Fintech Onboarding — Are You Ready for Embedded Finance?

What Is Embedded Finance?

In simple English, embedded finance is the implementation of financial services into business operations of non-financial providers. For instance, your retailer can process the payment and offer loans and insurance thanks to embedded finance options.

But before getting there, the modern financial services industry has undergone three stages of evolution so far.

First, all financial activities were distributed by banks and specially established financial institutions. In particular, money transfers were the primary responsibility of banks only.

Then came the first wave of fintech companies. They used technological innovations to deliver financial services on top of traditional banking. For example, PayPal pioneered online payments and set the route for the Great Unbundling of Banks.

And finally, up to the present moment, we were witnessing the Great Democratization of Finance. It has resulted in introducing specific financial transactions that are distributed and served by non-fintech companies, e.g., WeChat Pay for P2P payments.

Today, financial technology enables consumer digital companies to integrate or 'embed' financial services into their daily business activities.

Some Stats to Add Value

According to Juniper Research, the total value of the embedded finance market in 2021 reached $43 billion. The study also estimates that in 2026 the market cap will exceed $138 billion. 

Such a rapid growth of more than 215% can be explained by the introduction of more available APIs to be distributed by financial services vendors. Such easily integrated APIs will erase the existing barriers and create new opportunities for embedded finance providers.

Moreover, according to eMarketer, a third of fintech professionals are convinced that by 2030 Big Tech companies will become the main players in embedded financial services or, maybe, will even control the sphere. Today, tech giants are focused on this financial technology development, which significantly fuels the trend.

Where Can You Find Embedded Finance?

There are a lot of examples of fintech implementations in general and embedded finance tools in particular. Let us see what emerging use cases of the technology we can find here and now.

Payments

That is, probably, the best-known example of embedded financial services. Because when you buy something in an app, you use the technology to complete your purchase without any additional moves. E.g., when using Uber, you make your payment right in the app. The majority of e-commerce services providers allow you to pay using embedded functionality on their website or in apps.

Furthermore, there is an interesting subset of embedded payments — closed-loop payments. With this feature, you can use a branded card and store your funds with the respective retailer. 

For example, in the Starbucks app, you can transfer some cash to it. These funds can be used only for buying Starbucks products. But the brand offers an attractive reward system for the service because closed-loop payments help offset the processing costs.

Banking

Financial functionality and finance apps are usually integrated with a bank on some level. But with embedded banking, an app embeds bank accounts. 

For instance, Treasury Prime, ZenBusiness, and Bench now work with a bank affiliate (LendingClub Bank) and provide their customers with bank accounts at a discount

Insurance

With embedded insurance, companies can offer customized insurance policies for their products. Thus, when you buy a Tesla, the company offers you a competitive insurance policy.

Lending

Thanks to embedded lending, retailers can offer installment or loan plans at checkout. In particular, a business partnership with such insurance industry services as Afterpay or Affirm allows companies to embed lending options into their apps and, as a result, to get more completed purchases.

Embedded Finance: a Win-Win Solution

We are absolutely sure that this technological trend may bring numerous opportunities for any type of business. Let us see together what particular advantages embedded finance can bring for all the parties involved.

Fintechs

Embedded finance is an exceptionally great opportunity for your fintech startup or company. You can embed your innovative tool in an e-commerce checkout or other popular relevant services. And there will be no fuss about releasing your fintech app into today’s highly-competitive market.

For other fintech business models, the top option will be introducing an embedded fintech product for a bank or a BaaS provider. Such partnership helps prevent problems, overcome challenges, and set more prospects for the ongoing scaling.

Non-Fintechs

If your business is not a fintech, you may consider embedding financial capabilities into your online service or app. When you affiliate with a bank, you can provide an additional service to your customers. Moreover, you can also offer some more cute perks like discounted checking or accounting options.

Apart from that, you can introduce your embedded payment system or design an integration option for your app wallet solution. That is how you will own all sides of transactions and earn interchange revenue. Here, a reliable banking and financial software development partner can help create your service.

Banks

What is the main advantage that banks get from fintech and embedded finance? Probably, it is the opportunity to reach promising markets and new audiences.

Banks are still powerful at banking. They have rich experience in following regulations and complicated rules, in the risk management of lending and holding funds. But for many banks, modern digital transformation trends are challenging, since they lack fintech expertise.

Meanwhile, Banking as a Service provides new perspectives for effective collaboration of fintech and banking businesses. BaaS offers tools for embedded finance: customized software services for banks to integrate with retail, fintech, and other digital companies.

Embedded Finance: Looking Forward

Is this financial technology the future of the industry? The answer is undeniably positive. We believe it is one of the components that lie ahead of the forthcoming digital transformation of the financial services industry. And there are several essential reasons for that.

It Gives More

Previously, there was only one possible option when we needed to use a banking service or learn more about new products. We had to go to the bank. That also meant that banks were limited in promoting new services and products.

Fintech companies and embedded finance have much easier access to their customers. With a bank in almost every app, the finance industry is much closer to its clients and has more data to understand their needs and interests.

That is why in the future, financial technology investments will help your finance team be nearer and meet customer needs. And so, it will increase the rate of a successful upsell of your products and services.

It Bridges the Gaps

Embedded mobile banking delivers emerging technologies to the areas and audiences that were earlier underbanked.

Moreover, it helps fintech companies apply data science to find new prospects and opportunities.

It Solves Problems

Fintech innovations help business leaders address challenges in a better manner.

Thus, for companies like Uber, embedded finance makes it easier to pay for gig workers' services. People can get instant payments without paper checks or a traditional bank account. Furthermore, it helps avoid high fees.

It Is a Good Starting Point

For many fintech startups, embedded banking is a promising departure point into the competitive fintech sector.

Let us have a look at Block Capital (former Square). It extended $594 in business loans in the third quarter of 2021. In the meantime, the company started by delivering an embedded payment process for small businesses, then it evolved into a POS provider, and now it is a big business lending market player.

On the Road to Your Business Goals

So, we believe that a deeper understanding of embedded finance will provide rapid growth to your business. It gives a working pattern for quick response to challenges and new requirements.

The technology increases your opportunities to meet customer needs, expand your audience, and grow your business.

Integrating embedded finance into your services and products has never been simpler! Contact our specialist to know how we can help.