What Is Embedded Finance & Why Is Everyone Talking About It?

In today’s digital age, customer experience is critical to any business's success. Giving consumers great interactions builds brand loyalty and makes them more likely to promote your business through word of mouth. That is why it's important to constantly seek innovative ways to delight customers. A great example of this is how many businesses in the financial services industry are using embedded finance. 

With higher demand for better customer experience top of mind, more companies are putting greater emphasis on enhancing customer satisfaction. Keeping customers happy has become an essential factor in driving business growth. In that same thread, financial service providers leverage embedded finance to create seamless financial service integrations with non-financial platforms. This allows for a more intuitive, personalised, and convenient experience for customers.

What is embedded finance?

Embedded finance merges insurance, lending, banking, and investment services with other customer offerings through APIs. Through embedded finance, nonfinancial businesses enable customers to access financial services on platforms they already use. Some examples include e-commerce websites, ride-sharing apps, and gaming platforms.

How is embedded finance different from traditional finance solutions?

In traditional finance, customers often need to visit physical branches or navigate complex online platforms. Embedded finance brings financial services directly to customers. By integrating financial services with platforms customers already use, businesses are able to:

• Eliminate friction
• Improve user experience
• Build stronger relationships with customers

Embedded finance is poised to shape the future of the industry

Embedded finance is experiencing a surge in adoption. More and more businesses are starting to recognise the value of providing seamless financial services. Many have started integrating financial services into their offerings. Aside from providing a better customer experience, embedded finance allows businesses to offer convenient and cost-effective access to financial services.

Understanding embedded finance

Core components of embedded finance

Embedded finance solutions enable companies that typically don't deal in finance to integrate checking and savings accounts, loans, insurance, debit cards, savings, and investment tools into their platforms. For embedded finance to work, three key components need to be accounted for including:

• The platform provider
• The financial service provider
• The customer

The platform provider integrates financial services into its platform, while the financial service provider offers the underlying products. The customer benefits from a seamless experience.

How it Works: A Simplified Explanation

Embedded finance uses Application Programming Interfaces (APIs) to connect non-financial platforms with financial institutions. This seamless integration of embedded finance enables businesses to:

• Empower customers to complete their purchases without leaving the platform
• Offer convenient financing options to encourage more customers to close the sale
• Expand the range of products and services offered
• Generate additional revenue through fees or commissions associated with financial services

Benefits of embedded finance

Leveraging embedded finance places both non-financial companies and traditional banks in a win-win situation. Through partnerships, traditional banks can access new markets. Meanwhile, companies that are in non-financial sectors are empowered to offer seamless payment experience and other financial services—without building an infrastructure from scratch. Aside from that, embedded finance solutions empower non-financial companies to do the following:

Enhance customer experience

Good customer experience is everything. That’s why it’s important to get it right from your customer’s first interaction and prioritise their convenience and satisfaction. By offering financial services within platforms that they already use, it saves customers time and effort. Aside from that, embedded finance solutions give you access to customer data that can help you deliver personalised recommendations and tailored financial products that enhance the overall customer experience.

Improve financial inclusion and accessibility

Embedded finance has the potential to expand financial services to underserved populations. It promotes financial inclusion by removing barriers to entry and providing access to essential financial tools.

Increase revenue streams

Integrating financial services into existing platforms can create new revenue streams for businesses. Fees, commissions, and interest income can significantly contribute to overall profitability.

Streamline operations

Embedded finance can streamline operations by automating financial processes and reducing administrative burdens. This allows businesses to focus on other business-critical competencies and improve efficiency.

Challenges and Considerations

Regulatory Hurdles and Compliance Issues

The evolving nature of embedded finance presents regulatory challenges. Businesses must navigate complex compliance requirements to ensure they operate within legal boundaries.

Data Privacy and Security Concerns

Handling sensitive financial data requires robust security measures. Protecting customer information is paramount to maintaining trust.

Potential Risks and Mitigating Factors

While embedded finance offers a lot of benefits, it also involves inherent risks. But that shouldn’t dissuade you from leveraging a powerful tool for customer experience. Instead, you should implement effective risk management strategies to mitigate various challenges such as the following:

• Operational Risks: If implemented incorrectly, embedded finance can involve various operational risks, such as system failures, fraud, and errors in data processing.
• Credit Risk: When offering financial products like loans, businesses are exposed to the risk of borrowers defaulting on their payments.
• Reputational Damage: If a business fails to manage embedded finance risks effectively, it can lead to reputational damage and loss of customer trust.

It’s important to proactively address these potential risks and implement effective mitigating factors. Here are some suggestions on how to harness the benefits of embedded finance while minimising its drawbacks:

• Robust Regulatory Compliance: Establish strong compliance frameworks and procedures to ensure adherence to relevant laws and regulations.
• Advanced Security Measures: Implement robust security measures, such as encryption, access controls, and regular security audits to protect customer data.
• Risk Management Framework: Develop a comprehensive risk management framework to identify, assess, and mitigate potential risks associated with embedded finance.
• Partner Selection: Be meticulous when looking for financial service providers to work with. Choose one with strong risk management practices to reduce the risk of operational failures and credit defaults.
• Continuous Monitoring and Evaluation: Regularly monitor and evaluate embedded finance operations to identify and address potential issues before they escalate.

The Future of Embedded Finance

The role of technology is undeniably driving the growth of embedded finance. Advancements in artificial intelligence, blockchain, and data analytics are enabling innovative solutions. As technology continues to evolve, we can expect embedded finance to become even more prevalent and sophisticated, transforming the way we interact with financial services.