The Effect of Embedded Finance on Markets and Economy

The embedded finance market is quickly developing as the demand for more integrated and user-friendly financial solutions keeps increasing. The concept has led to efficient financial services, personalised consumer experiences, and new business revenue streams. 

Financial services have advanced massively in the last couple of years, changing how we shop, pay, and handle finances–embedded finance leads the change. 

Insurance offerings embedded in e-commerce platforms, one-click payments via a coffee shop’s app, and branded credit cards are all real-life examples that most of us use daily. 

Embedded finance dramatically alters when, where, and how people engage with financial services and opens excellent market opportunities for financial and non-financial companies. 

Such companies have benefited from improved customer engagement by 88% and customer acquisition trends by 85%. This article will look into the definition of embedded finance, how it works, and real-world examples of what is currently disrupting it. 

What is Embedded Finance?

Embedded finance is a concept that involves integrating financial services into non-financial platforms. 

Using APIs that link with finance partners, organisations in diverse industries are now integrating banking, lending, insurance, and investment functionalities directly into their apps and services. 

Image: The embedded finance graph

This is not a new concept, but one can think of the seamless buy now, pay later (BNPL) schemes at the checkout. 

However, the ubiquity of smartphones and application programming interfaces (APIs) have changed the dynamics of where and how consumers can access them. 

Today, users can easily get insured on an e-commerce site or make one-click payments easily and quickly.  

The benefits of embedded finance include convenience, strong customer loyalty, new revenue opportunities for companies, and more. This is a major departure from traditional models, where financial services exist separately from other consumer experiences.

Previously, embedded financial instruments have been present in our transactions, such as airline co-branded credit cards or insurance options with car rentals. But the digital age has gone a bit further. 

E-commerce platforms embed banking functionalities on the site, made possible by banking-as-a-service (BaaS) providers linking these services directly into the user experience.

Embedded finance has a transformative effect, improving customer experience and opening up enormous new market opportunities. 

According to projections, embedded finance can reach as much as $384.8 billion by 2029, compared with only $22.5 billion in 2020. This shows the impact this model will have on the financial environment. 

How Embedded Finance Works and Its Benefits

Embedded finance incorporates services like loans, insurance, and investments into non-financial companies’ platforms by partnering with tech partners and traditional banks. 

This is not an entirely new trend – car manufacturers have offered financing for years, and retailer-branded credit cards are a staple. 

Yet, embedded finance gained traction in the late 2010s, spurred by shifts in fintech, evolving consumer expectations, and new market opportunities, as noted in Peterson K. Ozili's study in the "Journal of Internet and Digital Economics." 

Critical drivers of embedded finance growth include: 
 

• E-commerce Expansion: As commerce moves online, businesses embed financial tools into their platforms, improving the customer experience. 
  
  This involves providing a "Buy Now, Pay Later" (BNPL) facility, branded credit cards, and rewards at checkout - all of which contribute to improved consumer experience and sales revenue. 
  
  Ride-hailingand freelance services have also introduced wallets and financial management tools to lure users. 
  
  
   
• Technological Developments: Fintech and APIs, which develop rapidly, allow for the fast-paced integration of financial services with non-financial applications. 
  
  Digital onboarding, electronic Know Your Client (KYC) procedures, and real-time data are some of the features that contribute to transaction effectiveness and user comfort. 
  
  
   
• Changing Consumer Demands: Today's consumers, used to digital solutions, tend to lean toward non-traditional providers of convenient and seamless financial services.
  
  
   
• Financial Inclusion: The benefits of embedded finance can be accessed by the unbankable, whom conventional financial institutions have shunned. 
  
  It provides the possibility of better financial inclusion through insurance integration in transactional applications or assisting the less fortunate in accessing the needed financial products. 

Embedded Finance Examples

Embedded finance allows businesses to provide personalised financial services to end customers through the client, enhancing the user experience and creating new income streams.

Below is a closer look at different sectors where embedded finance is gaining ground.

Embedded Payments

Embedded payments simplify the transaction process by embedding payment features into the interface of applications and websites.  

This also streamlines the checkout by removing the need to visit an external payment processor and improves the safety and speed of transactions.  

Major tech companies and small startups are adopting embedded payments to eliminate friction and abandonment rates at the checkout, resulting in increased conversion rates and customer satisfaction. 

Source: Freepik

Embedded Banking

On the other hand, embedded banking allows companies to offer customised financial solutions, including account management, direct deposits and financial planning.  

This unity would enable businesses to maintain power in managing the customer’s experience and collect significant data on spending behaviour and financial needs.  

For example, integrated financial management solutions allow the company to simplify operations and provide in-depth services to clients. 

Embedded Investing

Embedded investing enables companies to offer investment options as part of their service offerings and provides a convenient way to invest without visiting brick-and-mortar financial institutions. 

Such an approach makes access to investment markets easier, pushes daily consumers, and decreases the complications generally linked to investing, thus making it more approachable. 

Embedded Finance Companies

The underpinning of the embedded finance ecosystem involves embedding financial solutions into diverse platforms.  

For example, companies like Stripe provide potent APIs that allow businesses to integrate secure payment processing in their apps. Plaid acts as a channel for connectivity between bank accounts and financial applications, which increases the integrity and security of financial information communication.  

DriveWealth is another example of an embedded finance company that offers the tech needed to operate investment services in apps, which brings financial markets to consumers everywhere. 

DeFi and Embedded Finance: Benefits of Their Integration

Integrating decentralised finance (DeFi) into embedded finance is a much-needed shift in fintech. Such integration has multiple benefits, including fast transaction speeds, lower transaction fees, increased transparency, and strong immutability.  

Such characteristics of decentralised platforms complement embedded finance.

Blockchain technology allows embedded finance applications to seamlessly interoperate with decentralised services, including gaming Dapps, staking pools, metaverses, etc.  

Within these virtual worlds, companies can set up digital shops or similar premises and conduct trade in both digital and physical products.  

This integration enables smooth transactions for various products and services; hence, it is becoming increasingly popular in businesses that want to enter the growing market of virtual asset users.  

Embedded finance is displayed on platforms like crypto exchanges and betting Dapps.

Recommended Read: Understanding Decentralised Applications (Dapps) 

PayPal is a typical example of this trend, where bitcoin has been embraced and hence a union of DeFi principles and mainstream financial transactions. 

Bottom Line: The Impact of Embedded Finance on the Future of the Economy

The embedded finance market is quickly developing because of the demand for more integrated and user-friendly financial solutions. This concept is set to revolutionise the way businesses interact with consumers.  

As the space grows, it ensures easier customer transactions and constant innovation in financial service delivery and experience.  

Direct integration of financial services in digital platforms creates a more united and lively market environment that is more adaptive to a broad customer base.  

This transformation is part of a more general trend towards a user-centred and integrated financial system that aims to bring more personalisation and inclusiveness.  

Efficient financial services, personalised consumer experiences, and new revenue streams for businesses show that embedded finance is here to stay and will just get better.