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Imagine every time you order an Uber you’re forced to enter your banking details and confirm them with an SMS code or token. Or whenever you shop on Amazon, you have to add a new address, contact information, and card number. The reason why this is not a reality is the system has the ability to store your data and bypass the banking institution. This convenience is referred to as embedded finance.
Embedded finance encompasses a lot more than just helping you catch a ride: it’s a big ecosystem of FinTech app development products and services. In this article, we’ll discuss embedded finance examples, trends, benefits, and challenges. Additionally, we’ll answer the question: what is embedded finance?
Let’s begin by tackling the question of what is embedded finance. The embedded finance definition states, that this is the integration of various financial services into solutions offered by non-financial companies. For example, a department store like Costco or Walmart provides branded credit cards as a form of embedded finance. Aside from loans and credit cards, this service expands to insurance plans and different payment programs, allowing customers more choices when making a payment.
Although embedded finance is nothing new in some industries like car rental insurance and airline credit cards, this solution has been gaining more and more traction in recent years. An increasing number of e-commerce retailers are also pivoting to the so-called Banking as a Service (BaaS) structures to satisfy their customers’ needs. Instead of redirecting clients to banking services, these businesses offer embedded finance solutions right on their page or app.
Embedded finance helps businesses process financial decisions much faster. It also gives them valuable insights into how their customers spend money. With embedded finance, businesses can get paid more quickly compared to traditional methods like invoicing. This leads to improved efficiency and cash flow for the business. Roman Tyzhnenko, Financial and Banking Software Solutions Consultant
Embedded finance helps businesses process financial decisions much faster. It also gives them valuable insights into how their customers spend money. With embedded finance, businesses can get paid more quickly compared to traditional methods like invoicing. This leads to improved efficiency and cash flow for the business.
Embedded finance services are often confused with open banking and decentralized finance. FinTech is a relatively new sector in which various forms of solutions are used interchangeably. While there are numerous similarities in FinTech cases, there are also integral differences.
For instance, open banking allows financial institutions to share user data with third-party vendors through the use of APIs. An online banking platform serves to allow account holders access to their financial data via apps and websites. Decentralized finance, or DeFi, utilizes blockchain and crypto to democratize financial systems. These solutions make banking more open and accessible to the average consumer and eliminate third parties like traditional financial institutions and government authorities.
Embedded finance integrates financial services into nonfinancial organizations. Using APIs and FinTech partnerships, nonfinancial companies can offer financial products directly to the customer.
A $100 billion USD industry in 2023, embedded finance is expected to reach $250 billion by 2029. Especially among younger consumers, embedded finance solutions like buy now pay later (BNPL) are becoming increasingly more popular. A recent study shows that nearly 50% of Gen Z and Millenials have used BNPL services in the previous year.
Capitalizing on the trend, businesses are starting to offer embedded finance products. Research from Capterra reveals that 56% of organizations delivered some form of embedded finance and plan on offering more services. Moreover, 94% of the early adopters have seen a spike in revenue streams.
Surveys from Forbes suggest that roughly a third of Millenials and a quarter of Gen Z are open to the idea of getting a checking account from organizations like Google, Amazon, Facebook, and others. Meanwhile, older generations aren’t far behind and are also willing to utilize embedded finance services if they come from established companies.
The way embedded finance works is by utilizing APIs that allow non-financial service providers to add financial features to their solutions. Alternatively, these firms rely on BaaS providers to act as the middleman between traditional banking services and nonfinancial organizations.
For example, a customer interacts with a non-financial platform such as an e-commerce site and selects a financial service like a loan, insurance plan, investment opportunity, or payment option. This prompts the platform to make an API call to embedded finance providers where the request is processed and delivered.
The foundation of the embedded finance industry comprises three key players: traditional financial institutions, FinTech organizations, and nonfinancial companies. Let’s take a closer look at each component and identify its roles and responsibilities in the workflow.
The backbone of embedded finance is traditional banks, both federal and state banking institutions with all the required licenses and regulatory compliance in place. They are the ones with the financial expertise, technical infrastructure, and regulations necessary to create embedded finance products. While offering their acumen and infrastructure, banks also assume a high level of risks and liabilities allowing FinTech companies to realize their solutions within regulatory and technological frameworks.
FinTech companies, namely BaaS providers, act as links connecting banks to brands. Their strongest suit is the technological and operational infrastructure that allows for the innovation of financial products. As such, FinTech organizations take on numerous responsibilities like risk management and governance as well as technological support and guidance.
Lastly, non-financial institutions, or end-brands, integrate financial features into their solutions. By collecting and analyzing user data, these companies can leverage these findings to deliver a tailored customer experience and create innovative products. They are, however, liable for providing safety of customer data and complying with financial laws and regulations.
From payments and lending to investment services and insurance, embedded finance examples span over a large pool of offerings.
Embedded payments are among the most ubiquitous services that embedded finance provides. Embedded payments allow customers to skip entering their banking data every time they make a purchase, thus boosting their experience. For example, apps like Uber and Lyft save your banking details after the first purchase and enable 1-click payments in future interactions.
Services like Venmo as well as Google and Apple Pay also exemplify embedded payments by storing user banking information. Moreover, users can even use their Venmo profile to verify their bank accounts, allowing for a faster, safer, and more seamless shopping experience.
Embedded lending allows businesses to offer financing options directly to customers at the point of sale, such as applying for a loan to purchase a new refrigerator directly from the appliance store’s website. This streamlines the lending process for customers, making it easier to access credit when and where they need it.
The most popular type of embedded lending is buy now, pay later (BNPL), where customers can cover their purchases in weekly or monthly installments. Klarna is a great example of these business models. By partnering up with retailers and negotiating terms for the customer, Klarna offers BNPL options for numerous e-commerce solutions. All that is required from a buyer is a simple application.
Aside from Klarna, direct BNPL is available across various platforms, including Affirm, Afterpay, Four, and others. Through these services, users can access almost every brand under the sun—from essentials like Walmart and Best Buy to luxurious brands like Bently and Calvin Klein.
Embedded lending provides customers with more accessible and affordable lending options while allowing companies to offer more payment alternatives.
Embedded insurance is another popular form of embedded finance allowing customers to directly purchase insurance. While traditionally, insurance brokers were a separate entity requiring policyholders additional effort and research, embedded insurance comes as a part of the shopping experience. Car rentals have been using this type of financial service for a long time, and nowadays it’s gaining traction in the world of e-commerce.
For example, numerous e-commerce sites offer various devices like laptops and smartphones that require insurance coverage. Instead of seeking insurance separately to make sure the device is covered, customers can opt for an embedded insurance offer right on the e-commerce platform.
With the emergence of investment services like Robinhood and Acorns, embedded investment has simplified the process of buying and selling stocks. While conventional investing is associated with high capital and exclusivity, embedded investing can democratize the industry. Now, an average person who wants to invest a smaller amount is capable of accessing the services to do so.
Although branded credit and debit cards are nothing new, FinTech platforms like Ramp and Divvy have made them a lot easier to obtain. For instance, users can acquire a branded card from Amazon, Gap, or Target. These cards usually offer additional perks and savings for the consumer, further fostering brand loyalty and increasing revenue streams. Businesses can also create their own cards for employees to streamline business expense management and provide better experiences.
What benefits can a financial institution gain from embedding financial services? In this part, we’ll go over the advantages of embedded finance for banks, nonfinancial companies’ platforms, brands, and consumers.
Financial institutions can access a wider pool of potential customers by partnering up with FinTech companies and brands. Large e-commerce platforms especially usually have significant audiences that will likely rely on embedded finance to make their purchases. Gaining access to such user bases can allow a financial institution to leverage brands’ capabilities and reach to acquire new customers and grow revenue.
Offering flexible payment options along with loans and insurance plans aids financial institutions in establishing additional streams of income. At the same time, these alternatives help customers manage their money and avoid costly credit card fees and interest. Not only does it enable banks to increase revenue but also supports customers in their personal finances.
First and foremost, collaborating with financial institutions allows businesses to unlock new valuable data. From enhanced customer acquisition and retention to increased loyalty and improved customer journey, brands can leverage these findings to measure risks, offer personalized recommendations, and improve user experience. Businesses can utilize these data points to understand behavioral patterns and customize their services to cover customer needs better.
Much like financial institutions, brands can also generate new revenue streams by adopting embedded finance. Customers who could not afford to purchase a brand’s products can now take advantage of lending, loyalty programs, and value-added services to cover their needs. Acquiring new potential buyers, as well as retaining existing ones, can significantly increase the company’s revenue.
Embedded financial services enable companies to create and utilize new business opportunities, thus making them more appealing in the hypercompetitive market. It also eliminates the need for intermediaries like banks and insurance brokers, allowing businesses to foster a closer bond with their customer base.
Using embedded financial services, brands can broaden their product portfolio and offer more flexible payment options like discounts, bonuses, and BNPL. Consolidating e-commerce and financial services in one place aids companies in becoming the default platform for many users. This dynamic facilitates a stronger relationship between the brand and consumer, promoting customer loyalty and trust.
Using embedded finance products, consumers gain access to a large pool of financial services they require. Instead of switching between different apps and websites, calling banking services, or borrowing money from friends and family, users now have better autonomy over their finances.
Unifying all the services in one platform is also more convenient for the end consumer. Searching for products, selecting a flexible payment option, and getting the approval all in one app is a significant upgrade from traditional banking and lending systems. Embedded finance offers a more seamless customer journey, thus boosting user experience.
Embedded finance empowers brands to develop more custom and flexible payment alternatives to appeal to various demographics. These options allow customers to unlock discounts and offers to utilize various cost-saving shopping experiences.
The embedded finance ecosystem is quite complex and requires precision, investment, and technical acumen to pull off. In this section, we’ll take a look at some of the challenges that you may face when adopting embedded finance.
Any time you decide to collaborate with a third party—whether it’s a vendor, supplier, partner, or payment gateway—you’re increasing the attack surface for potential hackers. Instead of solely thinking of securing your own assets, you now have to make sure all partners are also compliant with the security best practices. When adopting embedded finance, keep this in mind and audit your potential collaborators to minimize liabilities.
Adding new services to your portfolio—especially those associated with finances—will inevitably prompt additional customer queries. This in turn puts a larger burden on your customer support team which will require an expansion of your workforce. You can either invest money in hiring more experienced and financially savvy technical support representatives or pivot to AI chatbots. Regardless of which scenario you choose, this requires additional expenses and efforts to cover customer needs.
According toresearch from Capterra, over half of respondents admit to regretting their choice for the implementation of embedded finance in one way or another. From relying on a faulty product to not receiving enough support during the adoption process, many businesses share their remorse related to embedded finance products. However, these issues can certainly be fixed with thorough vendor vetting and expert assistance from financial software development agencies.
Making BNPL options more ubiquitous can hurt the customer in the long run. The majority of casual consumers aren’t financial specialists which can put them at risk of overspending. Using a seamless service, users may not realize the potential consequences of opting for BNPL and take on more loans than they can carry.
At the end of the day, any new service that is meant to make the shopping experience more customizable and seamless is likely to require more user data. In the case of embedded finance, this can be financial data that customers will be entrusting brands with. Since cyber crime is higher than ever, many customers are rightfully concerned about the safety of their sensitive information.
Lastly, let’s take a look at the future of the industry and discern some prominent embedded finance trends.
When more non-banking services begin to offer embedded finance products, traditional financial institutions will be forced to change their business model to stay afloat. They may respond by expanding their offerings, enhancing their in-house embedded finance portfolio, or partnering up with FinTech companies. As a result, the consumer will have a larger choice of services at a smaller price, which is a huge win for the economy.
While traditional banking services become less appealing to the customer, more neobanks and virtual banks will appear in their place. These new types of financial institutions tend to offer fewer fees and less red tape to remain competitive in the market. This in turn empowers customers to make a more informed and suitable banking decision, which helps them have better control over their finances.
Although embedded finance has made its way into e-commerce, it’s expected to penetrate other sectors, including healthcare, education, manufacturing, and many others. By partnering up with established financial institutions, businesses can leverage the benefits of embedded finance without spending a bank on financial consultants and software companies.
Personalization has been the hottest topic for discussion for quite a while and now it’s evolving into hyper-personalization. A concept capable of producing a new generation of innovative products, this can help businesses create tailored credit offers, insurance plans, and even investment opportunities. By utilizing AI and machine learning algorithms, a financial institution can assess risks, detect fraudulent behavior, and increase customization in embedded finance systems.
The emergence of non-financial companies that embed financial services in their portfolio offers the underbanked population new options to create and use bank accounts. Traditionally, opening a bank account or getting a line of credit was available to citizens with good credit history, permanent addresses, stable jobs, and a slew of other criteria. Embedded finance can bridge that gap allowing alk people to utilize financial services without the mandatory red tape.
Among other notable embedded finance trends is the integration of cryptocurrencies. While blockchain in FinTech is nothing new, embedded finance may simplify the buying and selling of crypto. Decentralized finance (DeFi) concepts can also become more mainstream within financial services and allow more unbanked people to take control of their financial situation.
BNPL is expected to grow in the coming years, amassing $834 billion in global transaction value by 2028. A concept that benefits both brands, financial institutions, and consumers, BNPL is becoming increasingly more popular. Research shows that half of respondents opted out of BNPL due to complex checkout processes and unclear requirements, and not because they didn’t want to use the option. Investing in seamless integration can incentivize more customers to try BNPL which will prompt the industry to grow further.
With the probability of recession being at least 35%, businesses are growing concerned about the potential repercussions of the economic downturn. However, 87% of organizations across industries and business models state they would adopt embedded finance to prepare for the upcoming recession. The elevated convenience and flexibility for the consumer, paired with new streams of income for the companies, creates a perfect scenario for tumultuous economic conditions.
If you’re interested in exploring the future of embedded finance in more detail, get in touch with our experts at NIX. We’re a software development company with years of experience in building, modernizing, and marketing mobile and web applications. Our in-depth, cross-industrial journey has resulted in a rich portfolio of case studies showcasing our dedication, acumen, and expertise. Reach out to us to learn more about embedded finance, FinTech, and technological integration
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