What is Embedded Finance? Meaning, Examples & Benefits

Summary: Embedded finance lets you integrate different payment infrastructures into your native application or website for faster payment processing. Let’s find some other examples of embedded finance in the article below!

Embedded finance is surely the next big thing in the world of finance. It has transformed the way financial services are provided and distributed. With embedded finance, you can integrate services like loans, insurance, investment instruments, etc., into your existing product suite.

It makes financial services more accessible to your customers, meaning that they can access them from your website or app without any need to switch to a different financial app or website. Keep on reading to learn more about embedded finance and how you can use it for your industry.

What is Embedded Finance?

Embedded finance can be defined as the integration of different financial services such as loans, debit cards, insurance, payment processing, and investment options into non-financial products. It enables organizations to use the financial services delivered by third parties via APIs or integration into their site.

These services can come up in many forms such as peer to peer lending, product insurance, in-app payments, and so on. Therefore, providing these services into the products consumers are using eliminates any need to seek different service providers.

How Does Embedded Finance Work?

Many financial products are provided by licensed financial institutions. Generally, it requires the non-financial service organization to collaborate with any bank, insurance company, or any licensed financial institution. Many of them choose to do it with a banking-as-a-service platform.

Once the official partnership is done, the embedded financial products are delivered and managed through APIs by non-financial service providers. These products are offered under the brand name of your non-financial organization and not the service provider. In this way, customers avail themselves of financial services like loans and insurance directly from the business website or application.

Types of Embedded Finance

Embedded finance comes in several types. Here are some popular types of embedded finance services provided to customers.

• Buy Now Pay Later (BNPL)

Buy Now Pay Later (BNPL) is a type of payment option enabling users to purchase any product and service and pay via installations.

It is generally offered by third parties that collaborate with retailers and e-commerce platforms to deliver various financial options to customers. This enables organizations to provide users with more affordable options to purchase products.

• Embedded Insurance

Embedded insurance is a kind of insurance which is integrated into the purchasing procedure of a non-insurance goods or service. It implies that the insurance coverage is included when you buy a non-financial product such as car, mobile phone, etc.

This insurance type helps in improving the customer royalty as customers get the insurance coverage directly with the product purchase.

• Embedded Investing

Embedded Investing is defined as financial investment options integrated into the non-investment goods and services. It means that the customers get the opportunity to invest in various assets and securities through a single application like the e-commerce app, devices shopping app, etc.

For example, when you earn cashback, you can use it to invest in various financial assets from the app itself. This enables businesses to earn additional money from their app through investments in securities and assets.

• Embedded Payments

It refers to the integration of various payment processing apps into business apps via APIs. This enables businesses to accept payments for the services provided directly from their own app. Embedded payments streamline the payment procedure for customers and enable businesses to improve the overall user experience.

What are the Benefits of Using Embedded Finance?

Embedded finance comes with a plenty of benefits for businesses, financial institutions, and consumers, some of them include:

• Additional Income Source: Embedded finance helps you to create an additional revenue stream by providing financial products directly from your website. You can receive your commission from the financial institutions whose products you will be selling on your product.
• Increase Sales: With the help of this, you can offer multiple payment models to your customers such as buy now pay later. This will help boost sales as customers can also pay for the product via easy installations.
• Tailored Offerings to Customers: Most businesses collect data like purchase history, preferences, etc., of their customers when they complete a purchase. This information is then used to customize financing offerings and payment options for customers.
• Convenience: With embedded financing, you can offer options of purchasing the product insurance at the time of checkout. Therefore, making it convenient to easily buy product insurance directly from the app or website.
• Quick Customer Acquisition: By collaborating with businesses, financial institutions can offer their embedded financing products like loans, insurance, etc., to customers. This helps them to rope in more customers at minimal cost that might not have been possible through the direct channel.
• Boosts the Product Competitiveness: Helps in building the product competitiveness as you can provide financing options, product insurance, etc. from the application.

Examples of Embedded Finance

There are several examples of embedded finance that you can see in everyday life. Some of them include:

• Payments made on the merchant’s side for the goods purchased via Paytm, PayPal, etc.
• Insurance at the time of checkout when a customer buys a product like a mobile phone or laptop
• ‘Buy now pay later option’ on the website to buy a product and pay for it in installments.
• Branded payment cards to make payments and get discounts
• Businesses often provide an option to open bank accounts for fast payment processing.

Embedded Finance Use Cases

Embedded finance is used in different types of industries for multiple purposes. Here are some use cases on how embedded finance is leveraged across various industries.

• Retail

Ordering groceries, makeup products, food, or any other item and paying for them directly through apps is a popular example of embedded finance in retail. When you buy products, you can pay for them via various payment options such as UPI, credit or debit card, EMI, etc.

• Healthcare

In healthcare, embedded finance helps in streamlining payment procedures for patients by providing multiple payment options. The healthcare facility can integrate payment apps onto their website to make it easier for patients to avail medical treatment quickly by making payment on time.

• Education

Embedded finance has made it easier for educational institutions to lend loans to students at a lower interest rate by partnering with financial institutions. Based on the loan repaying capacity, institutes can provide loans to students at the lowest interest rate.

• Real Estate

In the real estate industry, embedded finance has made it easier for real estate agents to manage loan lending, insurance, mortgage, etc., directly from their application. Hence, making it possible for customers to easily buy and sell property from the application hassle-free.

How Embedded Finance Will Disrupt Fintech?

With the coming of embedded finance, it has become easier for businesses to offer different financial services to customers from their existing website.

Embedded finance is disrupting fintech as it has made it easier for non-financial entities to integrate financial services into their existing website, such as payment processing, insurance, loan lending, etc. By leveraging this, organizations can provide various financial services to customers without obtaining licenses, complying with regulations, or creating additional infrastructure for the same.

Another way in which embedded finance is disrupting fintech is by providing an integrated way for managing finances. Previously, customers needed multiple platforms to invest and manage their money which was time consuming.

However, businesses can offer investment options directly from their application or website without any need of managing multiple providers via APIs.

Challenges Faced in the Industry by Embedded Finance

Despite the growing popularity of embedded finance among businesses, there are a few challenges with this.

• Lack of Responsibility for Data Breaches: Embedded finance might create ambiguity around who will be responsible for any type of regulation violations. It also creates problems for regulators regarding who will be responsible for customer data privacy breaches.
• Complicated Relationship for Customers: It might create a complicated commercial relationship for customers as the services will come from two different entities. This will create confusion for customers as they do not know which entity is responsible for several aspects of product buying experience.
• Customer Risk Detection: Businesses offering embedded financial services might not be able to identify the at-risk borrowers as compared to banks that use financial data to find them. So, you might end up offering the same loan repayment terms without considering their financial status. Therefore, resulting in an increased rate of non-payment of loans.

Future of Embedded Finance in the Market

Embedded finance has already set foot in different industries like insurance, healthcare, retail, etc., to improve the customer experience. The major user cases include customer payments and loans. As per the report published by KPMG, the Indian embedded finance market can reach almost $1 trillion by the end of 2024

A similar report by Deloitte stated that the embedded finance in India might touch $1.2 trillion in annual revenue by the end of 2025. The expected revenue will be driven by the increase in demand for financial products and growing use of APIs by businesses to integrate financial services.

Conclusion

Embedded finance implies the integration of financial products into everyday non-financial products. From making payments to direct peer-to-peer lending, businesses have been able to make financial services accessible to customers via embedded finance. It has the potential to disrupt conventional traditional banking by making financial services easily accessible for customers and businesses.

FAQs