Tuesday, December 6, 2022

Embedded finance: the next phase of growth in Fintech

embedded finance

Financial services have always been the nervous system of the global economy, a critical system that must always provide effective and equitable services for social cohesion and enhanced development.

While advancements in the Fintech industry have grown tenfold, the legacy 20th century business models in finance have grown out-of-date, with many not even adapting to the fundamental paradigm shift – technological, institutional, and societal – ushered in by the monumental transition from an Industrial to an Information Age.

As such, these business models need to be reshaped to better serve the needs of the market and keep up with the ever-changing technological tides.

The current buzz around Fintech right now is embedded finance, which, according to UK-based venture investment firm Anthemis, is predicting a market-wide revenue of almost $7 trillion in the next decade.

What is embedded finance?

Embedded finance is the integration of financial services within a non-financial app, website or platform. The biggest and easiest example of this is done via ride-hailing apps; when a customer pays for a ride at the end of the journey directly on the ride-share company’s app, they are using embedded banking.

They do not need to fumble with cash or hand their payment card to the driver. In fact, they don’t even need to say a word to the driver at all. They can simply exit the vehicle and finish up the transaction on their phone.

The same can be applied to Amazon loans, Apple Cards, booking a parking space directly from the Google Maps app, and Shopify merchant accounts.

How it works

Embedded finance can take on many shapes and forms, but traditionally fall into three categories:

  • The transfer of value in space:  This category includes payment processing and traditional bank products such as savings and checking accounts.
  • The transfer of value in time: This category includes investments as well as loans and other forms of financing.
  • Managing risk: This category includes insurance and other products that provide some layer of protection against risks.

All of these can be integrated into non-financial services and platforms delivered on the Internet. The difference between embedded finance and different forms of integration is that it paves the way for cross-industry integration.

This can be seen via the popular rise of digital wallets, in which a person stores their payment card information on the app. The credit or debit cards are issued by a traditional bank.

From there, customers can use the app to pay for purchases in brick-and-mortar stores, online payments, as well as the ability to transfer money to other users of the app without having to type in their bank account or credit card information each time.

Thus, the versatility of embedded finance can be a widely impactful tool for businesses to open various revenue streams, as it allows all sectors to become more Internet-enabled ultimately leading to be “finance-enabled.”

What’s on the horizon?

Previously, organizations who wanted to integrate financial services within their business models had to deal with massive heaps of operational coordination and technological plumbing in the background.

As Banking-as-as-Service (BaaS) is on the rise, technology-driven suppliers that underpin the infrastructure of banking is also meeting it upwards in parallel for both financial services and non-financial companies.

“While embedded finance is still a nascent field, we expect many more use cases to come. It’s a great opportunity for selected start-ups, SMEs and large corporates to create more client value, while capturing new revenue lines,” the report by Anthemis said.

This gives embedded finance companies an edge due to their ability to streamline operational capabilities through distribution, data, and resources, which in turn, provides a major boost to the worldwide startup ecosystem.