Everything you need to know

Embedded finance is transforming financial services by integrating lending, insurance and investment options into nonfinancial organizations. It eliminates the need for traditional financial intermediaries and provides convenience to consumers.

As consumer behavior and technology evolve, businesses are increasingly adopting embedded finance – ways to save payment options that make it easier for customers to access financial services.

This trend is not only changing how financial services are delivered but also providing new opportunities for fintech companies and businesses to improve customer experiences, improve loyalty and expand their channels. of income.

A study from Marqeta found nearly 42% of survey respondents use traditional and digital banking providers, and the same study found that 86% of US mobile wallet users made purchases through a retailer’s embedded mobile app.

About 65% of businesses surveyed do not currently offer embedded financial services but plan to consider adding these services, according to a report from Juniper Study.

What is embedded finance?

Embedded finance includes financial services, such as lending, payment processing and insurance, to the infrastructure of nonfinancial organizations. This process is done without the need to route these services through traditional financial institutions and use companies such as Affirm, Afterpay, Klarna and Uplift to finance the purchase of a product.

Embedded finance is not a new concept. Nonbanks have offered private-label credit cards for retail stores and airlines for years. Another example involves sales financing at car dealerships. These arrangements offer a channel for the banks behind them to reach the customer without direct contact.

Customers find examples of embedded finance in the digital interfaces they interact with such as digital wallets, shopping cart platforms, loyalty apps and even social media e-commerce platforms. Embedded finance is ushering in changes in consumer behavior and technology. With the digitalization of e-commerce and business management, the opportunity to offer non-financial customer experiences has increased.

Businesses create application performance interfaces (APIs) that allow nonfinancial entities to access financial services directly on their sites. These APIs act as bridges and make it easier for businesses to integrate various financial offers and services for customers directly on their sites using a partnership with financial companies. for payment processing, insurance and loans.

Examples of embedded finance

Having financial options brings financial services to a customer when they need them instead of searching for services separately. Here are some of the most popular types of embedded financial services.

1. Embedded banking

Embedded banking is also known as banking as a service. With embedded banking, nonfinancial companies offer customers accounts under their brand. Customers use the company’s platform for business. Examples include Lyft’s checking account and debit card for drivers and Shopify’s Balance for store owners to avoid opening a separate account.

Embedded banking is designed to increase platform loyalty. This provides additional benefits such as faster payments.

2. Embedded lending

Usually, the loan is made separately from a purchase, and many buyers need a loan for some purchases. Embedded lending allows businesses to offer lending services during a sale. Before embedded lending, customers took out credit cards or a traditional loan from a financial institution — both of which could have higher interest rates. The benefits of embedded lending to a business include increased sales because customers have easy access to loan options.

The “buy now, pay later” (BNPL) option is one of the most popular forms of embedded lending. BNPL offers installments over a fixed period without interest, and the buyer can choose between different options such as weekly or monthly payments.

3. Embedded payment

Embedded payments make digital purchases faster by storing payment information, so customers don’t have to re-enter credit card information. For example, many apps like Starbucks and Panera allow users to save payment types. As a way to show brand loyalty, customers can also earn points for rewards in the app.

Social media sites also offer embedded payments to purchase featured items directly from their platforms. Recently, TikTok created an in-app wallet feature called Balance, and Facebook and Instagram offer Meta Pay.

Credit cards are just one aspect of integrated payments. Direct bank account payments from customers save the retailer from paying additional costs to credit card processors. Businesses can store all payments on their own platform so they can easily process transactions and facilitate customer purchases without ever finding their physical wallet.

4. Embedded investment

Embedded investing enables noninvestment service providers to provide clients with investment options, generating additional revenue for businesses. Typically, customers must open a new account at a financial institution such as Fidelity, Charles Schwab or Edward Jones. Users can also switch to other online stock trading options such as Robinhood or E-Trade.

Now, customers can invest in cryptocurrency with platforms they already use — like PayPal or Venmo. Consumers are looking for and expect sites to offer additional services in the way that a super app can, where people can perform multiple tasks on one platform.

5. Embedded insurance

Embedded insurance may not be new, but with the development of fintech, it is quickly spreading to digital markets. Users can buy insurance instantly using online shopping, so it is offered when people need it. There may be options, such as term. Most of the embedded insurance options come from partnerships with fintech companies. Customers add insurance to their purchases, such as an extended warranty.

6. Embedded fintech

Embedded finance can also integrate other fintech processes into a financial institute’s website or app. For example, a bank can offer additional services such as reviewing subscription services for a customer and helping them delete unused services to save money. Some services may include investing in cryptocurrency from their banking app to avoid signing up on another website.

Future of embedded finance

Embedding financial services can create new revenue streams for businesses. Working with financial providers, non-financial organizations can offer additional services and create more relationships with other businesses and consumers. Traditional financial companies will face a lot of competition, so they will find ways to offer additional services and improved customer service to remain competitive.

Niche banks, such as neobanks for employees — which enable companies to provide banking for their staff as an additional incentive to improve retention — may rise. Neobanks are also called challenger banks. They typically focus on a small number of financial services — such as savings and spending — and they insure deposits by partnering with a bank insured by the Federal Deposit Insurance Corp. Chime, Revolut and GoBank are examples of neobanks.

Embedded finance will continue to develop as some areas are still in the early stages. More sectors can offer embedded finance as consumers look for convenience​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​

Amanda Hetler is a senior editor and writer for WhatIs where she writes technology explainer articles and works with freelancers.

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