How is Embedded Finance going to change the Fintech World?
Global giants like Amazon, Mercedes, IKEA, or Walmart are cutting out the traditional banks, the financial middleman, and plugging in software from start-ups to offer customers everything right from Credit, banking, and insurance. As a result, they have now cracked the code for Finance. Until recently, if an organization wanted to offer financial services, they were required to form a FinTech arm within their business. This included an enormous capital expenditure, which took years to develop and a long time to show profits. Embedded Finance Infrastructure reduces the barriers approximately 10x for digital platforms to natively offer financial services to their customers. Therefore, for the customer, Embedded Finance enables ‘native’ FinTech experiences inside the non-fintech digital platforms closest to the customer. Furthermore, embedded Finance brings together multiple stakeholders and enables them to play to their strengths where all the parties involved are benefitted mutually.
Who are the major players in the world of Embedded Finance Ecosystem and their roles: The Embedded Infrastructure has three key institutions which work together for providing the financial solution to the end-users.
- Digital Platforms: Non-FinTech organization which owns a customer-facing digital platform like a website, mobile app, or a desktop application and with their in-depth understanding of their target market segments, they could offer customized financial solutions to customers ’embedded’ within their platforms.
- Embedded Finance Infrastructure Organization: FinTech companies that develop end-to-end software tools such as Software Development Kit (SDKs) and APIs and connects financial institutions with the digital platform enables easy integrations to quickly import functionalities with web or mobile app. In case of the Embedded Finance, the entire loan journey is embedded within the app or the platform. It also provides critical value-added services such as loan lifecycle UI, underwriting engines, alternate data, customer servicing, etc.
- Financial Institutions: Banks, Small Finance Banks, NBFCs, their function is twofold. a) They provide financial services and are best positioned to manage compliance, regulatory, and credit risk. They use their manpower and network to service loan requests from the Embedded Finance ecosystem and manage them.
Impacts of Embedded Finance:
- Digital Platforms will play a significant role in the distribution of Financial Services: Digital Platforms are uniquely positioned to serve their customers better than ever before and in ways which a traditional financial institution cannot. The customer now is expecting digital platforms to fulfil their requirements in depth. With their deep understanding of customers, they can foster innovation and play a pivotal role in distributing financial services to the end customers.
- Banks will Partner with Technology Players: Partnering with digital platforms will enable financial institutions to leverage their vast customer data. Banks could use this data for acquiring new customers, better understand the existing ones, customize financial products, and drive repeat transactions.
- Access to Data will urge innovative financial products: Data empowers banks to tailor-make their financial products according to the needs of their end consumer. In addition, data from new sources like platform data facilitates advanced underwriting and enables them to approve customers. This will give rise to a next-gen financial products innovation.
- Continued growth in Vertical Software-as-a-Service (SaaS): Embedded Finance Infrastructure has made it possible for SaaS businesses to include financial services in their core software product offerings. Customers in the vertical markets leverage purpose built-in software, which solves most of their problem statements. Therefore, the consumer works with that organization for every software requirement. As a result, SaaS markets have one dominant player who fulfils the widest set of customer requirements.
- Increased growth in unit economics of Financial Services: Financial Institutions are able to acquire more consumers at a low cost and efficiency while driving repeat transactions. This grows their margins, which enables them to offer the same financial products to their customers at an optimal price point.
- Enhanced Customer Experience of using the Financial Services: With the plethora of upcoming Embedded Financial companies, our favourite brands are now offering financial services leading to spoilt customers with many choices. Existing services are getting better while the accessibility is set to improve by the day.
- Buy Now Pay Later (BPNL) is becoming more popular: BPNL is a service which is guaranteeing over 50% revenue of the entire Embedded Financial market by 2025. This phenomenal growth is a reflection in part of the increasingly high expectations from the customers for seamless payments and convenience. As a result, one-stop-shop apps where end-users can shop, seek Credit, pay for utilities will soon become a norm as opposed to their expectations.
- Embedded Credit: Embedded Credit is the seamless integration of “Leading-as-a-Feature” into digital platforms. Platforms can offer Credit to their customers through a well-known interface at the point of demand creation rather than having to redirect the customers to a third-party site. This is made possible through “Embedded Credit Infrastructure Orgnaizations,” which provide full-stack lending solutions to digital platforms. It includes the software infrastructure for underwriting, partnerships with banks, KYC, and customer service. It enables them to deploy the lending plans quickly and execute them at a lower cost. Embedded Credit ultimately yields better margins on FinTech products and provides new go-to-market options.
To summarize, businesses are now strategizing to integrate Embedded Finance Infrastructure either by repurposing their organization’s talent pool and resources to build in-house Embedded Finance Infrastructure, which will include technology licensing and services. As an innovation strategist, I champion Partnership Innovation Model and would recommend a partnership with the Embedded Financial Companies to leverage their expertise which will drastically reduce the time to market. Therefore, with the lending company in place as part of the Embedded Financial Solution, the expenses are shared amongst multiple stakeholders making it a cost-effective business model.
