The Future of Embedded Finance
By Matt Naish, Head of Product Strategy, FISPAN
Embedded finance has been around for longer than you think. If you’ve ever used a ride sharing service or ordered late night eats using a food delivery platform then you’ve already experienced some of the benefits of embedded finance – seamless, easy to use, and an improved overall customer experience. Embedded finance, simply put, is non-financial institutions using financial tools and services. Common examples include payment processing or lending but it’s evolving to be so much more.
The Acceleration of Embedded Finance
Over the past two years, the pandemic accelerated digitization strategies in many industries, most notably, in the Embedded Finance industry. Driven mainly by increased API availability from financial services vendors, the Embedded Finance industry’s market value is now projected to reach an estimated $138 Billion by 2026, according to Juniper Research.
The push toward implementing digitization strategies will only increase as more than three quarters of buyers and sellers say they now prefer digital self-serve and remote human engagement over face-to-face interactions. People are consuming new experiences and doing so more efficiently, allowing both existing players and new start ups to prosper. Applying these new technologies can enhance all banks’ capabilities and deliver on the expectations of these increasingly tech-savvy consumers. Long used in the consumer retail sector, many embedded finance applications have evolved into the B2B space and the options and opportunities have and will continue to grow.
How Embedded Finance Is Used in the Market Today
As with many fintech technologies, embedded finance aims to meet the client where they are and provide them with the technology they need when they need it. Embedded finance has the opportunity to bring disparate but related groups together, each bringing their own strengths into the market to prosper. We know banks have expertise in payment transactions and can provide loans, merchants and suppliers with great products to sell and fintech partners have expertise in seamlessly connecting these entities in ways to best serve the end user – the customer.
Any industry is ripe for disruption when it comes to embedded finance. Embedded finance has opened up opportunities in various marketplaces:
- Buy Now Pay Later (BNPL): A now popular retail option which offers online shoppers interest-free financing on retail purchases over a series of installments.
- Marketplace Point of Service Lending: Similar to BNPL but for larger commercial purchases where cash flow management is a key motivator for both buyers and suppliers. Also sometimes referred to as invoice financing. At the checkout portal, commercial clients are given the option to pay in installments for their purchase by passing a simple business credit check along the customer journey and agreeing to the terms in the agreement. This enables flexible payment options for the commercial client and immediate payment for the supplier. A third-party takes on the risk by using a sophisticated credit modelling check. Industries that benefit from this option include construction and manufacturing, oil & gas, grocery, restaurants, and food services.
- Banking-as-a-Service (BaaS): BaaS is a model in which a licensed bank can integrate its digital banking services directly into the products of a non-bank business – such as a retail store. In this example, the retail chain can provide banking services to their customers – like loans, savings accounts, credit cards, etc. – by integrating with the BaaS offerings that are backed and offered by a traditional bank.
- Integrated Insurance Services: Tesla drivers have the option to buy insurance directly from Tesla via their online /app-based Tesla accounts. Customers can also access all their insurance policy documents, make changes to their policies and submit claims, right from the Tesla app. With promoted insurance savings of up to 30%, Tesla aims to provide a complete digital experience and thus reduce costs associated with traditional auto insurance sales and service.
- Navigation apps: Google has integrated with parking solutions providers, Passport and ParkMobile, to enable users to easily pay the parking meter from their driving navigation app.
- Fintech-as-a-service (FaaS): Fintechs providing non-traditional financial institutions with financial offerings, most often through a seamless integration of software with the institution’s back offices through APIs. This service integration allows non banks to provide financial products and services in an efficient and cost effective manner. On the banking/financial institution side, the FaaS platform can allow for complete digital management of an end-to-end transaction, like a loan request. Here, the customer process can be seamless and hassle free, while still ensuring legal and regulatory compliance as well as proper security requirements like strong authentication.
Until recently, a large investment in resources was required to offer these embedded banking services. Today, with the proliferation and accessibility of APIs, these integrations are now easier than ever. Institutions who were initially reluctant to make the shift to digital processes have had to quickly adjust to growing demand and expectations. Additionally, new functionalities have highlighted that traditional banks were not fully equipped to make rapid digital moves when the pandemic hit. Banks have to rely more heavily on technology than they ever have before.
Embedded finance requires banks to evaluate their position in the customer journey and determine where they can best provide value, what gaps exist and with whom they should partner. Banks are realizing that some smaller fintechs are the ones that are able to provide these next-generation solutions, and they’ve come to recognize that fintechs can do it faster, and probably cheaper – and, that’s where fintechs, merchants and banks can work together to fill those gaps.
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