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The Covid pandemic has led to the growth of digitalisation and encouraged businesses to collaborate with Fintech companies for expanding their revenues and customer retention. One such trend in this regard is Embedded Finance.The embedded finance market will likely strengthen its hold on the global market at a strong CAGR of 16.4% between 2022 and 2032.The market is valued at US$ 54.3 billion in 2022 and will most likely reach US$ 248.4 Bn by 2032. Earlier, the market was booming at a higher CAGR of 26.9% (2016-2021), resulting in market size of US$ 43 Bn in 2021.
Embedded Finance refers to integrating financial services into a non-financial service or business. Embedded finance infrastructure companies enable platforms and companies to offer financial services such as embedded banking, lending, payments and investments entirely within their own apps or ecosystems through the use of API, i.e. Application Programming Interface.
The rapid growth in embedded finance can be due to the following factors-
The emergence of digitalisation has led to a shift in the pattern of the buying behaviour of consumers, which resulted in the development of the digital platform economy, driving a consumer-led trend that introduced new norms for the younger generations and changed the purchase habits of adults.
Consumers are keen to adapt and avail of financial services from non-financial providers, especially the youth. The proof of this is the sudden rise of embedded payments and embedded investments within the country. The sole reason being that these new age finance providers have better UI and service experience than the conventional banking. Their efficiency and effectiveness has also been appreciated by the consumer base worldwide.
Embedded Finance has the potential to provide a better customer experience with the help of the data provided by them. This encourages the customers, especially the millennials and Gen Z audience find this model of settlements and payments very interactive and convenient.
The types of Embedded Finance are explained below –
Embedded payments are defined as the integration of payments infrastructure to create a seamless flow within the platform or an app. The first financial service to be embedded in the non-financial product experience, which has now become an essential part of the value proposition of any SaaS (Software as a Service) platform or E-Commerce app the customers are using intuitively on a regular basis.
Some of the examples of embedded payments are E-wallets in e-commerce apps, payments by educational institutions, in-game purchases for video games, subscription-based payments for SaaS, ERPs and much more. Another feature of the embedded payment system is the facility of payment in instalments by the user, which is usually covered under the embedded credit segment.
As the name suggests, embedded credit means embedding credit products in non-financial digital platforms. This helps the consumers in the application, repayment or acquisition of loans. One of the most familiar examples of this type of embedded finance is buying a product on EMI from an online shopping website.
This type of embedded finance deals with combining insurance within the purchase of a service or product. The embedded insurance companies offer transactional technologies and APIs, allowing the insurance solutions to integrate with websites, mobile apps and other partner ecosystems.
Most platforms prefer collaborating with external insurance companies rather than incorporating complex capabilities internally. Still, insurance companies often work with obsolete tech stacks, making the integration quite complex. On the other hand, embedded insurance infrastructure companies provide a hassle-free way of connecting with insurance companies with the help of their tech stack.
Embedded Investments enable the integration of stock market investing into their vertical offerings. API-based brokerage firms have bought the trend of embedded investments. These firms have built API to reflect every microservice from funding, opening account, trading, portfolio management, and market data. This enables many platforms to offer investment services to their customers in context.
Embedded Investments permit the investors to invest in the stock market without leaving the platform their current platform, be it payment messaging or social. Some employee portals allow employees to buy stocks directly from the portal.
The key players of the Embedded Finance Ecosystem are-
Enablers are the tech or Fintech companies that provide digital solutions and fintech development services to enable financial institutions to provide their services by plugging financial offerings into platforms to increase distribution and improve customer retention. The services are provided depending upon the pay-per-use, on-demand or hybrid services.
Providers are financial institutions such as banks that provide their financial products through API. They facilitate or enhance existing solutions with the help of technologies and frameworks. One such example is BaaS (Banking as a Service), where financial institutions rent out their core banking infrastructure to power various fintech services and applications.
Embedders are the organisations that create a link between the providers and the end consumers through a platform to aggregate the financial services to such consumers and enable them to access numerous solutions in a frictionless manner.
The most common examples of embedders are the food delivery or cab services apps that allow customers to make payments without bothering to move to an external payment site and enter their account information.
Embedded Finance is most commonly used in the following areas –
MSMEs often face difficulties in getting short-term loans. This issue can be resolved with the B2B E-Commerce platforms, which provide the Buy Now Pay Later Feature to retailers during checkout.
There has been an increase of 162% in the customer acquisition of the BNPL app. They are expected to account for 3 % of E – Global Commerce spending by 2023.
These apps provide cash advances and business loans to its SME and MSME customer base using their platform data. This enables small businesses to avail of flexible in-context credit from their accounting apps, which can be utilised for their business growth. The embedded finance opens up alternate revenue streams and enhances customer acquisition and retention.
Retail-tech platforms can use Embedded Finance to unlock alternate revenue sources and monetise their customer base. Both retail tech and embedded Finance platforms can leverage a revenue-share partnership to offer tailored credit to their customers. These revenue-share partnerships introduce a ‘usage-based revenue instead of subscription-based revenue and significantly increase the growth of per-user revenue.
Logistic platforms use embedded finance by servicing truck drivers and trucking fleets and offering fuel and maintenance financing. This helps the partners to obtain funds during a crisis without relying on third parties.
This includes ride-sharing companies offering personal loans to their driver-partners by trip information, driver ratings, and more. They can also implement deduction at source strategies for collection.
The business aggregator companies like the food delivery apps use Embedded Finance to provide small-sized loans to their partners to help improve their service level. For example. Another way embedded finance is used in these companies is by providing payment options to its customers when using these apps.
Embedded Finance shall benefit businesses in the following ways –
Many service providers seek a business that enhances their Customer Lifetime Value and exceeds the Customer Acquisition Cost (CAC). Embedded finance can be highly useful in this respect as it can enable companies to attract more customers and increase customer retention by providing convenient payment methods and other financial services.
The companies would be able to gather a wide range of data with the help of financial services. For instance, besides payment services, portfolio management services would help the companies to understand the asset status and employment status of the customer along with the medical history through the provision of insurance services.
Optimum utilisation of such accumulated data can lead to the formulation of plans that are in line with the customers’ needs and facilitate accurate credit decisions and improved accuracy in recommending goods and services related to the company’s core business. This further helps increase customer retention for businesses and companies in the long run.
Apart from strengthening the company’s core business, embedded finance can contribute towards increasing revenue by integrating financial services into the current offerings of the business. The Buy Now Pay later service is expected to enhance the revenue for over 50% of the embedded finance market by 2026
The integration of financial services doesn’t necessarily require licenses, infrastructure and other elements as most of it is handled by in-house and fintech companies resulting in the reduction of the initial investment costs, and the funds can be utilised for the development and marketing of those products and services. The saved time can lead to an early launch of the product and services.
The concept of Embedded finance has witnessed significant growth in recent years. It is considered the next wave of fintech, which can transform the financial ecosystem. Therefore, it can be quite beneficial for companies to incorporate Embedded Finance to align with the evolving trends and enhance the growth of their business.
Read our Article: Banking as a Service (BaaS): A Detailed Overview