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Embedded finance: The future of finance

The era of embedded finance is taking hold. “Embedded finance represents a massive new opportunity – an addressable market opportunity estimated to be worth over $7 trillion in the next ten years, twice the combined value of the world’s top 30 banks today,” according to Oracle’s estimates.

Corporates and banks are turning their attention to embedded finance – defined as the integration or embedding of financial services within traditional, non-finance companies. A new study from Jupiter Research, Embedded Finance: Key Trends, Segment Opportunities & Market Forecasts 2021-2026, has found that the value of the embedded finance market will exceed $138 billion in 2026, from just $43 billion in 2021. It’s clear that the future of finance has arrived.

Embedded finance enabling companies to offer digital financial services

Embedded finance enables companies that are not financial institutions to include financial products or services (banking, lending, insurance, payment processing and more) in their online or digital offerings. It is a form of Banking-as-a-Service (BaaS), allowing businesses to offer their customers financial services without needing to form partnerships with individual providers or go through the usual compliance and regulatory processes. 

Through the use of application programming interfaces (APIs), non-financial companies can simply plug in the services they require and package them within their own design ecosystem. For example, a customer buying a product on a major retailer’s website is now far more likely to be offered a range of financing or credit options, from buy now, pay later (BNPL) to access to other lending products. While continuing to be a retail business, the ability to offer BNPL and other consumer credit or financing options means the retailer is now providing digital financial services to their customers, and has effectively become a fintech business.

The enormous potential and key factors in the rise of embedded finance

In 2019, Andreessen Horowitz’s Angela Strange stated that in the near future, “every company will be a fintech company.”

“In the not-too-distant future, I believe nearly every company will derive a significant portion of its revenue from financial services. Every company, even those that have nothing to do with financial services, will have the opportunity to benefit from fintech for the first time.”

Regardless of whether Angela Strange’s prediction will come true or not, a wealth of opportunity awaits established and new companies, even as more businesses are looking to engage customers through in-house financial services. In July 2021, an independent study commissioned by OpenPayd showed that 73% of brands planned to launch embedded financial services in the next two years – 18% in the next two months – while 92% planned to do so within the next five years.

Organizations can harness the power of embedded finance to open up new revenue streams, own more customer experience data, reduce purchasing friction, increase customer stickiness and retention, and reinvent the services they offer to their clients or customers. This trend isn’t just going to be led by banks and financial institutions. Any brand or merchant can rapidly integrate (manage and sell) innovative financial services into their core products or new propositions via embedded finance.

Embedded finance is revolutionizing financial services because it streamlines the financial processes and makes it easier for consumers to access services they need when they need them.  In effect, they act as the bridge between a consumer and the company they do business with. For example, consumers can make a purchase and get instant credit in one place without having to rely on the traditional finance provider to provide them a debit or credit card, or a loan to buy a house or any other large purchase.

The growth in online banking and e-commerce, the rise in flexible financing, and the advent of open banking and plug-and-play platforms that enable companies to lend to customers are key factors for the rise of embedded finance. This BaaS model, which allows the integration of financial services via APIs, is truly the intersection of finance, technology, distribution, data and process, and it stands to benefit all business sectors.

Manifestations of embedded finance

With the adoption of embedded finance gaining momentum, treasurers will want to know the common use cases of embedded finance that can transform the future. Here are the major manifestations of embedded finance:

1. Embedded payments

Embedded payments refer to the integration of payments infrastructure within an app or platform so that buyers do not have to pay or enter their credit card or debit card information for each transaction. Alternatively, if an online retailer or store offers a BNPL option that converts the purchase into an automatic loan or suggests payment by installments for such purchases from the online store itself instead of a third-party lending institution, it is considered as a form of embedded payments. In essence, embedded payments mean making payments with the touch of a button without switching apps. This also leads to a faster checkout and settlement process.

Embedded payments examples include the Starbucks app that enables its customers to save time by using the mobile app to order and pay ahead. It also allows customers to store cash and earn rewards for purchases at Starbucks.

Ride-sharing apps like Uber and Lyft also embed payments into their app so that a customer doesn’t have to pull out a debit card or credit card to pay. Instead, they complete the transaction in the app after the ride is over. Embedded payments also include digital wallets such as WhatsApp Pay, Google Pay, Apple Pay and Samsung Pay.

2. Embedded lending

Embedded lending denotes the embedding of credit or financing products into non-financial digital platforms. Embedded lending lets someone apply for and get a loan right at the point of purchase. This removes the need for excessive paperwork and cumbersome processes, and enables the customer to get loans at the tap of a button.

Embedded lending use cases include Affirm, Klarna and AfterPay. All these companies let a customer split an online purchase into several smaller monthly payments or installment plans at checkout.

3. Embedded insurance

Embedded insurance integrates or embeds insurance into the purchasing process of a product or service. This removes the need for an insurance broker or agent from the process of purchasing an insurance policy.

In a way, embedded insurance has been a part of the automotive industry. Dealerships offer their own financing, and drivers have been paying their loans and leases though digital channels for some time. But now some industry level players like Tesla have reimagined their product offerings to include embedded insurance.

Tesla offers nearly instant and comprehensive auto insurance coverage at the point-of-sale online and when making a purchase at a Tesla showroom, providing a cost-effective alternative to a third-party insurance provider.

By offering coverage at the product’s point of sale, embedded insurance saves the customer the added burden of researching, selecting and purchasing an often overly complicated insurance plan through an outside provider. 

4. Embedded banking

The term ‘embedded banking’ is often used interchangeably with embedded finance, but it isn’t the same. This is an instance where a company through its app offers or embeds banking services designed to replace the savings or checking accounts provided by traditional financial institutions or banks.

Embedded banking examples include the debit card from Lyft. Here drivers get paid instantly after every ride with Lyft Direct, an online bank account and debit card.

Shopify offers a similar embedded banking service for businesses. The service enables small business owners to set up a separate business bank account and simplify tax management by keeping their business and personal expenses separate.

5. Embedded investments

Embedded investments allow users to invest in the stock market, mutual funds, or retirement plans without leaving the platform they’re on. A suitable embedded investment example is Acorns, an app that automatically invests people’s spare change from everyday purchases, like gas and groceries, by rounding up purchases in a touch-free and seamless process. Users don’t have to remember to transfer money to their account or pay attention to the values of stocks or mutual funds as their portfolio is automatically adjusted based on what the market does.

Embedded investments simplify the investment process by offering users a single platform to invest and manage their money and automate their financial decisions. API-based brokerage firms lead the trend of embedded investing.

The versatility and usefulness of embedded finance extend to almost any other industry where buying and selling take place. Embedded financing is finding its way into invoice financing in B2B marketplaces, the food and beverage industry, healthcare, the gig economy, human resources, purchase parking and more.

The use of BaaS and API-driven banking and payments services to integrate financial services within other environments and ecosystems offers a world of possibilities for corporations and banks, and they look set to capitalize on the futuristic trend for financial services while creating a new paradigm.

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