What Is Embedded Finance & How It Can Affect the Financial Industry

There is a development within the fintech realm that is causing so much buzz. That development happens to be embedded finance, and multiple companies are already rushing to implement it. In this post, Bogdan Kolomiyets explains the value embedded finance brings to businesses.
8 min read
12/17/21
By Bogdan Kolomiyets
Business Analyst
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What Is Embedded Finance & How It Can Affect the Financial Industry

From stores without checkouts to financial taxi applications, fintech is proving to be a truly revolutionary invention. In 2020, its market was valued at $110.57 billion, and the latest trends forecasts indicate that the figure will balloon to six times bigger by 2030.

What Is Embedded Finance?

Embedded finance is a hybrid environment that extends financial services to other ecosystems and environments through Banking-as-a-Service (BaaS) and API infrastructure. To put it simply, non-banks can offer financial services like wallets and accounts without starting from zero.

A good example is Amazon’s “Buy Now, Pay Later” business model. Amazon is not a lending institution. However, by incorporating this new model, the giant retailer can now issue automatic loans.

Embedded finance is a native of the open banking ecosystem. In open banking, banks and non-financial entities share customer data with third-party financial providers. Like in embedded finance, this business model can only be achieved through API (Application Programming Interfaces) and SDK (Software Development Kits).

Both open banking and embedded finance are excellent tools for growing revenue streams. Therefore, every business that craves to stay ahead of the curve must strive to integrate them into their systems.

What Value Will Embedded Finance/BaaS Integration Bring to Businesses?

Any business that leverages embedded finance stands to improve brand loyalty. This is because their customers get as many services as they want from one place. Such a hybrid business model increases the conversion rate by acceptable margins.

This fintech trend provides companies with the convenience of easily widening their product offering. And with that comes more revenue which could help to recoup expenses lost in tax deductions and transaction fees.

With powerful customer management tools, companies get to analyze every move a customer makes. The insights from this can be used to predict their future moves, which lets brands position themselves strategically to benefit some more.

The Meaning of Embedded Finance and BaaS for Financial Services

The boom of embedded finance and BaaS are just getting started. A recent research indicates that services such as BNPL will hit $20.40 billion by 2028. This is a clear indicator that many non-bank businesses are considering partnerships with financial providers to strengthen their lifetime value.

Insights from McKinsey state that banks will have to think about what role they will play in the revolutionary embedded finance and BaaS setup. Furthermore, these institutions will need to adopt new business models like B2B2C and B2B2B distribution abilities, pay-per-use monetization, and proper branding.

Banks may be cold feet about sharing their data with second and third parties, but soon that choice could be taken out of their hands if BaaS evolves. Those with rigid legacy systems will have to undergo modernization first in order to integrate open banking.

Fintech is on the rise and multiple non-bank corporations are already launching various products. While the future is not entirely predictable, the growth of embedded finance is not a fad. Rather, it is the future, and those who start early will dominate the market making competition arduous for others.

Graph representing market value of the embedded finance sector in the US

Source: Statista

How Will Embedded Finance Change the Future?

Here are a few common ways embedded finance will streamline business transactions:

  • Consumer lending (Buy now, pay later)

One trend that is hotting up in the fintech realm is the Buy Now Pay Later (BNPL) strategy. It simply allows online shops to let their customers buy products and pay later in installments. Top brands that use this embedded finance approach include Amazon, Klarna, Boohoo, Target, Charlotte Tilbury, Sephora, and Casper.

  • Integrated insurance services

In this approach, non-financial sellers can allow their customers to purchase insurance products and services through their platform. For example, a company that sells house remodeling services and materials can link its customers to a mortgage insurance provider for their homes.

  • Wealth management

This move intends to change the way people invest by embedding stock trading into non-financial companies. Here is a good example. Anyone consuming your primary product can buy stocks or shares of a company they like right on your platform.

  • Embedded payment (Fintech-as-a Service)

Non-fintech companies can leverage fintech-as-a-service to embed financial solutions to their platform. This gives a business the ability to process invoices, payments or even host multiple payment channels.

In the United States alone, embedded payment (the most adopted embedded finance model) brought in $16.1 billion. Insurance came in second at $5 billion, followed by consumer lending at $1.4 billion, and lastly, investments and trading barely hitting $1 billion.

Statista’s future projections for both models are breathtaking. In 2025, payments will still be leading with a glistening figure of $140.8 billion, followed by insurance at $70.7 billion, consumer lending at $15.7, and wealth management will witness a significant bump up to $2.6 billion.

Let’s look at it from the BaaS side. In 2020, Future Market Insights reports that Banking-as-a-service (of which embedded finance is an inherent part) helped companies bring in a nifty $2.5 billion. And the future insights get even better. This nascent fintech revolution’s total value is expected to balloon 5 times in 10 years to hit approximately $12.2 billion by 2031. Remarkable, isn’t it?

DataArt Clients Adopting the Revolutionary Model

Case Study 1: Credit Card Service for a Fintech Company

The client is a BaaS-based company with a line of financial tools. When they approached DataArt, they were in a start-up stage, launching their first product offerings and developing long-term business strategies.

After a while, the company was doing well, and they witnessed a surge in client base. This prompted a proactive approach to move into different locations and directions. One of the directions was to embed credit cards in their systems.

But that is where they ran into trouble. Their in-house team could not pull off the project. DataArt was mandated to take over, and, together with the company’s team, they embedded a credit card system from one of the service providers. This was done through API with multiple API calls and web-hooks.

Thanks to working with DataArt, the client’s ambitious project was realized, and they had credit card services integrated into their ecosystem seamlessly. This, as a result, allowed them to venture into new markets and sell more.

Case study 2: Embedded Insurance for a Global Credit Card Services

The client is a payment and credit card service provider. On top of that, the company also sells to its customers personalized insurance, and its cost depends on one’s behavior.

Here is where the challenge comes in. To successfully recommend a policy, this would involve calls, and sometimes the customers would be redirected to the insurance provider’s website.

This means the client could not accurately track successful transactions. The bounce rate seemed high as some customers deemed the process too complicated.

DataArt created for the client a customer-facing BaaS-based API platform that connects to the insurer's interface flawlessly. This allowed customers to shop insurance as part of their journey on the client’s platform. There was also an included API that allowed both companies (the client and insurer) to independently track and make changes when needed.

As a result, the client improved customer satisfaction, lowered bounce rates, streamlined sales, enhanced product personalization, and much more.

Benefits of Embedded Finance to the End-User

Embedded finance products provide users with a lot of benefits. The first one is faster transactions. It takes a short time to approve credits through the Buy Now Pay Later (BNPL) model compared to applying for a loan through banks or credit services. The registration process is relatively short as well.

The second benefit is increased convenience. Statistics indicate that millennials prefer to do online shopping through the BNPL model rather than paying pronto. Furthermore, the BNPL arrangement does not charge interest.

Still, for convenience, consumers would rather get a variety of services from one platform than seek them elsewhere.

The third benefit of embedded finance to end-users pertains to simple interfaces. If a few steps in their transaction are eliminated, they do not have to be redirected to third parties. Instead, they check out from the same friendly and more accessible interface.

Conclusion

Fintech, including embedded finance, is a fast-growing niche. It is poised to proliferate some companies to success by enabling them to offer more than one service. With embedded finance, for instance, online retailers can instantly turn themselves into lenders, thereby serving as a one-stop-shop for all their customers’ needs.

Embedded finance is going to make competition challenging for many companies. As companies add more services and product offerings, they become just as powerful as the Marvel character, Thanos, in his quest to collect the infinity stones.

This begs the question: how many infinity stones (embedded finance services) are you planning to collect? If you are looking for a distinguished and reputable software company to work with, you should give DataArt a call.

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