While the process of digital transformation began much before, the COVID pandemic has played its part in encouraging contactless payments all across the world. The future of financial services is now being dominated by emerging trends like the “Buy Now – Pay Later” model and wearable payments. One interesting observation that is worth noting is that these financial trends are not a “fad” but are here to stay.
Is embedded finance the future of banking? Also referred to as embedded banking, embedded finance is being called the fourth platform with a market potential of over $7 trillion. Essentially, it allows consumers to access a range of financial services within a non-financial app or platform (for example, riders paying for their Uber ride within the Uber app).
What is embedded finance? Let discuss that along with some prime examples of where embedded finance is being used.
What is Embedded Finance?
Imagine an electrical appliance shop offering general insurance for all its sold products, or a car manufacturer offering free car insurance to its customers. That is in essence, what embedded finance is all about. Apart from payments, embedded finance covers the entire gamut of financial products including lending, insurance, banking, and much more.
Paul Compton of Barclays believes “embedded finance can enable a win-win-win for incumbents, startups, and consumers” in the FinTech space. Michael Gilroy of Coatue Management talks about embedded finance as “a better way to meet customer’s financial needs and getting financial products into the hands of historically underbanked individuals.”
While “traditional” financial services required non-financial platforms to invest and build a FinTech infrastructure for its customers, embedded finance reduces these barriers typically by 10x. This is how the online retail brand Amazon can offer the “Amazon Pay Later” facility to its consumers.
Let us now talk about 5 industry examples where embedded finance is being deployed.
As more non-financial companies look towards embedded finance to serve their consumers, here are 5 manifestations or examples that are showing immense potential:
Be it Amazon or Klarna, the BNPL model is now creating a new avenue of credit for shoppers. Effectively, the BNPL facility is a form of embedded financing that is offered whenever online shoppers check out after making an online purchase. In place of using a credit or debit card, consumers can immediately opt for point-of-sale (POS) financing during the checkout process to cover the value of their purchase.
Among the largest BNPL players, Afterpay has reported record sales of over $10 billion in just the first half of 2021.
Among the impacts of the COVID-19 pandemic, we witnessed large retailers and restaurants using QR codes to access their menus or make payments. For instance, major payment services like PayPal started offering QR code purchases as a form of touchless payment method. Similarly, using the Walmart Pay app, in-store customers can use their smartphones to scan and pay for their items.
Also known as embedded lending, POS lending expands the scope of BNPL by adding the creditworthiness of the borrower, thus enabling more significant or high-value purchases. Using easy-to-integrate lending tools, non-financial companies enable their consumers to access higher credit, all within the same app or platform.
San Francisco-based POS lending firm, Affirm has increased its partnership from around 100 in 2015 to over 1,500 in 2018 along with over $1 billion in POS loans. Max Levchin of Affirm says that by “adopting point-of-sale lending, merchants are acknowledging that their customers want alternatives to credit cards when it comes to paying for products or services.”
Instead of the “traditional” approach toward buying insurance, embedded insurance is growing to be a more accepted norm. In developing economies like India where insurance penetration is still on the lower side, embedded (or integrated) insurance is an easier mode of approaching consumers.
By integrating a variety of insurance products, business enterprises can help consumers select the right type of insurance and the right coverage at the point of purchase. An example of this is that of Uber offering rideshare insurance to its registered drivers.
What happens when non-banking companies start offering banking services to their consumers? This is the realm of integrated or embedded banking. Through the cloud-enabled BaaS model (or Bank as a Service), any business can now integrate banking services like digital accounts or credit card details into their mobile apps or websites.
Roland Folz of Solarisbank says that “any company that wants to invest in user loyalty and experience should focus on financial services integration.” For instance, by partnering with BBVA Mexico, Uber is now offering a digital bank account to its drivers and delivery partners.
While all this looks promising, how does embedded finance benefit its many stakeholders? Let us discuss that next.
Effectively, embedded finance offers a smooth and seamless experience to banking customers. For instance, eCommerce shoppers are less likely to abandon their shopping cart when their payment details are saved within the eCommerce app or when they can opt for the BNPL facility. For instance, using an embedded credit facility, an Amazon user can directly convert a high-value purchase into smaller EMI payments during the checkout process.
Similarly, insurance companies can now integrate their products with third-party tools and platforms, which are more acceptable for POS consumers. Through embedded finance, B2B, B2C, and SME businesses can look to improve their customer lifetime value by offering customized financial products “embedded” within their business apps or platforms.
In summary, embedded finance is improving customer satisfaction by providing consumers with seamless and hassle-free access to financial services. As a result, we are seeing growing adoption of embedded finance among direct consumer companies. As we move forward, more consumers will expect more brands to simplify buying their products with easy financing options. Brands that are not ready for this transition are likely to lose business and market share.
A modernized payment infrastructure can help in making this transition. With its expertise in integrated DevOps, Verinite is unlocking business value for its customers in the area of financial service.
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