what is embedded finance

Embedded Finance: How it is Disrupting Banking as we know it?

Embedded finance – integrating digital financial products and services into a non-finance business’s broader offering – is set to transform financial services.

The shift to digital has accelerated during the COVID-19 pandemic and boosted demand for new online solutions.

In emerging markets, embedded finance will enable the “underbanked” and “unbanked” to get control of their financial needs like never before, reducing reliance on the traditional banking sector. This is a vast market in Southeast Asia, for example, where only half of the adult population has a bank account

Banks will be impacted significantly by these changes, while agile fintech startups will grasp opportunities to build customised “embedded” solutions for businesses. A report by Google, Temasek, Bain & Company predicts that digital financial services such as lending, investment and insurance will each grow by more than 20% annually through 2025. For banks to succeed in this changing space they’ll need to partner and collaborate with fintech firms to take advantage of each other’s respective strengths.

Let’s look at some of the drivers of this fast developing space.

How Businesses Benefit from Embedded Finance 

Until fairly recently, companies that wanted to set up a financial service involving payments would have approached a bank. But today, they can access financial services via an ever-expanding pool of fintech firms offering Banking-as-a-Service. Fintech firms deliver embedded finance via an API – clever software that operates in the background, enabling different apps to talk to each other across multiple channels, including mobile and web, in a smooth, automated manner. In China, for example, Alipay and WeChat Pay have been disrupting the payments space in this way with great success for many years with their e-wallets.

The benefits to businesses are clear. Embedded finance is similar to outsourcing to a specialist, only it’s much more efficient and frictionless. A company can continue to focus on their core business-critical activities, such as customer acquisition, while leveraging the “embedded finance” services provided by a third-party. By adopting the embedded finance approach, companies can develop a wide range of new offerings such as lending, global payouts, trading, and card issuing, while also improving and streamlining their internal operations.

Embedded finance extends a company’s product offering to their existing customers who trust them for other core services already, so it increases their value proposition and customer loyalty. And more finance products can be added over time as customer buying trends and needs evolve, without a company having to invest in costly technological development or extra back-office resources. They simply slot in another embedded finance API and let that do all the hard work.

Big tech companies, such as Airbnb, Grab, Uber, and Amazon now offer a range of financial services to their customers, from debit cards, instant payouts and currency exchange to loans. Meanwhile, most telecom operators now offer digital wallets and innovative solutions for cross-border payments direct from their software application.

Customers Enjoy A Seamless Payment Journey

There are wins for users, too. Today, consumers expect to buy finance products online as quickly and effortlessly as any other e-commerce shopping experience. They want to buy insurance or arrange a loan as easily as purchasing groceries or ride-hailing, for example. But they don’t want the hassle of being redirected to another app. If their favourite platform can simplify their payment journey and provide a seamless experience, they will be happy.

Embedded finance is a rapidly evolving space, with regulatory measures still catching up with the pace of development in most markets. New rules might limit the scope of growth of new financial products and services offered by non-finance enterprises. In the meantime, banks will need to behave as nimbly and innovatively as the fintech startups if they want to keep up with demand for digital finance services.

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