Several nonfinancial companies have integrated financial services into their platforms in recent years. This integration is known as embedded finance. Keep reading this article to learn more about embedded finance.
Understanding Embedded Finance
Nonfinancial firms that have embraced embedded finance use APIs (application programming interfaces) to link their platforms to their financial partners, who offer various services like loans, savings, debit cards, and insurance. For instance, car dealers may partner with financial institutions to offer auto loans to their customers.
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Embedded finance began growing in popularity around 2010 when multiple online stores started to support various payment methods.
What’s Driving Embedded Finance Adoption?
There are several factors enabling embedded finance. Some include:
Shift to e-commerce: The e-commerce space is growing. To stay ahead of the competition, companies offering e-commerce services are integrating financial services into their platforms to provide a seamless customer experience. For example, some e-commerce merchants have partnered with financial companies to offer the Buy Now Pay Later payment method, while others run cashback reward programs.
Technological advancement: Financial technology has advanced over the years, thus enabling easy integration of financial services into various nonfinancial platforms. Thanks to technology, these platforms can easily conduct Know Your Customer checks to ensure all transactions are legal.
Changes in consumer expectations: Many people have become comfortable with getting financial services from nonfinancial companies, as they prioritize convenience over everything.
Serving the Underserved: Not everyone can access services offered by traditional financial institutions, but anyone can use financial services provided by companies that adopt embedded finance. This makes it possible for the underserved to access various financial products.
Types of Embedded Finance
Embedded Banking
This refers to the integration of banking services into the platforms of nonfinancial companies. For example, popular e-commerce platform Shopify offers business banking services to customers. Ride-hailing app Uber, on the other hand, has embedded a banking system that processes drivers’ deposits.
Embedded Payments
Nonfinancial companies that have embedded a payment gateway on their platforms simplify the payment process. For instance, Uber has integrated with payment apps like Venmo and PayPal to allow customers to make payments within the platform.
Embedded Lending
Companies that embrace embedded lending allow customers to access loans at the point of sale, thus boosting clients’ purchasing power. Such firms partner with Buy Now Pay Later service providers like Afterpay and Klarna.
Embedded Investing
Several investment platforms collaborate with various financial institutions to allow customers to buy or sell assets like crypto and stocks with ease.
Embedded Insurance
With embedded insurance, the process of acquiring insurance is simplified. Online travel firms like Expedia offer travel insurance covers during the booking process, providing much-needed convenience to clients. Also, car manufacturer Tesla provides insurance to customers during the buying process.
Pros and Cons of Embedded Finance
Pros
Embedded finance covers more consumer needs: From risk coverage to financing and money transfers, companies embracing embedded finance offer customized financial services covering customers’ specific needs.
Enhanced security: Respected financial partners that facilitate embedded finance already satisfy several regulatory security requirements. Therefore, customers can transact securely.
Improved user experience: Embedded finance allows customers to make payments fast, saving them time.
Increased financial access: As mentioned, companies with embedded finance integrations allow the underserved to access financial services.
Cons
Cyber attack risks: When nonfinancial companies integrate with financial service providers, they open up room for potential cyber-attacks. To reduce the risk of cyber breaches, these companies must check for vulnerabilities in their systems regularly.
Increased need for customer support: When a company embeds finance services into its platform, excellent customer support will be required to help clients whenever they are stuck. Failing to provide that support will damage company-customer relationships.
Regulatory compliance: If a nonfinancial company embeds regulated financial services like lending, it must comply with certain rules like privacy protection, customer identification, and transparency disclosures. Incompliance usually leads to legal actions against the company.