Embedded finance: the direction of the future in the payments industry
27 May 2024 15:42
Olena Gusakova is a graduate of Harvard and London Business School, MBA and MiF (Master in Finance), and a member of the 100 Women in Finance.
In the race to provide banking and payment infrastructure for embedded finance, potential winners are already beginning to emerge. At the same time, there is still time for all market participants, both newcomers and experienced players, to gain a share in this dynamic market.
Small businesses starting up today may never have interacted with a traditional bank before. By logging on to their e-commerce or accounting platform, they can open a deposit account, order a debit card, and meet most of their financial needs. The operators of these platforms are usually not banks. They are usually software companies that partner with banks and technology providers to integrate financial products into a single, convenient and easy-to-use customer experience . This new form of partnership between banks, technology providers and distributors of financial products through non-bank platforms is at the heart of what is known as the embedded finance revolution. Sitting at the intersection of commerce, banking and business services, payments was one of the first applications of embedded finance, and many ambitious embedded finance providers come from the payments industry.
The value of this integrated experience to customers helps explain why embedded finance reached $20 billion in revenue in the United States alone in 2021, according to analysts’ estimates. The market is projected to double in the next three to five years. Despite the scale of this opportunity, many banks, payment providers, fintech companies, investors, software companies, and potential distributors still do not fully understand what embedded finance is, how they can participate, and what it takes to win. These issues will be discussed in the article below.
What is embedded finance?
Embedded finance is an innovative approach that allows non-financial companies to integrate financial services into their products and platforms. This means that companies from various sectors of the economy, from retail to technology, can offer their customers a variety of financial products, such as payment systems, lending and insurance, without the need to go to traditional banking institutions.
Theevolution of embedded finance is a response to changes in consumer behaviour, with consumers increasingly favouring digital solutions and looking for ways to simplify their financial transactions. The use of digital technologies allows embedded finance to be easily integrated into users’ daily processes. For example, a small business that uses an accounting platform may be offered to open a deposit account or apply for a loan directly in the application.
Thepeculiarity of embedded finance is that it allows you to provide financial services in a context that is understandable and convenient for the end user. Thus, when a customer makes a purchase in an online store, they can immediately take advantage of a loan or instalment plan without leaving the platform. This not only simplifies the process of purchasing goods, but also creates an additional incentive to make purchases.
Embedded finance opens up new opportunities for companies, allowing them to expand their range of services, increase customer loyalty and boost their revenues . Overall, this leads to the creation of strong partnerships between traditional financial institutions and companies from other business sectors.
Digital transformation and its impact
Digital transformation is crucial to the development of embedded finance. This process is changing the way companies interact with their customers and offering them new tools for providing financial services. Digital platforms, such as mobile apps, e-commerce and social media, are becoming powerful channels for the introduction of financial products.
One of the key elements of digital transformation is the use of innovative technologies, such as artificial intelligence, blockchain and big data analytics, to create more personalised and efficient financial solutions.
Digitalisation is also contributing to increased accessibility of financial services. Thanks to online platforms and mobile applications, more people are able to use financial products even if they do not have access to traditional banking institutions. This, in turn, opens the door to greater financial inclusion, especially in regions with underdeveloped banking infrastructure.
Distribution of embedded finance
The distribution of embedded finance plays a key role in its success and market acceptance. Various business sectors, such as retailers, business platforms, telecommunications companies and original equipment manufacturers (OEMs), are actively implementing embedded finance products to increase customer satisfaction on the one hand, and to expand their market opportunities on the other.
Embedded finance enables these companies to add value to their core products and services by integrating convenient financial solutions. For example, retailers can offer consumers credit or instalment payment options at the point of purchase, thereby making their products more affordable.
It is also worth noting the role of technology companies in the development of embedded finance. They not only provide the necessary platform and tools for integrating financial services, but also play a key role in developing innovative financial products that can be easily adapted to the needs of different business models.
The role of technology and regulation
The development of technology is fundamental to the success of embedded finance. Recent advances in artificial intelligence, machine learning, and blockchain are opening up new prospects for personalising financial services and improving their security. For example, the use of artificial intelligence to analyse financial data allows for a more accurate assessment of credit risk, while the use of blockchain can ensure continuous and transparent monitoring of transactions.
At the same time, the importance of regulations cannot be underestimated. They form not only the legal framework but also guarantee compliance with security and privacy standards. Regulators around the world are actively working to adapt legislation to meet the growing needs of the digital economy and ensure consumer protection.
At the same time, technological innovations often outpace legislative processes, necessitating rapid adaptation of regulations. Regulators face the challenge of striking a balance between supporting innovation and ensuring stability and protection in the financial sector. Therefore, it is important that legislation is flexible enough to adapt to rapidly changing conditions, but at the same time ensure effective consumer protection and market stability.
Use cases and innovations
Embedded finance offers a wide range of innovative applications and use cases that are transforming traditional business models. One of the most impressive examples is the integration of financial services into retail and e-commerce.
Another important scenario is the integration of financial services into business platforms. This allows companies to provide their customers not only with basic products and services, but also with additional financial options such as cash flow management, automated lending and insurance. This creates additional value for customers.
Embedded finance also plays a key role in the development of the gig economy and freelancing. Fintech innovations are making it easier for freelancers and independent workers to access financial services such as corporate cards, cash flow management, and even insurance, making their professional lives much easier.
Identifying market leaders and future trends
Embedded finance is currently at the crossroads of significant change and innovation, becoming one of the most talked about topics in the financial services world. This concept opens up new opportunities for companies from various industries, allowing them to engage customers through more integrated and convenient financial services.
The market for embedded finance is forecast to continue to grow as more companies and industries begin to realise its potential. The main factors driving this growth are ongoing technological innovation, evolving consumer habits, and the adaptation of the regulatory environment.
At the moment, leaders in the field of embedded finance are actively working on the development and implementation of new products and services that meet the needs of modern consumers and businesses.
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