Embedded finance – what it is and how it affects your business

Although not a new concept, embedded finance is a growing trend that’s more than likely to remain fixed in place and thrive in the future as consumers and businesses seek ways of getting around banks for traditional banking services.

With this increased convenience, we’re likely to see huge rates of adoption worldwide. Some predict that embedded finance will have an estimated market value of over $138 billion in 2026.

Meanwhile, others expect embedded financial services to reach a value of around $230 billion in revenue by 2025. This reflects a tenfold increase of $22.5 billion in 2020. Other dramatic predictions expect the market to reach a value of a whopping $7 trillion by 2030. 

With all this being said, it’s clear that embedded finance is here to stay. And what will it look like?

For consumers, they’ll be able to pay for online purchases without entering their bank details or instantly take out a consumer loan on digital platforms outside banks, for example. Other examples include lending, payments, wallets, and bank accounts, but without the bank. 

As for merchants and businesses, many, including retailers, telecos, big techs, software companies, car manufacturers, insurance providers, and logistics firms, are getting ready to adopt embedded finance to serve consumer and business segments. 

But what exactly is embedded finance and how does it work? We take a look at this and more here so keep reading!

What is embedded finance?

In simple terms, embedded finance is when non-financial companies adopt and integrate financial services into their offering. This type of “merging” with a financial service, such as payment processing, lending, or insurance, streamlines financial processes for consumers. It makes it much easier for them to access the services when they need them. 

There are many explanations of what the meaning of embedded finance is, but it all boils down to the same thing – simplicity and a shift away from traditional banks.

In more technical terms, embedded finance is when banking-as-a-service (BaaS) is used to embed a financial API into a website or app. The purpose of this is to integrate financial services within other environments and ecosystems.

What this translates into is that brands or companies “lease” access to the tools and services which are offered by embedded finance providers and use these to build financial products. All this without the associated development and compliance costs.

One of the main purposes of this is to help businesses augment their existing revenue streams, launch new products, reinvent the services they offer their customers, and integrate through an additional finance “layer” ultimately offering improved user convenience.

How does embedded finance work?

Before jumping into the nitty-gritty of how embedded finance works, it’s worthwhile looking into the methods of embedding finance and banking programs into non-financial products and services.

There are several methods here. These include investing in an additional offering of an existing brand’s digital platform, joining the embedded finance movement as a connector (e.g. a data transfer network), or collaborating with a business that embeds financial infrastructure into its product/service and joining that ecosystem. 

So, how does it all work?

As mentioned earlier, embedded finance relies on APIs (Application Programming Interface).

But what are these?

Essentially, this is a type of code that’s used to simplify interactions between systems and services. A “set of instructions that connect two pieces of software to each other to facilitate the exchange of data”, it’s a system that can be viewed as a “gateway” between customers, banks, and companies.

Those APIs also enable companies to “plug into” specific banking and/or payment services and processes, building the solutions and maintaining the technology themselves. Through BaaS and APIs, embedded finance enables any company to integrate payments – whether in-person or online. 

Benefits of embedded financial services

Embedded finance comes with many benefits – both for consumers and for businesses. Here are some of them:

• Ease of use and consumer convenience – it removes consumers’ pain points, improves the customer experience, raises brand loyalty
• Profitability – because of augmented and diversified revenue streams
• Improved customer insights – embedded finance can help understand consumers, their spending habits, and needs 
• Ease of use for brands – brands can simply “lease” access to different parts of the banking stack and help improve the customer experience further 
• A broad range of spheres – businesses – whether physical or online – can take advantage of areas such as wealth management or even insurance. 

Examples of embedded finance

From a buy-now-pay-later (BNPL) model to providing insurance, there are many embedded finance examples. Let’s look at some of them:

• BNPL – this model creates a new line of credit for shoppers because it gives “access to a wider range of products,” which can be paid for over a period of time. 
• Point-of-service lending – this is a financial tool that businesses can embed to finance larger purchases. They need to lend responsibly and will need access to data such as that on creditworthiness. 
• Integrated insurance services – “helps provide customers with the assurance that their money will not be wasted on a product if something goes wrong.” 
• Investments and trading – investment applications that work with embedded financial services allow clients to use resources in a way that does not compromise their financial situation.
• Fintech-as-a-service – this can range from invoicing to customer acquisition and many other areas. 

Other examples of where embedded finance can play a role include embedded payments, card payments, lending, embedded investments, insurance, and embedded banking.

Trends

With so many far-reaching areas for embedded finance to take hold, it offers businesses new opportunities to generate revenue, fosters greater trust in innovative financial services, increases demand for integrated experiences, and leads to the adoption of new technological advancements.

Overall, here’s what trends you can expect from the embedded finance space over the short to medium term:

• Increased customer demand for integrated experiences
• Easier diversification of customer experiences and offerings
• Demand for new fintechs
• Rise of a more open culture
• Search for new and diversified revenue models
• Adoption of technological capabilities
• Changing levels of trust in financial services
• The role of big data will become more prominent
• Artificial intelligence is likely to take centre stage
• An evolution of the overall market

Looking at the big picture

In closing, embedded fintech and embedded finance are here to stay. From the variety of different embedded finance models being made available to consumers and businesses, there’s a much wider choice for each player in the arena and the opportunities for growth are exponential.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog in general should not be interpreted as a legal, monetary, tax or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.