Originally thought to be a trend, embedded finance has drastically changed the financial ecosystem, and it’s here to stay. Popular for Business-to-Consumer (B2C) relationship transactions, it has now emerged within the business-to-business (B2B) atmosphere designed to manage and grow relationships. In both main industries, the question remains: What is embedded finance, and why is it so important for the digital market?
If you’re unfamiliar with the term, embedded finance is the use of financial tools or services, such as lending or payment processing, by a non-financial provider. These means are designed to streamline the financial process for consumers, making it easier for them to access the services they need whenever they need them. Some of the most well-known examples of embedded finance include Klarna and AfterPay. Embedded Finance occurs when financial services are embedded with non-traditional financial service areas, such as banking services within a ridesharing app, insurance services within an eCommerce checkout process, and embedded services like buy now, pay later offerings.
Advantages of Embedded Finance in Fintech
Many believe that Fintech is the future of Embedded Finance. A clear benefit for both B2B and B2C marketplaces, some of these advantages include increased sales revenue, convenience, customer loyalty and sign-up rate, and analytical insights around consumer purchasing habits and preferences.
As embedded finance is a clear boss in seamless integration, it’s no wonder it has quickly become a leader in online customer experiences. Known for its extreme convenience, typically with buy now, pay later and protection insurance offerings, this frictionless proposition has allowed forward-thinking businesses to differentiate themselves in the market. With pain points for consumers removed from this equation (such as needing credit elsewhere), customers are more inclined to complete a purchase immediately instead of waiting until they have the means. This transactional method helps consumers receive immediate customer satisfaction and can drive future services and sales returns.
Since embedded finance makes customer spending so much easier, sales promotion and expedited revenue growth are increased. With prestige and trust being key characteristics for customer sign-up and loyalty, these offerings are hugely beneficial from a repetitional and brand standpoint. By not providing embedded finance as an option in overall strategy, companies risk losing their business to more forward-thinking competitors.
Most noticeable from a customer experience point-of-view, allowing these processes to be simplified and inclusive for all customers in fintech has led to a significant increase in knowledge about targeted audiences and how their purchasing patterns vary when given different payment options. With customer satisfaction top-of-mind for buyers, these characteristics have proven essential for brand loyalty and allow brands to stand out significantly from businesses only using traditional purchasing methods.
Aside from mere convenience, embedded finance, when used correctly, can be an incredible tool for consumer understanding. Taking a deeper dive into consumer behaviors, these data points can be beneficial for showcasing purchasing preferences while shopping online and on non-traditional platforms like social media. Within these ideals, businesses have the opportunity to pull data for the use of fully understanding consumers’ spending habits, wants, and needs. Additionally, embedded payment systems ensure a faster and more effective transition from traditional shopping to digital purchasing. This knowledge allows businesses the opportunity to drive future business developments toward an immediate growth trajectory.
Once these businesses have an immediate growth strategy in place, they can design goals for embedded finance projects. By continuing in this direction, you open yourself up to improving customer service, growing your existing customer base, or launching new ventures to meet specific target audiences or needs. An important first step in the embedded finance space for these businesses is understanding your company’s role in the entire financial ecosystem.
How you can Engage Embedded Finance in a Meaningful Way
There are three main methods to embed finance and banking programs into non-financial products and services; the first is investing in an additional offering into the brand’s digital platform. This can include offering lending services or creating embedded bank accounts for businesses. Secondly, you could join the embedded finance movement as a connector – a bridge between financial service providers and non-financial businesses. This method may resemble a data transfer network used by businesses willing to offer their financial products. Lastly, you could collaborate with a company focusing primarily on embedding the financial infrastructure into a product or service and becoming part of that ecosystem. The growing need for convenient financial services and the increasing number of online transactions fuels the growth of platform ecosystems, just like the growth of the embedded finance concept itself.
As the importance of embedded finance continues to rise, so does the importance of blockchain within this space. Since blockchain is known for its efficiencies and for providing greater trust and security for users, it poses a clear advantage when paired with embedded finance solutions. As the digital revolution has caught up with the financial services sector, leading to the rising demand for decentralized financial services, blockchain paves the way for speedier transactions and automatic executions. Since blockchain features revolutionary technology within fintech domains when paired with embedded finance, there are further capabilities for creating a mutually beneficial relationship.
Ensuring the success of embedded finance hinges on one crucial factor: the underlying bank or regulated financial entity must handle all compliance due diligence on customers and transactions. Regulated institutions must refrain from delegating this responsibility to a non-regulated party.
In these instances, users could save a considerable amount of time when making purchases, while businesses can save expenses of both resources and time. At the same time, embedded finance also empowers users to make purchases according to their convenience. The time factor is a formidable aspect of embedded finance, as business owners should recognize the benefits of maximizing time and opportunities to streamline many financial processes. The third key factor of embedded finance paired with blockchain is risk management. The financial services for managing risk also include products that offer safeguards against risks. The availability of payment information through a blockchain-based application could provide security and flexibility within embedded finance. In these instances, customers are more likely to complete a business transaction when using blockchain paired with embedded finance than they are to complete an online purchase otherwise.
Why Does Embedded Finance Matter?
Embedded finance has become an essential part of the global financial ecosystem. When paired properly alongside blockchain, a significant opportunity exists to create a revolutionary financial instrument. This game-changing means of purchasing has a transformative impact and serves far-reaching implications in most if not all, industries.
With traditional banking being a drastically old business model, there is typically a gap regarding advancing technologies. This means that a typical bank is more likely to have delayed operations, and customer experience is often lacking. With fintech designed around modern technology and cutting-edge specialist tools, embedded finance allows them to connect with other data sources, process information quickly, and offer significantly better user experiences to customers. Utilizing these new technologies also means that fintechs don’t have to maintain large, complex IT systems, so they can usually be relied on for more competitive pricing than traditional financial service offerings.
With the embedded finance market rapidly growing, customers and businesses expect their financial services to be consistently available and convenient. Varying between B2B and B2C spaces and industry specifications, embedded finance options grow with availability through payment processing, investing, and multiple other offerings in between. Providing these services allows companies to increase their revenue, customer retention, and loyalty and glean increased analytical target insights. As the popularity grows, there are emerging fields of opportunity within the fintech space, such as through crypto companies with abilities to bundle embedded finance products onto their platforms and expand their offerings beyond trading. As this space continues to advance further than anyone could have anticipated, embedded finance has proven itself to have the upper hand over competitors in the fintech universe and as a means for businesses to disrupt their way into the digital marketplace.