Embedded Finance Explained: 4 Ways It’s Disrupting The Fintech World

The time, location, and manner in which people engage with financial services are all being fundamentally exchanged by embedded finance, which is also opening up considerable chances for financial and non-financial businesses to grow their customer base and boost loyalty.

In 2023, the universal embedded finance market was approximated to be worth $82 point 32 billion, and it is anticipated to increase quickly in the years to come. In order to stay competitive, businesses need to learn more about the prevalence and uses of embedded finance.

In this post, we’ll define embedded finance, go over its various forms, and speculate on how the industry’s growth and potential future trends may affect it.

What is Embedded Finance?

The combination of financial services, such as banking, lending, or payment processing, with non-financial products is familiar as embedded finance. Users can now easily access financial services using the tools they already have. When a retailer’s app permits customers to “Buy Now, Pay Later” at the point of sale, that is an instance of embedded finance. This addresses the need for users to apply for a distinct loan or credit and enables them to disunite their purchases into instalments within the app.

A loan, payment plan, insurance plan, or simple method of making a payment are just a few examples of the financial options that effective embedded finance solutions provide to meet the needs of their customers where they are. The use of embedded financial services is not new; consider airline credit cards, insurance add-ons for rental cars, or in-store payment plans for expensive goods.

Since e-commerce companies are now providing financial services directly on their websites, consumers no longer need to be referred to a bank or other financial institution, and embedded finance is growing online. With features like a 5% discount on qualifying Target purchases, Target RedCard, for instance, offers customers a smooth shopping experience by integrating payment methods straight into its retail ecosystem.

Third-party “banking-as-a-service” businesses that integrate financial services into non-financial businesses’ user interfaces through API integrations make this phenomenon possible. In addition to offering businesses a vast market opportunity, embedded finance can enhance the customer experience and is expected to grow significantly over the next several years.

Embedded finance offers financial service providers and non-financial businesses across a variety of industries a substantial opportunity by expanding their markets and enhancing customer experiences.

Examples of Embedded Finance

Instead of being a completely distinct aspect of a customer’s life, embedded finance delivers financial services right when they’re needed. Consequently, there are numerous varieties of embedded finance services and products. Financial technology, banking, credit cards, payments, lending, investing, and insurance are the most prevalent instances of embedded finance.

1. Embedded Banking

When banking services, like checking accounts, are coordinated genuinely into non-banking platforms, this is known as embedded banking. The ride-sharing app Lyft, which provides its drivers with an in-app checking account and a connected debit card, is a prime intense of embedded banking. Without a distinct bank account, drivers can manage their money, penetration cash advances, and obtain earnings instantly using this account. People commonly use the terms ’embedded finance,’ ’embedded banking,’ and ‘banking as a service’ interchangeably, even though they all refer to slightly different concepts.

Another instance of embedded banking is Shopify Balance, which enables owners of Shopify stores to “skip the bank” by receiving payments more speedily and doing away with the requirement to open a separate business bank account. A debit card with special benefits for purchases made to expand a Shopify business is also provided.

2. Embedded Payments

One general reason customers abandon a digital purchase is the inconvenience of digging out their credit card and personally entering all the details. This process is simplified by embedded payments, which link and store a payment method for exploitation at a later time with a single click. For example, customers can use the Starbucks app to gain reward points and save their credit or debit card information for one-click payments.

Credit cards are not the only embedded payment methods. Furthermore, embedded payments can save businesses money by permitting customers to pay directly from their bank accounts. Customers who use the bank account payment feature integrated into the SmartPay Rewards mobile app for accommodation stores and gas stations can obtain discounts and rewards. Because ACH fees are regularly lower than those of credit cards, using ACH to make payments, promotions, and business transactions saves money. Rewards and discounts encourage duplicate business and brand adherence.

3. Branded Payment Cards

Since consumers have long been able to obtain branded credit cards from their preferred department stores, branded credit cards predate fintech. Fintech, however, has made it possible for businesses to offer branded credit cards and expanded the use cases in which it makes sense. The business-to-business market is one sector where branded payment cards are having an effect. For a very long time, businesses have either given their employees a company credit card from their bank or allowed them to use personal cards for business expenses.

Fintech platforms like Ramp and Bill have made it easier for companies to obtain their own business credit cards and provide them to all of their employees. Compared to traditional banks, these platforms usually offer an easier and faster sign-up process, more access to business credit, and the ability for businesses to create as many branded business credit cards as they like, both virtual and physical.

4. Embedded Lending

At the point of sale, consumers can access loan options through embedded lending, a subset of embedded finance. It is worth noting that prior to the advent of embedded finance, these methods constituted the primary means for consumers to access financial services. In addition to helping businesses boost sales, embedded lending expands consumer access to lending. Online shoppers frequently encounter “buy now, pay later” (BNPL), one of the most obvious types of embedded lending.

It shows up during the online checkout process when customers are currently considering how much money they have available and offers to divide the payment over time. Usually, these products offer interest-free monthly or weekly instalment payments over a specified time frame. Well-known businesses that provide buy now, pay later options are Afterpay, Affirm, and Klarna.

5. Embedded Investing

By offering investment options that improve customer experience and create new revenue streams for businesses, embedded investing enables non-investment service providers. Historically, in order to invest, customers had to open a new account with a legacy financial firm, such as Goldman Sachs or Fidelity. Greenlight, a debit card made specifically for children and teenagers, is a prime example of this. Parents can effortlessly send money to their kids through a branded debit card. With parental permissiveness, kids can also invest or save their money in an interest-bearing account.

Platforms like PayPal and Venmo, which people earlier trusted and used daily, now make it convenient for customers to buy cryptocurrencies without needing a distinct exchange. Despite being a more recent application of embedded financial services, this market is poised for expansion as users grow accustomed to expecting their favourite websites to provide extra services. In the future, this could entail enabling users to purchase stocks through their checking account app or facilitating stock discussions in a chat room before buying shares with ease.

6. Embedded Insurance

Fintech has made it easier for insurance to spread to online marketplaces, even though it is not a novel concept at the in-store checkout. With embedded insurance, customers can buy insurance at the point of sale online.

There are several ways for businesses to incorporate digital insurance options, but collaborating with fintech firms is the most prominent approach. Customers can select insurance as an “add-on” to their purchase thanks to these fintech companies’ integration of insurance options into the checkout process.

Three prevalent kinds of embedded insurance are as follows.

• Singular policy: Businesses (like Boost and Binsurance) integrate the insurance policies into purchase flows after underwriting them themselves.
• Multiple policies: Businesses use an “agency” strategy in which they incorporate several insurance choices into the checkout process. Matic and Branch are two instances.
• Extended warranties: Extended warranties are provided by companies such as Clyde and Extend in e-commerce checkout flows, usually under a single policy option.

7. Embedded Fintech

Fintech solutions are coordinated into a financial institution’s website, app, or other business procedures through embedded fintech, whereas embedded finance principally refers to the integration of financial services into non-financial business processes. For instance, rather than making customers download several apps or create a new account, a bank could step in and resolution a helping hand. They might consider investing in cryptocurrency or cancelling old subscription services that customers no longer use.

Financial institutions can distribute more value, engage their clients, and offer a wider range of services thanks to embedded fintech. A bank used to have to invest months or even years in creating, constructing, and launching a new product before it could offer something else, like a new kind of loan or an investment.

8. B2B Embedded Finance

The purpose of B2B embedded finance platforms is to serve the needs of professional buyers, such as procurement departments at large corporations, whereas B2C embedded finance options are intended to facilitate consumer purchases. For example, a company that uses a catalogue management platform may be deserving for loans based on its past sales. Thus, a business can apply for a loan straight through the inventory platform if it needs one to replenish its inventory rather than having to go through a bank independently.

It partnered with YouLend to provide its business clients with revenue-based, resilient financing options. Even same-day offers and acceptances are possible for definitive companies. The FreshBooks platform is fully integrated with YouLend, allowing users to apply for and obtain funding from a company they are already familiar with and trust to manage their business accounts.

Embedded Finance Providers

With the expanding prominence of embedded finance, embedded finance providers have started to give businesses and consumers a wide range of choices. These companies offer a wide range of services, including banking, investment, and insurance solutions. These are a few instances.

Walnut

By making it simpler for fintech businesses to incorporate insurance options into the purchasing process, Walnut is modernising the insurance sector. For instance, Walnut may be used by a mortgage company to quote homeowners’ insurance for prospective homeowners while the mortgage is being approved. Walnut is a licensed insurance broker who helps with the purchase if the client accepts the quote. By making the process of buying insurance more efficient, this enhances the client experience.

Unit

Unit is an embedded finance startup that provides businesses with a simple way to lend, move, and store money. Companies can create unique products with a Unit that lets clients track spending, apply for cash advances, or obtain branded credit cards. Unit assists more businesses in utilising the potential of embedded financial services by managing the backend development aspect of embedded finance.

Engine by MoneyLion

Engine by MoneyLion is an embedded finance marketplace that assists companies in attracting, interacting with, and keeping clients. Businesses can use Engine’s embedded marketplace to provide pertinent financial products at the exact moment that customers are most likely to need them, including loans, credit monitoring, and investment options. In enhancement, Engine provides comprehensive analytics and AI-powered tools to help companies maximise customer satisfaction and boost sales.

What is The Future of Embedded Finance? Four Ways It Will Change Fintech

There are four main ways that embedded finance could change how financial and non-financial companies operate, per the research report by Plaid and Accenture.

1. Rearranged relationships between financial providers and consumers

Financial providers will need to get used to sharing clients with non-financial companies for services that they used to offer exclusively, because more businesses are now operating as financial companies. Traditional finance companies will face more competition as a result, which could lead to improved customer service and better products.

2. New Revenue streams

Financial services have already created numerous new revenue streams by being integrated into pre-existing buyer journeys. It’s likely that new revenue streams will keep appearing as businesses come up with innovative ways to use embedded finance to add value. This could involve more recent forms of embedded finance, such as embedded investing.

3. New Types of Competition

To stay aggressive and penetrate new markets, financial services companies must condition their business models. With the increase of embedded financial services and more non-financial firms discovering these new areas, the landscape is evolving expeditiously. This includes neobanking for employees, which enables companies to provide banking to their employees in an effort to improve retention, and the emergence of niche neobanks, such as familial neobanks.

4. A New era of Partnerships

Brands and financial providers will create enduring (and very profitable) alliances. These collaborations will give brands the expertise and skill sets they need to offer embedded finance without having to hire entire teams of software developers and financial specialists.

Embedded Finance is A Growing, Multi-Trillion-Dollar Market

For consumers as well as fintech companies and businesses, embedded finance offers enormous potential. It offers customers ways to save money and improve convenience, such as rewards for using a brand’s e-commerce app or zero-interest point-of-sale loans. The time to begin building is now for businesses looking to become part of the embedded finance revolution.

Neeraj Gupta

Neeraj is a Content Strategist at The Next Tech. He writes to help social professionals learn and be aware of the latest in the social sphere. He received a Bachelor’s Degree in Technology and is currently helping his brother in the family business. When he is not working, he’s travelling and exploring new cult.

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