Synopsis: In this article, we map out how embedded finance is transforming the finance landscape and influencing the way customers and platform businesses interact and manage their financial relationships. 

Integrating the traditional point of sale (POS) concept with cutting-edge software technology has birthed the concept of embedded finance, or at least the payments side of it. Characterized by the entrenchment of financial services into non-financial platforms, embedded finance has been turning around the fortunes of several platform sellers, enabling their customers to enjoy value-added services along their digital journey. 

Embedded offerings have a financial core, ranging from banking, lending, payments, and insurance to tax compliance and procurement. These can either be “thin stack” with platform merchants partnering with infrastructure providers, or “full stack”, implying in-house capability building. 

Fueled by the confluence of demographic dividends, smartphone penetration, rising income levels, and deeper digital penetration, embedded finance (EmFi) is en route to making further inroads into the Indian economy, transforming the way customers and platform merchants interact online. EmFi is even expected to take over B2B transactions, improving supply chain efficiency and trade flows. 

Who are the key players in embedded finance’s value chain? 

Offering a financial service on a non-financial platform, like an e-commerce marketplace, involves the participation of three major players that are listed below, although the lines are blurring slightly with technology constantly evolving. 

1. Platform merchants: Holding the key to data and distribution, platform businesses, the non-financial element in this value chain, own the customer-facing interface in the form of a website or a mobile app. Financial services are embedded onto their platform to simplify a customer’s native journey. B2C shopping, B2B procurement, and the gig economy are some examples. 

2. Financial services providers: Suppliers of capital, such as banks, NBFCs, and other regulated financial institutions, liable for managing credit and compliance risks, fall under this category. They are responsible for providing financial backing to platform businesses making embedded offerings related to payments, lending, BNPL, and the like. 

3. Technology and infrastructure providers: Enablers of the connectivity between digital platforms and financial institutions, these infrastructure providers handle data and processes by delivering APIs. Generally, fintechs fall under this category, but conventional banks are catching up in the assistance for credit scoping, digital connectivity, and more. 

How does EmFi enable platform business models? 

As more use cases of embedded finance become available, the space for EmFi is expanding, making way for several diverse platform business models, as described below. 

• Business-to-consumer (B2C) model: B2C involves the direct offering of embedded finance products, such as in-app payments, BNPL, and insurance add-ons, by the retailer or platform business to the end customer at checkout.  

• Business-to-business (B2B) model: In this model, non-financial businesses offer embedded financial services to partner merchants (platforms) and MSMEs. It also includes fintechs enabling API connectivity by delivering technical infrastructure for enhanced payment solutions. Offerings include inventory financing, cross-border payments, digital payments, and working capital financing. 

• Business-to-business-to-consumer (B2B2C) model: B2B2C involves a technology provider (fintech/ bank) collaborating with a non-financial platform seller to offer financial products to the latter’s end customers. To put it into perspective, assume an insurtech partners with a furniture retailer platform and offers product insurance at the time of customer payment.  

• Business-to-business-to-business (B2B2B) model: Adding another dimension to the B2B model, the B2B2B model involves a fintech or technology provider partnering with a non-financial entity whose end consumer is also a business. Embedded services include lending solutions, e-wallets, and working capital financing.  

• Consumer-to-consumer (C2C): Peer-to-peer lending, car rental platforms, and marketplaces for freelancers are examples of C2C platform business models. These entail the embedding of flexible payment options, such as digital wallets and mobile-based transfers, into a digital platform that facilitates the exchange of products/ services between customers.  

• Government-to-government (G2G): In G2G, embedded products are offered by the federal government to state or local governments. This model enables the disbursement of development funds, relief packages, or payments for digital transactions. 

The embedded benefits of EmFi 

The biggest win of embedded finance is its ability to offer a greater value proposition to the customers and platform sellers making these bold integration plays. Below, we list the major benefits of EmFi to its stakeholders: 

• Revenue stream diversification: By seamlessly integrating other financial services, EmFi opens up additional revenue generation avenues for platform merchants. For instance, providing insurance at checkout enables the car retailer to earn a commission while affording its clients a seamless, one-stop solution.  

• Higher sales and customer lifetime value: Embedded finance deals with card abandonment issues—on average, 70% of consumers drop their carts—by offering integrated solutions in one place. Payment mode alternatives such as EMIs, BNPL loans, digital wallets, etc. further improve the sales pipeline and build customer loyalty by improving customer retention. 

• Better customer insights: The integration of financial services enables platform merchants to gain holistic insights into their customers’ purchasing behavior and transaction history. Using artificial intelligence (AI), machine learning (ML), and smart data analytics, they can tailor their services, improving customer satisfaction.[Text Wrapping Break] 
• Enhanced user experience: By jettisoning the need to traverse several websites, apps, and platforms, embedded financial offerings improve customer experience by making it easy and convenient to transact digitally. To illustrate, when a bank collaborates with a platform to sell co-branded cards, the users benefit from easy access to a credit card, making for a frictionless experience. 

• Expand customer reach: Financial institutions unlock several growth opportunities by embracing EmFi, including increasing their customer base and developing new distribution channels. They can also earn additional revenue by providing their payment infrastructure and credit and fraud checking services to platform businesses.  

• Improve financial inclusion: Embedded finance promotes financial inclusion by extending services to unserved and underserved populations. Easy credit options empower individuals, platform sellers, and MSMEs to invest in their growth, stimulating economic and social development. It also furthers the cause of creating a cashless economy. 

The embedded challenges for EmFi 

Even though the embedded finance market is estimated to grow fivefold to reach $248.4 billion in 2032, this growth can only come from dealing with the key risks that could impede its growth. The challenges to EmFi are listed as follows: 

• Abysmal financial literacy: With only 27% of adults and 16.7% of teenagers financially literate, embedded finance may face uptake issues as consumers share limited awareness and understanding of embedded financial offerings. Fear of poor credit usage among populations with low financial literacy may also raise regulatory pressure. 

• Data privacy and security: As platform sellers are privy to customers’ sensitive data, they must constantly update their systems to ensure the utmost data privacy. Moreover, with open banking becoming the norm and API integration becoming complex with operations scaling, they must also strive to ensure a sanitized, cyber-secure environment.  

• Regulatory compliance: While RBI’s digital lending guidelines are a start, the EmFi compliance landscape will continue to evolve, requiring more regulations that platform sellers must successfully navigate to keep their wheels rolling.  

Looking ahead 

Embedded finance promises a new paradigm for long-term success for platform businesses. By integrating contextual financial products onto their platforms, non-financial entities have been functioning as the one-stop solution for all customer needs, offering seamless experiences and deepening credit penetration. Their digital growth is sure to propel India to greater heights, augmenting financial inclusion.