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Embedded Finance Explained: Definition Plus Examples

Embedded Finance Explained: Definition Plus Examples

Published on: 22 Feb 2024 8 min read

Nowadays, companies are constantly seeking new ways to improve customer experiences and simplify financial transactions. Embedded finance, also sometimes referred to as embedded banking, is transforming the financial industry.

Embedded Finance Explained: Definition Plus Examples

This model integrates services, such as lending, payment processing, insurance, and investments, into non-financial products and services. It provides consumers with a seamless and convenient way to manage their finances. This article explains embedded finance, its forms, and what’s in store for the embedded finance market.

Understanding Embedded Finance

Embedded finance is the integration of financial services into the infrastructures of non-financial businesses. It eliminates the need for consumers to redirect to traditional financial institutions. It also helps businesses provide services like loans, insurance, debit cards, and investments through their platforms or apps.

The rise of embedded finance is the result of different factors. One reason is the desire for quicker and easier financial transactions. Another reason is the need for small businesses to have different ways of making money.

By embedding financial services into their offerings, businesses enhance customer loyalty, increase revenue opportunities, and become more competitive in an increasingly crowded market. The integration allows customers to access different financial services without existing the platform they are using, creating a seamless customer experience.

A percent breakdown of the rising use of embedded finance globally

Types of Embedded Finance

Embedded finance encompasses various forms of payment services integration, each catering to different customer needs and business requirements.

Let’s look at the most prominent embedded finance examples.

1. Embedded payments

Embedded payments are the most well-known form of embedded finance products. Customers can make payments easily on the platform they are using, without needing external payment gateways or redirects. Companies like Amazon, Uber, DoorDash, and Walmart have successfully implemented embedded payment solutions so customers can complete transactions almost effortlessly.

Popular payment applications such as Google Pay, Apple Pay, and Venmo also offer embedded payment capabilities. They enable users to store financial information and conduct transactions within a single application.

Embedded payments offer convenience, speed up transactions, improve cash flow, and reduce expenses for businesses in payment processing. Customers prefer embedded payments because they simplify the checkout process and enhance security. With embedded payments, buyers do not need to share their payment details with multiple platforms.

2. Buy Now Pay Later (BNPL)

In recent years, Buy Now Pay Later (BNPL) has become very sought-after. These services let users make purchases and spread out the cost over time with low- or no-interest. BNPL solutions are part of the offerings of companies like Klarna, Afterpay, Affirm, and PayPal Credit. Integrated finance in e-commerce is popular as it allows buyers to make big purchases without straining their budgets.

Business owners benefit from BNPL plans by seeing an increase in sales and conversion rates. They can serve a broader range of consumers and foster client loyalty by providing flexible payment choices.

3. Embedded lending

Embedded lending is another type of embedded finance companies offer within their platforms. Customers can get loans without going through banks by applying directly through the app they are using. Klarna, for instance, allows clients to get money at the time of purchase without delaying the transaction.

Embedded lending provides businesses with an additional revenue stream and enhances customer experiences by simplifying the loan application process. It allows companies to gather customer data and use it to personalize future lending offers and improve risk assessment.

4. Embedded insurance

Embedded insurance integrates insurance coverage into the purchase process of non-insurance products. For example, customers can obtain insurance automatically when purchasing a car, a phone, or a vacation package. Companies like British Airways offer travel insurance at the time of booking, simplifying the insurance purchase process for customers.

By offering embedded insurance, businesses generate additional revenue and compete better. Customers benefit from having insurance coverage seamlessly integrated into their purchases and don’t have to seek separate providers.

5. Embedded investments

With embedded investments customers can access investment opportunities within non-investment products or services. They are able to invest in assets without going through a separate investment process. For example, consumers can invest their cash-backs from their credit or debit card in different assets.

Embedded investments offer new revenue streams and give customers convenient investment options. In addition, by integrating investment opportunities, companies can increase customer engagement and loyalty. Users benefit from simplified investment processes and higher returns.

Outline of the benefits of the financial services making up embedded finance plus examples of the organizations providing these services.

Benefits of Embedded Finance

Embedded finance offers plenty of benefits for both businesses and customers. Let’s take a closer look at some of these advantages:

For businesses

  • Additional revenue streams: Embedded finance provides businesses with new avenues to generate revenue. It diversifies their income sources beyond core products or services.
  • Enhanced positioning: By offering embedded financial services, businesses can stand out from the competition, attracting and retaining customers who value seamless financial experiences.
  • Increased customer loyalty: Embedded finance fosters customer loyalty by providing convenient and integrated financial solutions. It contributes to positive user experience and encourages customer loyalty.
  • Improved data insights: By integrating financial services, businesses gather data and gain insights into customer behavior, and financial needs. Thus, they personalize offerings and enhance customer relationships.

For customers

  • Convenience and seamlessness: Embedded finance simplifies financial transactions. Customers access a wide range of financial services within the platforms they are already using. In addition, there is no need for multiple logins or redirects.
  • Flexibility in payment and financing: Embedded finance offers flexible payment options, and installment programs like Buy Now Pay Later. It makes high-value purchases more affordable and manageable.
  • Enhanced access to financial services: Embedded finance expands access to financial services, particularly for those without traditional banking relationships. It provides an inclusive way to access all types of financial products.
  • Streamlined user experience: By integrating financial services, customers benefit from a seamless user experience, simplified account management, faster transactions, and personalized financial recommendations.

Conclusion

As technology advances and customer expectations evolve, embedded finance will become more prevalent in the financial services industry. Numerous industries and businesses have yet to embrace its vast potential. Embedded finance will change how we access and use financial services in retail, online shopping, healthcare, transportation, and more.

A prognosis of how the embedded finance market will grow by 2026, including BNPL, and a breakdown of what percentage of companies view EmFi as crucial.

We will soon see new types of embedded finance for specific financial needs and niche markets. Additionally,  blockchain, artificial intelligence, and open banking will further fuel its growth and adoption.

In conclusion, embedded finance represents a significant shift in the financial services industry. It offers businesses and customers a more convenient, accessible, and personalized approach to managing finances. By integrating financial services into non-financial platforms, businesses can unlock new revenue opportunities and enhance customer experiences.

About the Author:

Velina has been writing in one way or another most of her life. In 2020, she took a leap of faith and left advertising to explore the unlimited potential of the technology world. She is interested in topics such as FinTech, Digital and Neobanking, Payments, and Embedded Finance among others. Outside of technical writing, she enjoys vegan food, films, and creative storytelling.

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