Synopsis: In this blog, we will cover the concept of Embedded Finance. It will provide you with a better understanding of what Embedded Finance is, how it is related to BaaS, its benefits, and more importantly, its growth drivers.

Traditional banking models were greatly impacted due to the Covid-19 pandemic. The profound impact on consumer demands has accelerated the evolution of technology that facilitates these demands. 

Non-financial platforms and services have optimized their offerings to solve specific needs. This introduced an extraordinary potential for Fintech companies and non-financial platforms to offer targeted integrations with the help of BaaS. 

Banking as a Service, or BaaS, is a system that allows non-bank businesses to embed financial services in their products and offerings. This will enable companies, not licensed banks, to offer loans and payment services by integrating digital banking into their setup, leading us to the concept of Embedded Finance. 

What is Embedded Finance? 

Embedded Finance or embedded banking is the seamless integration of financial services into a non-financial platform. Customers can access financial services within the ecosystem of the business, such as the website or the app. For example, today, customers can make cashless payments within an app for cabs and e-commerce platforms. 

Finance has become a component of almost every leading company’s stack or is a part of their roadmap. In simple words, Embedded Finance focuses on people and their experiences. Through this, they can access financial services within the comforts of exactly where they are without breaking their journey.

Examples of Embedded Finance include embedded payments, embedded credits, embedded insurance, and embedded investments.

Importance of Embedded Finance

Embedded Finance will be worth 7+ trillion dollars in less than a decade. Businesses in the MSME, B2C, and B2B segments can increase their customers, monetize their customer base and scale their product offering with the help of Embedded Finance. Learn more about how leading financial services can help MSMEs.

Before Embedded Finance came into existence, if any business wanted to offer financial services, they had to create a Fintech arm within their organization. This involved huge expenditure, took ample bandwidth and time to build, and years to become profitable. 

Embedded Finance provides a native Fintech experience to customers as part of non-financial digital platforms and offers financial services just when they are needed in an already familiar setup and context. It is the evolution of Digital Lending and Decentralized Finance. 

Are Embedded Finance and BaaS the Same?

Embedded Finance and BaaS are closely related. They are both tied to the digital marketplace and attempt to simplify and streamline financial services for consumers and businesses. There are many similarities between them as they both equate to the delivery of financing opportunities by providers other than standard bank systems. But there are some key distinctions as well. 

BaaS is necessary to support the Embedded Finance model. Embedded Finance takes the model of BaaS and packages it as an integrated financing option for consumers of other products and services. The front-end access to financial services defines Embedded Finance, while BaaS is defined by its back-end banking functionality.

The Benefits of Embedded Finance

Embedded finance comes with a host of benefits – both for the consumer and the businesses. Here are a few of them:

1. Ease of Access & Convenience 

While Fintech mobile app developers are constantly trying to simplify their user interface and experience, Embedded Finance does it very smoothly in the existing app of the consumer without breaking their journey.

2. Easy Payments 

QR codes, Buy Now Pay Later, Digital wallets, and rideshare insurance are some ways in which Embedded Finance crafts a seamless experience for the users.

3. Better Conversions 

The current context and setup of a non-traditional platform allow better visibility and understanding of the customer’s journey and user experience to keep optimizing and improving for this added service.

4. Increased Revenue 

For a non-traditional platform, integrating financial services can easily shoot up the revenue manifold.

Even for financial institutions, the benefits of Embedded Finance are manifold. They can now access a larger and newer pool of customers they could not reach earlier. They can easily leverage the distribution capabilities of these platforms and improve their offerings and user experiences as well. This also enables them to build a more profitable business by increasing margins and reducing costs for end customers. 

What is Leading to the Growth of Embedded Finance? 

Embedded Finance will be the next big thing, and many drivers of its growth exist. 

1. Consumer Behavior 

The emergence of digitization has massively changed consumer buying behavior. The consumer-led change has changed purchasing habits of the previous generation and a new norm for the younger ones. Everyone today is a user of or familiar with Amazon, Facebook, and Uber. 

2. Need for Adaptability 

Consumers are willing to access financial services on non-traditional platforms, especially on e-commerce sites like Amazon. Millennials are constantly on the lookout for any such offerings relevant to their usage. 

3. The Rage for Customized Services 

The younger generation is much more open to sharing their data, allowing these platforms to offer customized experiences and curate the best financial services and offerings for them. 

Leading Companies Offering Embedded Finance Today

Amazon launched its zero-interest credit service called Amazon Pay Later in 2020. They eventually launched full-fledged financial services where customers can use the platform for multiple use cases. For Amazon, adding a finance stack proved to be an immediate success.

Uber supports multiple ways to access payments via different processor integrations. The introduction of seamless payment felt so natural to users that the Embedded Finance service with the app’s own ecosystem was almost invisible to the user and was credited to a great customer experience. 

Bottom Line

Digital platforms are not the only ones taking advantage of Embedded Finance. Financial institutions are utilizing Embedded Finance to manage and service financial requests through their ecosystem. Embedded Finance is driving organizations to transform their business operations to not only stay relevant but also to provide a bespoke, affordable, and accessible service to all their customers.