What is Embedded Finance?

The embedded finance sector continues to expand rapidly with analysts predicting more growth in the coming months. Embedded financial systems are reshaping the financial sector and how people interact with institutions in many ways. Here is some valuable insight into what embedded finance is and how it is changing the way people conduct commerce.

Defining Embedded Finance

The term embedded finance refers to the use of third-party financial services by the traditional financial sector. There are a lot of reasons why a bank would want to leverage a private firm to conduct particular services. Primarily, these new service providers improve efficiency and lower costs.

Changes in the Market

As the use of smartphones and other devices increases, so has consumers’ desire for integrated payment solutions. Today’s embedded financial systems enable users to enjoy seamless transactions. Unlike the legacy financial system, embedded finance was designed specifically to serve the growing digital economy.

Stripe Payment Processor via Homepage – Embedded Finance

You Use Embedded Finance All the Time

Notably, most people use embedded financial systems and are not even aware of them. These systems have become more popular alongside the growth of the e-commerce market. From sending money internationally to streamlining payments, embedded finance is everywhere.

Embedded Finance is on the Rise

According to recent reports, Embedded finance is a budding industry with massive potential to upend the market. As more people turn to digital payment systems, these networks continue to gain a more favorable positioning in the market. The use of embedded financial systems grew significantly around the globe since 2021.

Reports show that the Embedded financial market expanded to $20B in 2021. This growth is nothing to the $7T market that some have predicted for the next decade. Of course, all of this growth will require some coordination. As such, there are already groups stepping up to help direct efforts.

The Global Treasurer

In November, The Global Treasurer hosted a workshop regarding the integration of Embedded financial systems into the market in the future. They touched on a host of topics regarding how the tech is morphing the markets. Specifically, the group discussed the vital role that API technology plays in the sector. Notably, an API (application programming interface) is a piece of software that enables multiple computers to communicate securely.

The group also discussed how the market is expanding in all directions. They explained that it used to be the banks’ website that was the main interface for clients. However, today many more options are taking center stage. Currently, there are merchant apps, websites, cryptos, and social media-embedded financing options taking the spotlight. The group highlighted that in the future more cooperation between financial institutions and service providers could lead to further expansion and increased flexibility for users.

Tailored Finance Solutions

Embedded financial service providers offer a user-friendly alternative for people seeking more convenience. Banks are the best at creating websites or payment features. Their rigid structure means that they are usually the last to implement new payment strategies. The use of real-time API functionality enables users to enjoy more functionality and better-supported interfaces.

Embedded Finance Payment Gateways

One key area of the embedded financial revolution that is seeing massive growth is the payment gateway sector. These systems act as intermediaries between corporate customers and banks. They often provide more streamlined options and services compared to traditional options. Another major reason why these networks are blossoming is that they enable businesses to introduce payment methods without worrying about regulatory concerns as the firm handles all of those issues.

Embedded Banking

Embedded banking is another area of the market worth watching. It used to be only banks that offered savings accounts to clients. Nowadays, you can find a host of third-party groups offering accounts. Notably, most of these options provide higher APYs compared to traditional-financial institutes.

Embedded Lending

Have you noticed that many of your favorite online retailers now offer payment plans on purchases? These payment options are usually embedded financial firms. The firm handles the financing for the merchant which makes it simple to integrate payment options and drive more purchases.

Embedded Finance – Coingate Portal

Embedded Remittance

One of the sectors that have the most to gain from embedded finance is the remittance market. Remittance is an international payment often made by migrant workers to their countries of origin. Notably, embedded remittance systems are lowering costs for these laborers and helping them to provide more support to their home countries and communities.

Advantages of Embedded Financial Systems

There are a lot of advantages that Embedded financial systems bring to the table. For one, these services can be more tailored to an individuals needs which makes them ideal for personal use. Here are some of the other reasons why embedded finance isn’t going anywhere but up.

Embedded Finance is Faster

Embedded financial systems are much faster than legacy banking options. These systems leverage advanced technologies like cryptocurrencies to improve efficiency and eliminate middlemen. Embedded financial systems found a home in helping banks transfer funding as well. These systems improve efficiency, security, and transparency for all parties.

Simpler to Use

One of the biggest advantages of embedded financial systems is the simplistic nature of these platforms. Most embedded financial platforms are new to the market. As such, they leverage the most advanced layouts to simplify integrated payments.

Easy to Integrate

The straightforward nature of embedded finance has helped it to make its way into a variety of sectors. These systems can be set up and tailored to meet very specific needs. As such, these protocols are finding new use case scenarios in industries by driving growth.

The Ecosystem of Embedded Finance

The concept of Embedded Finance has been around for some time now, but it’s only recently that businesses have started offering these products and services in earnest. By embedding their own financial products within an existing service or product, companies are able to provide customers with more options when it comes to paying for goods and services.

With Embedded Payment applications, users can conduct transactions without having to open an account with many banks or even share their financial information with the company they’re shopping with.

This secure payment method is becoming increasingly popular among online shoppers and businesses alike as it enables users to save time and money while getting access to the same type of financial services that would normally be available only at a bank branch or through traditional payment methods, allowing for a more seamless experience.

Vendor relationships are key when it comes to Embedded Finance since it focuses on creating an ecosystem of different value chain players in order to provide the best customer experience possible. This strategy enables businesses to offer financial services directly to their customers via APIs. This can help businesses in many different sectors, such as retail, e-commerce, travel, hospitality, and more, to offer customized banking solutions.

Financial services organizations, tech companies, B2B vendors, etc., all come together here in order to provide the best customer experience innovation within the platform.

In the ecosystem of Embedded Finance, banks are the providers who hold financial licenses providing financial products and services. They provide distributors with access to regulated licenses, funds, risk frameworks, and a place to hold deposits.

Then comes the enablers, which are technology providers linking Embedders-Providers, enabling them to exchange data, information, and services. They maintain and configure technology for delivering financial products to distributors via APIs. These can be entirely new businesses or new verticals in existing Big Techs.

Embedders are finally brands that provide products and services to the end users. These non-FinTech companies own a customer-facing digital platform and deeply understand target audience segments. As such, they can offer customized financial solutions to customers ’embedded’ within their platform.

The future of Embedded Finance will be greatly enhanced by new players, such as neo-banks which provide services beyond e-commerce sites by creating powerful platforms that integrate with banks, existing companies, and other financial institutions.

In addition, the emergence of BaaS (Banking-as-a-Service) platforms which allows customers to access banking products from different providers within a single platform, has enabled financial companies and banks alike to offer more tailored services for their customers within commerce environments. Therefore, this has given rise to more customer-centric models designed around customer needs rather than the traditional one size fits all approach taken by many banks in the past.

Different Forms of Embedded Finance

As technology becomes more advanced, so do the possibilities of what can be accomplished through Embedded Finance, which comes in several forms.

Buy Now Pay Later

One of Embedded Finance’s forms is the ‘Buy Now Pay Later’ (BNPL) trend which is becoming popular on online retail platforms. It is a financial arrangement under which the user gets the product immediately but pays the purchase amount in monthly installments, usually free of interest.

This option is presented during mobile checkout, and customers often get charged if they fail to pay. Sezzle, Afterpay, and Amazon (AMZN ) Pay are some popular examples of BNPL providers.

The BPNL industry is growing so rapidly in part because it’s giving consumers more freedom and flexibility to shop but also because of its ability to extend credit to consumers who might not qualify for traditional financing.

Embedded Payments

An Embedded Payment is the integration of payments infrastructure into a web page or app such as Google Pay, Apple Pay, Venmo, Amazon, Uber, and DoorDash. This is to create a seamless payment flow within an app or a platform. They can also be used for in-game purchases in video games and subscription-based payments.

This type of integration makes it easy for customers to check out as they don’t need to provide their credit card information every time they make a payment and trust a third party with their personal information.

Embedded Credit

This one is a layer of ‘Buy Now, Pay Later’ under which businesses offer loans through their embedded finance offerings without requiring the customers to go to a traditional financial institution.

Through this form of Embedded Finance, consumers can apply for, acquire, and repay loans right within the platform. For instance, the EMI option at the checkout on Amazon.

Embedded Insurance

In Embedded Insurance, insurance is bundled within the purchase of a product or service. Companies providing this option offer transactional APIs and technologies that allow insurance solutions to integrate with mobile apps, websites, and other partner ecosystems. These companies provide an easy way to connect with insurance companies without requiring consumers to meet with an insurance agent to get coverage.

For example, Tesla (TSLA ) offers auto insurance at the online point-of-sale as well as in-showroom purchases. Another example is traveling websites offering the option to purchase insurance coverage during the checkout process when booking a flight.

Embedded Investments

Popular applications like Robinhood and Cash App are examples of Embedded Investment companies that allow their users to buy, sell, and trade stocks without ever leaving the platform or working with an investment adviser.

This trend was started by API-based brokerage firms that have built APIs to reflect every microservice ranging from opening an account, funding, trading, portfolio management, and market data.

Embedded Finance is the Future

When you look at the statistics and overall state of the embedded financial market it is easy to see that these systems are the future. Embedded finance is one of the ways that the traditional financial sector has managed to stay somewhat competitive with the emergence of digital assets. In the coming months, you should expect to see these industries continue to meld thanks to the influence of embedded finance.