Understanding Embedded Finance: Benefits and Examples

Gone are the days when we could maintain our financial operations solely with the help of banks and other financial institutions. Now we can pay, transfer money, lend, borrow, and perform other financial activities without leaving the apps.

Industry experts predict that the global embedded finance market size will reach $138 billion by 2026 as more and more companies, including giants like Walmart and Apple, leverage the technology.

But how does embedded finance work, and what exact benefits does it offer to businesses and customers? Read on to find answers to these questions.

What is embedded finance?

Embedded finance is the implementation of financial functionality into non-financial solutions, such as eCommerce platforms, social media platforms, and mobile apps. The technology allows to practically exclude traditional financial institutions from the business-customer interaction thus streamlining the settlement of financial processes.

What are the benefits of embedded finance?

Embedded finance offers multiple tangible benefits to businesses, such as:

• Enhanced customer loyalty — by providing customers with quick and efficient financial operations, embedded finance boosts customer satisfaction, leading to increased loyalty.
• Competitive advantage — ​​businesses that embrace embedded finance gain a strong competitive advantage by offering a more convenient customer experience, including swift and hassle-free transactions and user-friendly finance designs.
• Increased revenue — by integrating user-friendly and hassle-free financial services directly into their solutions, businesses significantly enhance the likelihood of customers making a purchase.
• Reduced role of middlemen — by reducing reliance on traditional intermediaries such as banks, companies can streamline processing time, eliminate unnecessary fees, and bolster security measures.
• Better data analysis — embedded finance enables businesses to gather valuable customer data related to financial transactions and behavior. This data helps companies better understand customer preferences, provide personalized offerings, and improve decision-making.

What are the main drivers of embedded finance?

There are several key factors that contribute to the increasing popularity and acceptance of embedded finance, namely advancing digitalization, COVID-19 pandemic, sharing economy rise, and increasing availability of APIs.

Here is a more detailed overview of each factor.

Advancing digitalization

Lots of businesses now establish their digital presence and offer online services. To provide the best possible customer experience, they need to process financial operations fast and frictionlessly, making embedded finance a go-to option.

COVID-19 pandemic

Social distancing and lockdown measures during the pandemic greatly increased the demand for digital banking services. Plus, this was the time eCommerce and online shopping trends boomed, further accelerating the adoption of embedded finance solutions.

Sharing economy rise

Sharing economy is steadily gaining traction, with more and more people willing to share underutilized assets or services such as rides or accommodation. Sharing economy very much contributes to the embedded finance expansion since it relies on peer-to-peer transactions, only possible if there is a fast and convenient way for transferring money between two parties.

Increasing availability of APIs

The growing availability of APIs (Application Programming Interfaces) has simplified the adoption of embedded finance for businesses. APIs allow different applications to interact and exchange information with each other. Thus, they enable businesses to seamlessly integrate existing financial services into their systems, eliminating the need to develop everything from scratch.

What are the types of embedded finance?

Depending on a business industry and specifics, there are different types of embedded finance functionality: embedded payments, embedded lending, embedded insurance, embedded banking, and embedded investment.

Let’s take a closer look at each of the types.

Embedded payments

Embedded payments allow customers to place an order and pay with a credit or debit card directly in the application. It is also possible to save a payment method for later use, so users will not have to reenter their card credentials with each new purchase.

Retail giant Walmart allows for embedded payments via its mobile application. Users can tie their credit, debit cards, and gift cards and choose between them when making a payment.

If customers want to check their receipt or need it to initiate a return, they can access all the receipts in the application anytime.

Embedded lending/Buy Now Pay Later

Embedded lending, or Buy Now Pay Later (BNPL), makes it possible for customers to obtain loans in a few clicks without the need to go to a lender or a bank. Such functionality simplifies purchases by eliminating time-consuming paperwork and lengthy approval processes.

Users can submit all the necessary information, such as personal details, income verification, and credit history, directly within the platform. The user’s eligibility and creditworthiness is then determined by the embedded lending system’s advanced algorithms.

Wayfair, a marketplace for home goods and furniture, has partnered with Afterpay and Klarna fintech companies to provide customers with a Buy Now Pay Later opportunity. It allows users to pay the total price in four payments, each scheduled to be made every two weeks.

Embedded insurance

Embedded insurance relieves customers from the burdensome task of searching for and negotiating with insurance providers. Instead, it offers an insurance package directly on the platform where they make their purchase, eliminating the need for additional arrangements.

For example, US Tesla owners have the opportunity to get insurance for their vehicles right through their Tesla apps. Tesla uses specific features within the vehicles to determine available insurance packages depending on one’s driving behavior, or Safety Score, and the car model. The insurance fee is adjusted monthly based on a Safety Score. The higher the score, the lower the price.

So, unlike traditional vehicle insurance companies, Tesla calculates your insurance rate based on your current driving behavior instead of age, gender, claim history, and driving records.

Drivers can purchase the insurance online with a debit or credit card. Tesla will automatically charge insurance payment monthly. All changes to the chosen insurance plan or clams can be made in the application as well.

Embedded banking/Banking-as-a-Service

Embedded banking, or Banking-as-a-Service (BaaS) functionality, allows companies to open checking and savings accounts and issue debit cards for their users. This means that businesses can offer their customers a full range of banking services.

Apple is one of the companies providing embedded banking services. It all began with the Apple Card, which iPhone users could apply for directly through the Wallet app. Upon approval, users could instantly use the card for mobile payments. The card charges no annual fees, foreign exchange fees, or late fees. Users can also request a physical version of the card.

In 2023, Apple partnered with Goldman Sachs bank and opened an opportunity for Apple Card holders to create a savings account with an annual percentage yield of 4.15%.

Embedded investment

Embedded investment enables businesses to offer investment opportunities to their customers directly through their platform. This can include things like stocks, bonds, ETFs (exchange-traded funds), etc.

Amazon offers an extensive range of embedded finance services, including investment capabilities. Users can conveniently invest in mutual funds and fixed deposits directly through a Wealth account within Amazon Pay. Furthermore, they can analyze and track the performance of their investments.

There is also a possibility to import users’ existing mutual fund holdings from other brokers and distributors into Wealth account for enhanced convenience.

What to consider before implementing embedded finance?

There are a number of important aspects to consider before implementing embedded finance into your business solutions. These include:

Type of embedded finance

You need to determine what type(s) of embedded finance your business should leverage based on your goals and target audience.

Regulation compliance

Since laws and regulations of embedded finance are still evolving, you should stay relevant on any regulatory changes and be well-aware of requirements in the markets your business operates.

Security

As your application will handle financial operations and collect sensitive financial information, it is a must you maintain robust security on your platform. Exposure of this data will not only negatively affect your customers but will bring you massive financial and reputational losses.

Technology

In order to successfully implement embedded finance functionality, it is crucial to have a profound understanding of the latest technologies, including APIs, cloud computing, big data, and machine learning. That’s why you will need to seek guidance from experienced fintech developers who can provide the necessary assistance.

Conclusion

Embedded finance offers great benefits to businesses and customers alike. As a big share of commerce and other services migrated to online space, we will see more and more companies embracing embedded finance in the future.

Thinking of adding some embedded functionality into your business solutions? Feel free to get in touch with us. Our seasoned consultants and developers will provide you with all the necessary details and advice on how to adopt the technology and become a go-to company for your clients.