A few years back, you had to pay for your ride home or food delivery using cash or card. Today, you don’t even have to exit the app. Everything is done under one platform.
And it’s all thanks to embedded finance and embedded fintech.
Embedded finance isn’t entirely a new concept. Airline credit cards, payment plans for costly items, and car rental insurance are forms of embedded finance that have been around for a while.
In fact, the origins of embedded finance can be traced back to the 1950s when Ford launched the Ford Credit to provide financing options for car buyers. Today, embedded finance is taking center stage in the majority of transactions, perhaps as Ford envisioned.
In this article, we’re going to look at what embedded finance and embedded fintech are, the different types, their advantages, challenges, and future opportunities.
TL;DR
- Embedded finance integrates financial services into non-financial business processes, while embedded fintech integrates fintech solutions into the processes of an institution in the finance industry.
- The benefits of embedded finance and fintech include improved user experience, increased customer loyalty, and more revenue streams.
- Some challenges and considerations of embedded finance and fintech involve regulatory and compliance issues, data privacy and security, and stiff competition.
Understanding Embedded Finance
Embedded finance is the seamless integration of financial services and digital banking into conventionally non-financial business services. This infrastructure helps businesses provide financial solutions, such as digital payments, directly on their websites or mobile apps.
Businesses merge their customer offerings with banking, insurance, investment, and loan services via an Application Programming Interface (API) linked to their financial partners.
Before embedded finance became mainstream, businesses had two options: seek separate providers for their different financial needs or create a finance arm within the organization.
Both of these options involved allocating large budgets, meaning businesses took longer to realize handsome profits.
But embedded finance offers a solution—it streamlines business processes by helping merchants provide instant and accessible financial services at the point of interaction. The point of interaction could be via the business website, mobile app, or in person.
Examples of embedded finance today include:
Embedded Banking
Embedded finance, embedded banking, and Banking as a Service (BaaS) are often used synonymously. This is because most embedded finance solutions are provided by traditional banks.
In embedded banking, non-financial businesses offer their customers a wide range of banking services, such as branded checking accounts for holding funds and making payments.
Embedded banking streamlines many functions for customers using a merchant’s platforms to conduct business. For example, it offers faster access to funds and eliminates the need to use a third-party bank account.
Embedded Insurance
Embedded insurance allows customers to purchase insurance for products or services at the point of sale. It’s provided when and where customers need it, removing the need for having a separate engagement with an insurance company or agent.
Insurance companies provide transactional APIs and technology infrastructure to allow merchants to integrate their insurance policies with their platforms. This lets customers include insurance as an ‘add-on’ during checkout.
There are several forms of embedded insurance:
- Singular policy – This is where companies underwrite the policies themselves and incorporate them into their checkout flows.
- Extended warranties – This is where companies provide prolonged warranties in addition to the standard warranty in their purchase flows.
- Multiple policies – This is an approach where companies integrate multiple insurance options into their checkout
Understanding Embedded Fintech
Embedded fintech is the integration of fintech solutions into financial institution services and processes. Many people will think embedded finance and embedded fintech are synonymous. However, they’re two different concepts.
The difference is in the industries they’re adopted. Embedded finance integrates financial services into non-financial business processes, while embedded fintech integrates fintech solutions into the processes of an institution in the finance industry.
Fintech comes from “financial technology” and it’s the application of innovative technology in the financial services industry.
Embedded fintech opportunities for financial institutions include subscription management, bill negotiation services, wealth transfer management, data breach and identity protection, and cryptocurrency investing.
Embedded fintech allows financial institutions to provide more value to their customers. They can offer new products without spending years and a lot of money on research, development, and launching.
There are several examples of embedded fintech, including:
Embedded Payments
Many customers would rather not take out a credit card and enter its details every time they’re about to make an online purchase. Embedded payments solve this by saving a payment method for easier digital transactions.
It integrates the payment process into the checkout experience and helps customers make payments by simply clicking a button.
Embedded payments don’t just focus on credit cards. They also allow customers to link transactions and pay directly from their bank accounts while helping merchants save on transaction processing fees.
Embedded Investing
Embedded investing allows non-investment service businesses to provide investment and trading options on their platforms. Traditionally, customers who wanted to invest and trade had to open an account with legacy financial institutions, such as Goldman Sachs and Fidelity.
With embedded investing, you can now buy, hold, and sell crypto and various stock options on a single interface. This approach simplifies investing and trading for the average customer by integrating it into platforms they already use for financial transactions.
Embedded Lending
Embedded lending or Buy Now Pay Later (BNPL) enhances customers’ purchasing power by allowing them to access favorable lending options at the point of sale.
Before BNPL, customers had to take expensive loans from credit card providers or financial institutions. But embedded lending now makes loan options accessible for customers during the checkout process.
Customers can then split payments into weekly or monthly installments over a specified period with no interest.
While BNPL is more popular with younger consumers, it also offers several benefits for merchants. For example, embedded lending can help them increase their sales by attracting consumers who may not have sufficient funds to purchase expensive goods outright.
Due to this, both online and brick-and-mortar businesses are making it possible for customers to access lending without having to pay a visit to a separate lending institution.
Benefits of Embedded Finance and Embedded Fintech
The benefits of embedded finance and embedded fintech for companies like yours come down to offering more value, enhancing customer experience, and improving business revenue.
That said, here are the benefits of embedded finance and embedded fintech:
Improved user experience and convenience
Embedded finance and embedded fintech allow businesses to provide more value and products to their customers, all from an environment that the customers are already familiar with. This creates an improved user experience.
On top of that, it adds convenience since there’s no need to switch between different apps, websites, or providers. Users can complete payments, manage finances, and access various financial services under one ecosystem.
Increased customer engagement and loyalty
Embedded finance gives businesses access to customer data which helps them offer personalized services and engage them better.
With embedded finance, your customers won’t be among the 53% of customers who abandon apps because their financial needs are met by other competitor apps.
On top of a customer’s financial data, a business can access information on their shopping preferences and the frequency of the usage of specific services, such as taxi-hailing or food takeout. The business can use this data to curate personalized services and cross-sell other services.
For example, a business with an eCommerce platform can access a customer’s buying patterns and recommend a suitable BNPL scheme or an installment payment plan.
Having personalized offerings is a sure way of cultivating trust, loyalty, and engagement.
Enhanced revenue streams for businesses
Embedded finance creates various revenue streams for businesses. As users conduct more transactions on a platform, a business can leverage the increased activity to introduce more value-added services and financial products, such as loyalty programs and personal credit solutions.
Businesses can earn from both the sale of goods and services and transactions with applicable customer fees.
For example, an eCommerce clothing store could leverage embedded finance to provide custom lending solutions based on its customers’ profiles and earn commissions through each sale.
Businesses can also get into revenue-sharing plans with their partners while not having any financial liability.
Seamless integration with existing systems and platforms
Embedded finance allows businesses to avoid the costs and complexities that come with having to build and operate their own financial infrastructure.
This also presents an opportunity to build strategic partnerships with other platforms, businesses, and financial institutions. Businesses can expand the number of value-added services and increase revenue-generating opportunities.
This is two-way traffic since the financial institutions benefit from a wider market and expanded customer base, while your business benefits from the seamless integration with existing systems and platforms.
Challenges and Considerations
Offering new services, maximizing new revenue streams, and improving customer experience come with their own sets of challenges.
Here are some challenges and considerations of embedded finance and embedded fintech:
Regulatory and compliance issues
The primary concern with embedded finance for fintech companies is regulatory and compliance ambiguity. Integrating financial products with non-financial platforms creates hoards of new responsibilities.
Embedding regulated financial services such as payments, lending, and investing leads to compliance responsibilities for data privacy, customer identification, transparency disclosures, fair lending, and equity access.
Financial service providers willing to integrate embedded finance may have to obtain various types of licenses based on the offerings.
Besides, these licenses aren’t easy to obtain since they have strict compliance requirements.
Data security and privacy concerns
Collecting your customers’ data for personalized services poses serious threats if the data is breached. Financial institutions and companies with financial products are often targeted by hackers and spammers.
Financial institutions and their partners must have data security standards in place to avoid getting compromised. They also need to have data-sharing agreements in place to address data-handling issues.
It’s also important to define the roles and responsibilities of all parties. This helps determine who is responsible for addressing any data privacy concerns and avoiding cyber-attacks and identity theft.
Not doing so can lead to legal issues and could taint your brand reputation.
Note that there are emerging data privacy regulations restricting data shared among companies. Ensure you’re up-to-date to avoid any issues.
Technological integration and scalability
Well-integrated technological infrastructure is the foundation of embedded finance solutions. Financial institutions and businesses that desire to embed financial solutions face the challenge of upgrading their technology and integrating streamlined APIs across partners.
The technology must protect the details and information of the underlying transactions, provide seamless transaction authorization and authentication, and allow visible audit trails. It must also adhere to compliance and regulatory rules, all while being easy to use and seamlessly integrated.
This represents a significant challenge, especially within traditional financial institutions where legacy tech is still common.
And speaking of traditional financial institutions, merging traditional banking systems with newer, modern fintech solutions and ensuring seamless communication between them is a complicated task.
Also, keep in mind that the worlds of finance and technology are both volatile and ever-changing. Not many trends stay relevant for a long time. You must ensure you adapt and scale fast since change is constant.
Potential market saturation and competition
The embedded finance market is growing fast due to the advancement of non-financial platforms providing financial services and products.
According to Grand View Research, the embedded finance market was valued at USD 83.32 billion in 2023 and is expected to grow at a CAGR of 32.8% from 2024 to 2030.
While this growth presents numerous opportunities for financial institutions, businesses, and tech companies, it also presents the risk of market saturation which makes the competition among industry players stiff.
As the competition gets stiffer, you risk losing your focus while trying to stand out by including more services. Too many auxiliary services dilute your competitive advantage and could lead to damaged customer relationships.
Case Studies and Real-World Examples
There are many real-world use cases of embedded finance and fintech solutions. Let’s look at their implementation in various industries:
Banking
Many modern companies and marketplaces have embedded banking solutions to replace traditional savings and checking accounts. Lyft’s direct debit card helps its drivers get paid directly after every ride, save their earnings, earn interest on their savings, and enjoy free cash withdrawals.
This is a great example of how embedded finance can increase customer loyalty to the platforms. A Lyft driver is less likely to drive for another tax-hailing service when the account helps them get paid faster.
Payments
Paypal cash card lets you spend your Paypal account balance anywhere Mastercard is accepted. You can use your physical card or add it to your mobile wallet for touch-free payments in stores with Google Pay, Apple Pay, and Samsung Pay.
Also, with ride-sharing digital platforms like Uber and Lyft, you don’t have to pay the driver using cash or credit card after every ride. Instead, these platforms let you complete the payment using the mobile app.
The Starbucks app allows its customers to save credit or debit card information to make orders and payments using their phones. You also earn loyalty points that you can redeem in the future.
eCommerce
The eCommerce industry has various applications for embedded finance and fintech, such as:
- Integrated Wallets – Alipay is an example of an embedded digital wallet from an eCommerce website (Alibaba) to help its customers store credit and debit card details for streamlined online and in-store mobile purchases.
- Point-of-Sale Financing – Afterpay and Klarna are BNPL services that allow customers to purchase things they need now and split the price into smaller monthly installments. They encourage in-app spending and make it easier for their customers to make payments.
- Loyalty-Based Financing – Amazon has a loyalty card program for its Prime members that offers cash rewards for purchases. You can use the card anywhere Visa is accepted.
Insurtech
Insurtech is the adoption of technology tools in the insurance industry. Tesla offers its customers an insurance program that lets them purchase insurance coverage when buying a car. This insurance option is cheaper than third-party insurance covers.
Companies like Branch and Matic are digital insurance agencies with networks of multiple insurance companies. They present their customers with these companies as options during checkout.
Fintech
Mango Practice Management provides solutions for accountants helping them with project management, time tracking, file sharing, document management, billing, and more. It integrates fintech solutions to enable billing capabilities.
Their platform seamlessly integrates with the Stax Connect API to help its customers accept ACH, eChecks, and card payments. Its users can also implement surcharging to pass processing fees to their clients and lower their costs.
Future Trends and Predictions
The embedded finance and fintech industries are yet to reach their maximum potential. If anything, they’re just getting started.
Since more companies are now offering financial services, traditional financial institutions will need to adapt and get used to sharing their customers with non-financial companies.
Customers will win since this will make the competition stiff. Financial institutions will focus on innovating trailblazing products and investing in better customer service.
This means that financial institutions will need to come up with new business models to give a competitive edge. You can expect to see the rise of niche neobanks with a specific purpose for a specific target market.
For example, financial institutions might provide neobanking for employees to help businesses offer banking to their employees and boost retention.
As the industry grows, we’ll also see the adoption of embedded finance and fintech in more industries and sectors, such as travel, hospitality, and food service.
Fintech partnerships and collaborations will also become more solid as brands look for opportunities to embed financial services without having to hire new teams of software developers and financial experts.
Conclusion
Embedded finance is a financial and technological advancement driven by the automation of commerce and the integration of financial products through technology.
There are many benefits businesses stand to enjoy from embedded finance. They include improved user experience, increased customer loyalty, and more revenue streams.
At the same time, there are some potential downsides and considerations involving regulatory and compliance issues, data privacy and security, and stiff competition.
But the benefits outweigh the potential challenges. With the world catching up fast, the best time to join the embedded finance and fintech revolution is now.
