Embedded Finance - An Introduction And Use Cases
by Sandeep Gupta, on Mar 7, 2022 8:18:24 PM
Key takeaways from this blogpost:
- Embedded finance is a set of financial services offered on customer-facing non-financial digital platforms such as a digital marketplace platform or a POS system.
- In healthcare, embedded finance helps facilitate transparent pricing and offers multiple payment options for patients.
- EdTech sector can use in-depth analysis to evaluate a student’s potential capacity to repay loans and lend accordingly.
Embedded finance is one of the hottest trends in the fintech space today especially since the pandemic hit. It is disrupting businesses by giving rise to enhanced and new revenue streams.
Oracle estimates that the embedded finance market will be $7 trillion over the next decade, an amount that is twice as much as the combined value of the world's top 30 banks today. In this blog, we will speak about how embedded finance has changed the business world along with some exemplary use cases of it.
What is embedded finance and how is it impacting the markets?
Embedded finance refers to a set of financial services that come bundled together with a customer-facing non-financial digital platform such as a digital marketplace platform or a POS system.
Before the inception of embedded finance, a business was supposed to create an exclusive FinTech department in their organization to provide their customers with financial services. This involved enormous expenditure, lengthy development time, also time to profitability. Embedded Finance APIs and Infrastructure make things easy for digital platforms by offering financial services in-house at the point of sale.
Types of Embedded Finance
Enterprises are actively working with technology companies for offering financial services. Here are some major examples of Embedded Finance:
Payments were the very first financial services to be integrated into non-financial experiences. Embedded Payments can facilitate rich use cases such as in-game purchases in video games, payroll automation, e-wallets embedded in digital marketplace apps, ERP payments of institutes, the subscription-based price for SaaS, and more.
BNPL or Buy now pay later
Embedded Credit or BNPL refers to the embedding of credit products into non-financial digital platforms. This enables consumers to apply, acquire, and pay back loans on the platform. For instance, a customer buying a washing machine online can convert their lump sum payment into EMI at the checkout, without leaving the platform.
Embedded Insurance involves the bundling of insurance with the purchase of a product or service. For instance, many automotive companies offer auto insurance online at the point of sale as well as as a part of in-store purchases.
Embedded Investment basically enables platforms to embed investments like equities, mutual funds, bonds, etc., within a digital marketplace app. API-based brokers have APIs built into every microservice from registering an account, funding, trading, portfolio management, as well as markets data. This enables various platforms to provide investment services to their customers along with other services like payments.
Key players in the embedded finance ecosystem
There are four key players in the embedded finance ecosystem which makes it possible to provide financial solutions to users:
It includes large banks, small finance banks, and non-banking financial institutions. They utilize their network to check requests from the embedded finance ecosystem and manage them. They manage regulatory risks, credit risks, and compliance risks.
These include businesses, non-fintech organizations that have customer-facing platforms online like websites, mobile apps, etc. They provide customized financial services to their customers that already use their platform.
It includes technology companies that connect financial institutions with digital platforms. They also develop standalone fintech products that enterprises can reap benefits from. These products can also offer services like loan lifecycle user journey, customer services, alternate data underwriting engines, etc.
These are players who transport information back and forth between the solution providers and showcase platforms. They employ SDKs, APIs, along with BaaS or Banking as a service as a part of their technological infrastructure.
Use Cases of Embedded Finance
There are a number of use cases of embedded finance because it solves multiple problems for industries to offer enhanced solutions.
Ordering items like shoes, or groceries online and paying for them within the app or website is a prominent embedded finance use case. Multiple marketplaces are popping up online that enable people to pay through e-wallets, cryptocurrencies, credit cards, micro-loaning apps, etc. without ever leaving the app. This not only increases customer engagement on the platform but also helps build credibility amongst users. Payment information once saved will likely bring customers back to the same website, as customers would rather not go to a new website to save the information all over again.
Healthcare costs are highly daunting concerns for people. Also, the lack of transparent pricing and payment options sometimes hinders or delays treatments. Embedded finance has great opportunities in the healthcare sector, ranging from better coverage in health insurance to offering better services in terms of preventive medicine. It can also facilitate transparent pricing and offer multiple payment options for consumers. At the same time, it can make the healthcare industry more profitable by decreasing the costs.
Global policies have made educational loans easily available for one and all. At times, students take up loans with much higher interest rates affecting their financial health. This can lead to bad loans. With embedded finance platforms, the EdTech sector can use in-depth analysis to evaluate a student’s potential capacity to repay loans and lend accordingly.
A significant challenge of the real estate sector is its lengthy documentation. With embedded finance, insurance, mortgage processes as well as lending can all be integrated enabling seamless buying of houses. This can vastly transform the house mortgage market.
Embedded Finance enables access to affordable, tailored, and easy-to-access financial services that will serve customers in all economic and social demographics. For an expanded user base and unbridled growth, it is important that enterprises optimize their digital platform, partnering with a technology partner having prior experience in strategizing and integrating embedded finance into their operations. To get started, get in touch with an embedded finance solutions provider.