Why the Future Lies in Embedded Finance

Louis Carbonnier is the Co-Founder and Co-CEO of Hokodo where he leads the commercial and product functions. Hokodo is a fintech startup that enables B2B merchants and marketplaces to offer a buy now, pay later solution to their customers.

Estimates by Oracle predict that the embedded finance market is expected to exceed $7 trillion in value within a decade – double the combined value of the current global top 30 banks. Rapidly becoming a contested battleground, the embedded finance market holds actionable opportunities.

Until recently, embedded finance has been a term more commonly associated with consumer financing. However, integration into B2B e-commerce is the next step for the industry. Promising start-ups now provide businesses with embedded services such as BNPL (buy now, pay later) and trade credit insurance. These provide businesses with more accessible, affordable, and effective financing compared to legacy solutions.

What is embedded finance?

Embedded finance is where financial tools or services that would traditionally be obtained via a bank are instead integrated into the products or services of a non-financial organisation. Already streamlining both customer and business commerce, embedded finance is allowing online stores to offer services such as short-term loans (through solutions such as BNPL) or digital wallets enabling instant contactless payments.

This significantly reduces barriers that previously existed to several products and services. For example, instead of needing to obtain a bank loan for substantial purchases, business buyers can use BNPL schemes at the point of purchase, eliminating the need for time-consuming paperwork applying for trade credit.

What are some examples of embedded finance in action?

Embedded payments

Embedded payments enable instant payment at the click of a button, such as when payment technology is integrated directly into the structure of an app or e-commerce site. As a result, buyers don’t need to re-enter payment details at every purchase.

Rideshare apps have adopted this form of embedded finance on an industry-wide scale. When using Uber, for example, customers pay automatically via the app after journey completion. The launch of Apple Pay in 2014 has additionally boosted the popularity of embedded finance in the form of digital wallets. Now, contactless mobile transactions and instant online purchases are becoming the norm.

Embedded lending

Credit and financing products can also be integrated into non-financial marketplaces, facilitating deferred payment facilities (BNPL) at purchase without the need for contacting other banks or lenders.

BNPL is well-established in customer-focused embedded finance, for example, Klarna or Clearpay. The B2B BNPL market – albeit arriving later than B2C BNPL – is now rapidly enabling businesses to access a modern, improved, and digital version of traditional trade credit, eliminating the need for extensive paperwork and approval waiting times.

Embedded insurance

Insurance products can now be found and added at the point of purchase through just one click, as opposed to buyers needing to trek through the process of securing the best insurance products after already spending resources finding and buying the product itself. Contact with brokers or insurance agents is no longer necessary. For example, we can now opt in to include travel insurance at the checkout when purchasing a train ticket.

The future of embedded finance

Embedded finance is flexible, with the potential for universal application across any company or industry with transactional elements. Payments can be revolutionised, and the horizons broadened for financial innovation. Businesses neglecting embedded finance will likely lose customers to digitised companies who invest in an improved customer experience.

Legacy systems are not designed for the integration of embedded finance. The migration to fresh technology would be a perilous undertaking for banks and insurers, so instead, many are partnering with tech start-ups to keep pace with the industry.

A “paradigm shift” must take place in how we view finance. Embedded finance leans on a “pull” logic – the customer takes out the financial product at the point of need instead of seeking financial products or services separately. When a customer purchases a long-distance train ticket, they rarely consider travel insurance. However, apps such as Trainline now provide travel insurance options at checkout for low prices, encouraging customers to purchase.

Consequently, providers must view financial products from a technical perspective. Embedded finance is a digital product combining the API and underlying financial product, making it available to partners. Businesses and banks alike must remember that the API is as important as contracts, and there are two clients in the embedded finance process – the developer embedding the product, and the end-user taking out the product.

Businesses capitalising on the opportunities presented by embedded finance must evaluate their existing processes and tools, determining which can be enhanced through embedded solutions. Following this, they should undertake research, before reaching out to a relevant partner who can provide modernised, frictionless financial solutions.