Ola Credit, Amazon Pay, Google FDs are all becoming common terms now, but come to think of it, why is your friendly cab aggregation platform offering you credit? or your e-commerce platform offering payments? The phenomenon behind all this is a concept called embedded finance, where any company offers you a product traditionally offered by financial institutions directly by partnering with them. 

It got us thinking about the quote of Venture Capitalist, Angela Strange at Andreessen Horowitz “With the growth of Embedded Finance, soon every company will be a Fintech”. 

Today, even our cab aggregators such as Ola or Uber offer some form of credit. 

Today more nonbank firms are delivering financial services such as bank accounts, wallets, payments, and lending because of embedded finance as a critical revenue driver. Nonbanks are offering banking-like services, known as embedded finance, to retain consumers and boost their so-called lifetime value to increase customer retention. Companies of all sizes and levels of development—including retailers, telecoms, big techs and software companies, automobile manufacturers, insurance providers, and logistics companies—are considering and preparing to introduce embedded financial services to serve consumers and businesses.

So, is every company becoming a fintech? Or is every company starting to act like a fintech? Let’s explore. 

Embedded Finance

The seamless integration of financial services into a non-financial platform is known as embedded finance. 

Embedded Finance refers to the integration of financial products and services into a non-financial company’s platform by using APIs (Application Programming Interfaces) in order to create a seamless experience for their users. An example of embedded finance might be booking a hotel room. In the course of booking, you might be able to purchase insurance or book travel without having to leave the app you’re currently using. You can make payments as well. This is just one of the everyday end-user applications of embedded finance. It allows customers to access financial services directly from their mobile app.

An embedded finance product has a significantly enhanced value proposition by adding financial services to increase the value of the product. In other words, embedded finance enables any business (retailers, utility service providers, brands, etc.) to manage and sell financial services as part of their customer journeys. Furthermore, embedded finance adds value to financial product providers. For example, their customers could receive seamless payments, banking, lending, insurance, or even wealth management in their experiences.  Small and medium businesses, B2C, and B2B sectors can benefit from increased customer lifetime value, increased customer monetization, and vertically scaled product offerings through embedded finance.

Embedded Finance Ecosystem 

An organisation can function as a finance solution provider using this embedded finance, which externalises the foundations of banking and enables multiple parties to participate in the process. There are three participant types in an embedded finance system.

Embedded Lending 

Lending is predicted to be one of the most popular financial services developments. An important innovation in the financial services sector is lending embedded in digital platforms. Lending is integrated seamlessly into digital platforms to create an embedded lending experience. When a customer needs credit, the platform rather than sending them to a third-party website may provide it directly. Aggregator companies like Uber/Ola or Zomato/Swiggy may offer personal loans to their partners by leveraging partner data to increase service levels.

Cards

With a modern card issuing platform and a co-brand, you may now obtain a credit card from your favourite brand. Zomato has partnered with RBL to offer Edition cards to their customers. If you frequently dine out like me, you already know about Edition cards, which Zomato offers in partnership with RBL. You apply for the credit card directly from your Zomato app, and you’ll be notified that you’ve been approved and granted a credit limit instantly. You will receive your card in seven days through the courier service. Giving their dedicated consumers with a seamlessly integrated financial service seems like the next logical step.

With the Hyperface co-brand program, now any brand can build and customise their own credit card program to their customers. Read more: https://www.hyperface.co/benefits-engine 

Why Embedded Finance? 

1. New streams of revenue

Companies can earn additional revenue by incorporating fintech into their operations. For example, they may earn a percentage of the annual fee and interchange fee from every consumer by providing credit cards. Lending services, such as Buy Now Pay Later, may generate revenue by collecting interest payments. A small transaction fee might be charged for payments made within the platform.On top of payments made through the platform, the company may earn a small transaction fee in addition to the interest paid.

2. Seamless payment process

The main advantage of managing payments on your platform is that you can oversee the payment process from start to finish. Instead of sending clients to third-party websites, you can now keep them on your ‘digital lawn.’  Companies are better able to grasp the payment habits of their consumers because they control the payment process from beginning to end.

3. Positive customer experience

A platform can identify and address customer troubles. This may result in more adaptable and seamless solutions. Rather than having to deal with three distinct corporations throughout the day to get the items associated with a major purchase, it’s convenient for users to get the items from the same source. Financial providers that are easy to use, relevant, and appealing have been identified and produced by embedded finance providers. In addition to providing high security and scalability, these features lead to a positive customer experience.

4. Financial Automation

Businesses face difficulties when recording their transactions manually.  Recording errors, loss of receipts, and accidental payments that are not business expenses are common and cause major audit problems. Companies can use financial APIs to automate accounting records to avoid overdraft fees, bounced checks, and track spending and cash flow to assist in operational planning, as well as identify fraudulent activities if an account has been compromised.

5.  Personalisation

Using open banking APIs, companies can track user behaviour patterns and trends by integrating financial services into their platforms. They can also use artificial intelligence to improve customer engagement by processing the information.

Applications of Embedded Finance 

Access to financial services should be a human right not a privilege, and that requires changing the way financial services are provided and redesigning the customer journey in what’s now called Embedded Finance.

Simply put, a non-financial brand offers financial service to create a far more seamless and customised customer experience.

Shopify, for example, offers Payments, credit, and bank account services to their users directly. Similarly, ridesharing companies like OLA offer digital wallets and pay-later options to both passengers and drivers.

Fintech firms like PhonePe and Paytm are expanding their consumer-focused services by combining mutual funds and credit offerings for both consumers and merchants. Facebook and Amazon, among other large consumer technology companies, offer digital wallets, P2P payment systems, loans, credit and debit cards to their customers.

Retail 

It is common for retail service providers to embed finance into their apps. Consumers can purchase shoes or groceries, for instance, and pay for them without ever leaving the website or app. People can pay through a variety of e-wallets, cryptocurrency exchanges, microlending apps, and other services without ever leaving the app. This boosts user engagement as well as user confidence. Once saved, customers are more likely to return to the same website since they won’t have to save their payment information all over again.

Healthcare

Healthcare costs are a serious issue for many people. In addition to the absence of clear pricing and payment options, which sometimes prevents or delays treatment, healthcare costs are especially worrisome. Embedded finance has great prospects in the healthcare sector, ranging from improved health insurance coverage to higher quality services in terms of preventive healthcare. It may also provide clear pricing and give consumers multiple payment choices. At the same time, it may lower healthcare costs, making it more profitable.

Education

The availability of educational loans online, students may take on loans with higher interest rates, which can have a negative impact on their financial health. The EdTech sector can use finance platforms to determine a student’s ability to repay loans by conducting in-depth analyses.

Real Estate

The real estate industry faces a major obstacle in the form of cumbersome documentation. By embedding finance, insurance, mortgage procedures, and lending, house purchasing could be made seamless, greatly

Embedded Finance in India – Significance and Predictions 

The embedded finance sector in India is expected to grow at a yearly rate of 46.0% and reach US$4,801.8 million by 2022 as per a report by Research and Markets. The industry is anticipated to grow at a CAGR of 30.4% between 2022 and 2029. The embedded finance sector is foreseen to generate US$21,127.5 million in revenue by 2029, up from US$4,801.8 million in 2022.

Predictions on Embedded Finance in India 

Symbiotic relationship between Banks and partner & tech players will become stronger

As opposed to the initial scepticism, banks are now open to partnering with fintech firms to introduce new financial products better and faster. Financial institutions can benefit by partnering with digital platforms by leveraging their technology and innovative mindset. Besides, banks can acquire new customers, understand existing ones better, tailor financial products to suit them, and drive repeat transactions by using this data. On the other hand, tech companies will have access to banking APIs which in turn will help them to come up with new products and services. 

Consumers will have more options at their disposal

Customers now have more choices with financial services provided by our favourite brands, due to the emergence of Embedded Finance companies. Existing services are getting better, and accessibility is improving.

Vertical SaaS will grow exponentially

SaaS businesses can now include financial services to their core software product with Embedded Finance Infrastructure. Customers in niche markets rely on dedicated software to address the majority of their issues. Consumers require software for many purposes, but they prefer to use vertical products of the same provider if possible to avoid further vetting. Embedded infrastructure will make vertical integration easier. 

The distribution of financial services will rely more on digital platforms.

Digital platforms can serve their customers better than ever before, and in ways that traditional financial institutions cannot. Customers now require digital platforms to fulfil their needs intuitively. With algorithms and data analytics tools, these platforms now have valid insights into consumer financial behaviour & have a deep understanding of their customers.  They can foster innovation and play a key role in distributing financial services to consumers effectively.

Unit economics of financial services will improve

By acquiring more customers at a lesser cost and more efficiently, financial institutions can drive repeat transactions. By improving their margins, they can offer the same financial products to their customers at an optimized cost.

Data will drive innovative financial products

Banks can customise their financial services based on new data sources such as platform data. Using this data, they will be able to undertake advanced underwriting and accept more clients. This will lead to the creation of fresh innovative financial services.

Buy Now Pay Later (BNPL) will become more popular

By 2026, revenue from embedded finance services is projected to account for more than half of the market. This development is partly due to increasingly demanding customer demands for seamless payments and convenience. Because of this, ‘all in one’ apps where consumers can purchase, pay for services, and seek credit are likely to become the norm rather than the exception.

More avenues will open up for Embedded Credit 

Lending-as-a-Service can be easily integrated into digital platforms in order to provide seamless credit. Rather than sending customers through a third-party site for credit, digital platforms can provide credit through a familiar interface at the point of demand. Lending infrastructure companies, which offer full-stack lending solutions to digital platforms, make this possible. Digital platforms can quickly deploy loan options and execute them at a lower cost with the Embedded Credit Infrastructure, which includes software infrastructure for underwriting, KYC, partnering with banks, and customer support. FinTech products and new go-to-market opportunities are better monetized and produced as a result of Embedded Credit.

Hyperface and Embedded Finance 

Hyperface powers embedded finance by helping you custom-build a unique credit program in weeks. Hyperface introduces Credit Card as a Service in Asia which enables Transaction Enrichment, Instant EMI Conversion, Intelligent Nudges, Spend Categorization & Cross-sell via smart APIs. Besides, Hyperface Smart Benefits Engine is capable of supporting Cashbacks, Vouchers, Milestone-based Rewards, and to enable 3rd party Offers and more. Any bank or brand can choose from our pre-integrated modules and unravel intuitive onboarding journeys with our simplified APIs. From customised benefits to real-time cashback, our APIs allow us to drive better customer engagement. Hyperface ensures card lifecycle management. From activation to blocking and offers card control at a click of a button for your customers. We have simplified complex technology by perfecting our APIs. From instant card issuance to real-time rewards, discover how you can build innovative financial features in minutes with Hyperface’s powerful APIs, PWA and SDKs.

Conclusion 

Embedded Finance enables companies to improve their digital platforms to reach more customers and grow more rapidly by providing easy-to-access financial services. 

Consumer brands and non-banks are finding new ways to provide consumers with a better experience by leveraging Embedded Finance in every industry, in every sector. 

There’s no doubt that the application and use cases of Embedded Finance will soon bless every portfolio and the possibilities are endless. 

However, every company cannot become a fintech company by embedding a plug & play financial element into their existing product portfolio. But every company can use fintech solutions and structure financial product and service offerings around certain embedded infrastructures and leverage them to create new revenue streams. Essentially, every company will get an opportunity to act like a fintech in limited terms via the astounding possibilities of Embedded finance.