embedded finance makes this possible by allowing the customer to purchase products or services and make frictionless payments with a few clicks without the need to search for cash or cards. This kind of convenience has become a part of daily routine, and a natural expectation. Be it ordering a cab and paying for it before the ride, filling up digital wallets with money or buying a cup of coffee, digital payments have become ubiquitous for an end consumer.
- Credit lending
India’s lending value chain has some deep inefficiencies which get directly addressed by embedded finance. Up until a few years ago, applying for a loan meant visiting the bank and going through days or weeks of appointments before actually getting one.
With embedded finance, a customer can apply for a loan or credit card as and when the need arises and secure it at the time of purchase. This creates a much larger market for those in need of credit, and can also be used as a powerful tool for creating financial inclusion.
Making financial investments seems like a complicated process that makes most people stay out of it. However, embedded banking programs can help simplify investment programs for users.
One example of embedded investment is Acorns, a company that gives a seamless and touchless investment experience to its customers. The platform adjusts the portfolio of the user as per the market changes and helps people invest their spare change by rounding up purchases.
Buying a car, home, life or health insurance in the past meant going through an agent. In the case of home or car insurance, the process was completely separated from the purchase.
With embedded finance, all these steps get unified. A person can buy insurance almost in an instant. For example, Zimyo, an HRMS platform, offers the employees of its clients easy and quick access to insurance options by connecting them directly to lenders.
The Rise of Big Tech in the Embedded Finance Space
Embedded finance is expected to become mainstream as consumers are increasingly showing their trust in tech firms to manage their finances. Tech companies are increasingly entering the space of embedded finance and creating their own ecosystems.
The scope for embedded finance for any tech company is huge. For example, HR Tech and Payroll platforms can offer tailored credit products such as loans and insurance to employees on employee portals. This makes it easier for employees to purchase directly from financial players, without making it a separate process.
Partnerships seem to be a highly effective way for tech companies to make this successful. Tech companies can merge with leading credit providers and develop a mutually beneficial partnership which also puts the user at an advantage.
The entry of tech into financial services should be viewed as an excellent opportunity for the two industries to collaborate and create delightful experiences for their customers. With embedded finance, companies can benefit by attracting and retaining more users to purchase their products through ease of use and the elimination of multiple third parties. Creating a unifying journey for their customers will translate into higher profits and improved levels of customer experience.
Is Embedded Finance the Future?
With all these technologies taking shape, embedded finance seems like the next big wave in FinTech. It is still in the nascent stage but shows great signs of exponential growth in times to come.
Financial institutions should re-look at their legacy models and be open to ways to collaborate with partners to make embedded finance a win-win solution for everyone.