Embedded Finance
Because of its expansive reach and technological capabilities, the fintech industry has painted the global economy in uncountable brilliant hues. Embedded finance is one such hue that has supplemented the success of many subsections within fintech. Embedded finance has undergone several stages of evolution to emerge as a necessity more than an augmentation in today’s digital age.
What is Embedded Finance?
Embedded finance, also known as EmFi, is the method utilized by non-financial organizations to provide their users with financial options, such as e-payments, money transfers, etc., on their websites and mobile applications. With embedded finance, non-financial organizations have the opportunity to integrate financial services and products with their portals and platforms.
The financial services and products are integrated with non-financial platforms through APIs (Application Programming Interfaces). APIs allow easy interaction and communication between software and applications, allowing different organizations to integrate their portals and services.
Embedded finance has led to a revolution that has got everyone’s attention. APIs can enable all types of organizations to offer financial services to their customers for e-payments, insurance, or even credit.
The embedded finance industry has achieved a quantum leap in its success charts because of its applicability and scalability. The industry is expected to grow with a compound annual growth rate (CAGR) of almost 60% to over $7 trillion by 2030.
Some Examples of Embedded Finance
Food Delivery Applications
Food delivery applications allow users to make payments using different methods, like credit or debit cards, online banking, virtual cards, UPI (Unified Payment Interface), cryptocurrencies, etc.
Online Retail Shopping Applications
Apart from making e-payments using different methods for online shopping, consumers nowadays, are also offered instant credit in the form of BNPL (Buy Now, Pay Later). In BNPL, a third party makes the required payment on behalf of the customer to the merchant allowing the customer to make the payment at a later stage.
P2P Lending
P2P or peer-to-peer applications allow people to avail of instant credit from individuals who offer direct, small loans to borrowers for a nominal interest rate.
Travel Applications
Nowadays, apart from e-payment, travel applications also offer e-insurance for tickets and journeys to their customers at the point of sale.
How Will Embedded Finance Impact the Growth of Fintech?
Embedded finance has caused an upheaval in payment systems globally. Non-financial organizations have the opportunity to integrate and offer financial services to their customers using APIs. Some of the streams of embedded fintech that are emerging as promising disruptors are:
e-Insurance
Insurance has always been an essential part of the commodity industry. In today’s digital age and with the rise in uncertainties, insurance has become one of the most relevant sectors in the financial system. Many non-financial industries have started offering insurance options to their customers, for example, the automobile industry is emerging as one of the top insurance providers for automobile purchases. Similarly, travel companies offer insurance for canceled trips and baggage loss. Such digital insurance is steadily gaining traction among non-financial platforms.
e-Investments
Embedded finance has also enabled non-financial organizations to provide digital investment options. Acorns is a prime example of embedded financial investment options, which rounds up people’s change and invests it for them. Non-financial organizations integrate such services into their platforms to offer easy investment options.
Digital Loans
BNPL is one of the most important fintech sectors rapidly bypassing traditional payment methods. Instant credit and digital loans powered and supplemented by artificial intelligence and big data are gaining ground with youngsters because of their promptness, quick verification, easy processes, and accuracy.
Online Banking Through Non-financial Platforms
Embedded finance is also advancing towards providing banking services through non-financial channels. With embedded banking, customers can link and update their personal information from non-banking channels, and perform other banking activities such as money transfers.
Best Practices for Embedded Finance
With its exponential usability, embedded finance has successfully disrupted many traditional financial methods. Because of the growing numbers, embedded finance has become a lucrative option for non-financial organizations. Here are three best practices for integrating embedded financial options in non-financial platforms:
Compliances
All financial activities come with heavy regulations and compliances that all participants should abide by. Any breach or compromise of financial standards and regulations can cause immense damage to customers and the participating companies.
Diversified Options
Although e-payments are widely implemented by non-financial organizations, diversifying their financial options would give companies an edge over their competitors. Companies should explore other financial services too, to tackle the growing competition in their respective industries.
Solidified Core Competencies
There is immense pressure on businesses and companies to offer more than their competitors leading to companies diluting their core vision and competencies. As a best practice, companies should evaluate the relevance of all services to gauge whether they complement and uplift their core values, missions, and competencies or not.
Final Thoughts
Embedded finance is inundating the fintech shores with its reachability and extensive application. The fintech industry has witnessed astronomical growth in recent years by allowing non-financial companies to enter the fintech zone. The embedded finance industry is currently in its initial phase of development. There is immense scope for its usability, which promises an increasingly credible future.
