What is Embedded Finance?

Embedded finance is a new and innovative way of integrating financial services into the offerings of non-financial companies. It offers customers a seamless and integrated financial experience, allowing them to access financial services while using the products or services of the non-financial company.

Embedded finance can take many forms, such as digital wallets, lending services, insurance products, and investment products. The goal is to give customers a more convenient and efficient way to manage their finances without navigating multiple financial service providers.

Understanding Embedded Finance

Embedded finance involves integrating financial products into non-financial customer journeys, platforms, and experiences. This concept is not new; for decades, non-bank entities have provided financial services through private-label credit cards in retail chains, supermarkets, and airlines. Other examples include sales financing at appliance retailers and auto loans at dealerships. These setups serve as channels for banks to reach end customers.

What sets apart the next generation of embedded finance is its integration into daily digital interfaces used by consumers and businesses. This integration can take various forms, such as digital wallets, customer loyalty apps, shopping cart platforms, and accounting software. For users, accessing financial services becomes a seamless part of everyday activities like online shopping, employee scheduling, or inventory management. This deeper integration of finance into non-financial experiences has seen significant growth in the US in recent years.

The advancement of embedded finance has been driven by significant shifts in commerce, merchant and consumer behavior, and technology. The move toward digital commerce and business management has dramatically expanded opportunities to integrate finance into non-financial customer experiences. A substantial portion of global card spending—especially in the US, where it’s as high as 50% and now occurs online, with many small and midsize US companies relying on software solutions to manage their operations.

Moreover, the rise of digital natives has broadened the base of consumers and businesses willing to receive all their financial services through digital platforms. Additionally, open banking initiatives, mandated in the European Union and voluntarily adopted in the US, have facilitated innovation by allowing third-party fintech companies to access consumers’ banking data and carry out transactions on their behalf.

Examples of Embedded Finance Uses With Real Examples

Health financing solutions

Healthcare providers and wellness companies can integrate financing options to help patients afford necessary treatments or wellness services.

Example:

CareCredit: CareCredit is a healthcare credit card accepted by over 200,000 healthcare providers in the United States. It offers financing options for various healthcare services, including dental, vision, veterinary, and cosmetic treatments, enabling patients to pay for their care over time.

Buy now, pay later (BNPL)

BNPL type of embedded financing allows customers to make purchases and pay for them over a period of time, typically through interest-free installments. This model is becoming increasingly popular as it provides an alternative to traditional credit cards and loans.

Example:

Affirm: Affirm is a leading BNPL provider that partners with retailers to offer flexible payment plans at the point of sale, allowing customers to split their purchases into smaller payments.

Education financing

Educational institutions and platforms can integrate financing options, such as student loans, to make it easier for students to access education and pay for tuition, books, and other expenses.

Example:

Ascent: Ascent is a private student loan provider that offers loans to undergraduate and graduate students, as well as coding bootcamp attendees. The company partners with schools and educational platforms to provide a seamless application process, enabling students to access financing directly through their institution.

Home improvement financing

Home improvement companies can provide embedded financing options to help customers finance their projects, making it easier for them to undertake renovations and upgrades.

Example:

GreenSky: GreenSky is a financial technology company that partners with home improvement contractors and retailers to offer point-of-sale financing solutions. This enables customers to access credit for their home improvement projects, with flexible payment plans and competitive interest rates.

Travel financing

Travel companies can integrate financing options into their platforms, allowing customers to book trips and pay for them over time.

Example:

Uplift: Uplift is a fintech company that partners with travel providers to offer pay-over-time financing solutions for vacations. Customers can access credit at the point of booking, making it easier for them to finance their trips and spread the cost over several months.

Point-of-service lending

Point-of-service lending involves offering loans or lines of credit to customers at the point of sale, often through online platforms or mobile applications. This enables customers to access financing when they need it, streamlining the borrowing process.

Example:

Klarna: Klarna is a Swedish fintech company that provides point-of-service lending solutions, allowing customers to access credit instantly at the checkout of participating online retailers.

Investments and trading

Embedded finance can also involve integrating investment and trading services into non-financial platforms, allowing users to manage their portfolios and execute trades within the same application they use for other purposes.

Example:

Robinhood: Robinhood is a widely used stock trading application enabling users to buy and sell stocks and cryptocurrencies without incurring any commission fees. The company provides a referral program in which users receive rewards for introducing new users to the platform.

Auto lending

Car manufacturers and dealerships can offer integrated auto lending services to streamline the vehicle purchasing process for their customers.

Example:

Ford Credit: Ford Credit, a division of Ford Motor Company, provides various financing options to customers purchasing Ford vehicles. The company offers competitive rates and flexible terms, allowing customers to finance their vehicle purchases directly through the automaker.

Subscription-based financing

Companies offering subscription-based products and services can integrate financing solutions that allow customers to pay for their subscriptions over time or access discounted rates.

Example:

Peloton: Peloton, the popular fitness equipment and subscription service company, offers financing options through Affirm, enabling customers to purchase their products and pay for them over time with fixed monthly payments.

Integrated insurance services

These services involve embedding insurance products within non-insurance platforms, making it easier for customers to purchase coverage. This can include anything from travel insurance offered during flight bookings to product warranties, and home insurance provided when purchasing a property.

Example:

Lemonade: Lemonade is an insurtech company that uses artificial intelligence to provide seamless insurance solutions. These solutions can be integrated into various platforms, such as real estate and e-commerce websites.

Fintech-as-a-service

Fintech-as-a-service provides financial technology solutions to businesses, allowing them to create and offer their own financial products without building the infrastructure from scratch. This enables companies to provide their customers with a more seamless and personalized financial experience.

Example:

Plaid: Plaid is a fintech company that provides APIs and other tools to help businesses integrate financial services into their applications. This enables them to create new financial products or streamline existing services.

Are you planning to enter Embedded Finance? Here are some great tips

Companies looking to enter the finance embedding space can follow these tips to increase their chances of success:

• Identify a specific need: Identify a particular financial need or pain point your target audience faces. This will help you determine which type of embedded finance solution is best suited for your business and customers.
• Partner with established fintech companies: Collaborate with them or financial institutions to leverage their expertise, infrastructure, and regulatory compliance. Such partnerships can help you develop and deploy embedded finance solutions more efficiently and securely.
• Ensure seamless integration: Focus on seamlessly integrating financial services within your platform or application. The user experience should be smooth, with minimal friction between the primary service and the embedded finance feature.
• Prioritize security and compliance: Ensure that your embedded finance solution adheres to relevant regulations and security standards. This is crucial to protect your customers’ data and maintain trust in your brand.
• Customize the offering: Tailor your embedded finance solution to meet the specific needs of your target audience. This may involve customizing the user interface, payment terms, or financial products offered.
• Test and iterate: Continuously refine your embedded finance offering based on user feedback and data analytics. This will help you improve the overall customer experience and adapt your solution to changing market conditions.
• Promote your embedded finance solution: Develop a marketing strategy to promote your embedded finance offering to your target audience. This may involve using targeted advertising, social media, content marketing, or partnerships with influencers and industry experts.
• Focus on customer support: Provide exceptional customer support for your embedded finance solution. This may involve offering dedicated support channels, creating a comprehensive knowledge base, or providing in-app assistance.
• Monitor performance metrics: Regularly track key performance indicators (KPIs) to assess the success of your embedded finance offering. This will help you identify areas for improvement and make data-driven decisions to optimize your solution.
• Stay updated with industry trends: Keep up with the latest trends and developments in the embedded finance space. This will enable you to anticipate shifts in customer preferences and stay ahead of the competition.

Future of embedded finance

As companies continue to look for innovative ways to include financial services in their core operations, embedded finance is positioned to play a revolutionary role in the financial sector and beyond. How individuals access and utilize financial services will probably change significantly as technology develops and client expectations change.

We may anticipate the rise of increasingly individualized and data-driven financial solutions in the following years. Companies will be better able to adapt their integrated financial solutions to customer demands and preferences as they collect more consumer data. Consequently, financial services and products will be more specifically tailored, and marketing initiatives will be more focused.

Furthermore, embedded finance’s use will probably surpass conventional financial service providers. A greater variety of companies will start to provide financial goods and services as they see the possibilities of integrating financial solutions into their platforms and apps. This may improve supplier competition, spur innovation, and result in better products and services for customers.

Artificial intelligence (AI) and machine learning will be critical in the future of embedded finance. Firms can create more complex and effective financial solutions as these technologies grow. For example, AI-driven underwriting models may assist providers in better assessing risk, resulting in more competitive pricing and better financial solutions for customers. Moreover, machine learning algorithms may improve the security of integrated financial solutions by detecting and preventing fraud.

Enhanced regulatory monitoring will also probably be a feature of embedded finance’s future. Regulators must modify their frameworks as more companies include financial services in their platforms to maintain robust consumer safeguards. For companies that provide embedded financial solutions, this can lead to new rules and compliance standards, which might affect the sector’s development and expansion.

Last but not least, as embedded finance spreads, it may democratize access to financial services. By integrating these services into common platforms and apps, embedded finance may reach a wider audience and close the gap between the banked and unbanked populations. The expansion of financial services availability might have significant effects on both financial inclusion and overall economic growth.

Conclusion

Embedded finance represents a paradigm shift in accessing and utilizing financial services. By integrating financial products seamlessly into non-financial platforms and experiences, embedded finance offers convenience, efficiency, and enhanced customer experiences. From healthcare financing to buy now, pay later options and beyond, embedded finance is reshaping industries and democratizing access to financial services.

As companies continue to innovate and leverage technologies like AI and machine learning, the future of embedded finance looks promising. However, it’s crucial for businesses entering this space to prioritize security, compliance, and customer-centricity. By partnering with established fintech companies, customizing offerings, and staying updated with industry trends, businesses can maximize the potential of embedded finance to meet evolving customer needs and drive growth.

In the coming years, embedded finance can expand its reach further, driving greater financial inclusion and transforming how individuals and businesses manage their finances. As regulatory frameworks adapt and technology evolves, embedded finance will continue revolutionizing the financial sector, offering tailored solutions and enhancing financial well-being for all.

Frequently Asked Questions