What if financial services were seamlessly integrated into your everyday life and accessible without the hassle of navigating traditional banking channels? This is what embedded finance promises.
It is a revolutionary trend that is transforming the way we interact with money. Gone are the days when financial transactions were confined to banks or online portals. Now, embedded finance is creating access to financial services by embedding them directly into the platforms we use daily.
Whether it’s buying a product online, booking a flight, or managing your subscriptions, embedded finance eliminates the need to switch between apps or websites, providing a frictionless and convenient experience. In this blog post, you’ll learn more about embedded finance.
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Embedded Finance Definition
Embedded Finance is the incorporation of financial services, such as lending, payment processing, and insurance, into the infrastructures of nonfinancial organizations, without the need to route them through traditional financial institutions. For instance, customers can use companies like Klarna to get financing when making an online purchase rather than visiting a bank for a loan.
How Does Embedded Finance Work?
Embedded finance works by adding financial products and services to the non-financial products and services people use daily.
For example, a ride-sharing app may allow users to pay for their rides directly within the app. This eliminates the need to switch to an external payment processing platform.
Also, a travel booking website may collaborate with a financial institution to offer travel insurance directly within their platform. All it takes is ensuring that financial services are easily accessible when you need them.
Customers can now access the platform more easily and efficiently without having to be redirected to traditional financial institutions. Thanks to this seamless integration, which benefits both businesses and consumers.
Businesses can now provide their clients with a convenient one-stop solution for all their needs by embedding financial products and services. Meanwhile, how exactly do companies accomplish this? Through the use of Application Programming Interfaces (APIs), companies can incorporate various financial services and products, including loans, insurance, and payments, straight into their platforms.
For instance, a “Buy Now, Pay Later” option can be incorporated into the checkout process of a retail e-commerce website. So, customers can use this feature, which is powered by an API from a financial partner, to make credit purchases without ever leaving the e-commerce website.
The outcome? A more enjoyable and seamless shopping experience for all parties, which will probably result in more sales.
Why is Embedded Finance Important?
Embedded finance is important for several reasons. However, we’ll discuss a few reasons below.
Financial inclusion: It has the potential to promote financial inclusion by making financial services more accessible to people who are currently underserved or unbanked.
Improved customer experience: Secondly, it allows businesses to provide a more seamless and integrated financial experience for their customers. By embedding financial services into the platforms that customers already use, businesses can eliminate the need for customers to switch between apps or websites. This makes it easier and more convenient for them to access financial services.
Enhanced competition: This financial technology is leveling the playing field for businesses of all sizes. By enabling organizations to embed financial services into their platforms, embedded finance is making it easier for small businesses to compete with larger, more established companies.
Increased customer engagement: Embedded finance can help companies increase customer engagement by providing them with access to financial services at the moment they need them. For example, an e-commerce retailer could use this financial technology to offer customers the option to pay for their purchases in installments at checkout. This could encourage customers to make larger purchases that they might not have been able to afford otherwise.
Embedded Finance Examples
Companies can incorporate embedded finance in different ways. The examples below will give you more insight.
1. Embedded Insurance
With embedded finance, you no longer need to visit an insurance agent to obtain coverage for a new car purchase or an impending trip. A few companies have integrated the insurance application procedure within the customer’s checkout process. For instance, while booking a flight, travelers have the option to purchase insurance coverage during the checkout process.
2. Embedded Investing
The next on our list of embedded finance examples is embedded investing. Embedded investment firms include apps like Cash App, Acorns, and Robinhood that incorporate stock market investing. Therefore, you can trade, buy, and sell stocks without ever leaving the app or consulting an investing advisor.
3. Embedded Lending
Among our examples of embedded finance, we have embedded lending. Embedded lending is an additional layer of ‘buy now, pay later’. Customers don’t even need to visit a conventional financial institution to apply for loans; companies can offer loans through their embedded finance solutions.
Check out: Is Finance a Good Career Path?
4. Embedded Buy Now, Pay Later Installment Plans
Before the advent of embedded financial technology, customers had the option of using layaway. This allowed them to purchase an item in-store and reserve it with a deposit. It would remain in the store’s possession until the buyer could make the payment.
However, businesses can now provide ‘buy now, pay later services’, allowing customers to purchase a product immediately and pay for it gradually through installments. When checking out on a mobile device, this embedded installment plan option is displayed. For instance, Afterpay provides four interest-free installment options as a ‘buy now, pay later’ option.
5. Embedded Payments
Perhaps one of the most well-known kinds of embedded finance examples is embedded payments. Embedded payments are supported by Amazon, Uber, DoorDash, Walmart, and Instacart. They allow users to place orders and make payments all through one app.
Other examples of embedded payment apps that allow users to save bank data and complete transactions in one location are Venmo, Apple Pay, and Google Pay.
What is The Future of Embedded Finance?
Embedded finance is a rapidly growing trend that is expected to have a significant impact on the future of finance. By making financial services more accessible and convenient, embedded finance has the potential to improve the lives of consumers and companies alike.
In the future, embedded finance is expected to become even more integrated into our daily lives. Hence, we can expect to see it used in various settings, from e-commerce and retail to healthcare and education.
As embedded finance continues to evolve, it will play an increasingly important role in the way we interact with money.
Embedded finance is the integration of financial services into non-financial platforms and experiences. This means that customers can access financial services without having to leave the platform they are already using.
Additionally, you can expect to experience more of this in the coming years as it helps customers and companies to transact and do business conveniently.