Why Embedded Finance for Enterprise is the Next Big Thing?

The finance sector is experiencing immense changes with the addition of embedded finance for enterprises. As businesses look to stay ahead of the competition, they integrate financial services into nonfinancial platforms or applications. This practice has recently experienced tremendous growth due to technological advancements and shifts in consumer behavior. Digital transformation has enabled enterprises to provide their customers with a comprehensive one-stop-shop experience by incorporating financial services into existing products or services. This improved ease and convenience makes embedded finance for businesses an appealing solution for companies.

The emergence of embedded finance is transforming lives and businesses around the world. It’s powering a new era of customized, seamless financial services experience integrated with business services and commerce. Most notably, people can now access financial products without ever having to step foot into a traditional bank – all they need to do is log in through their eCommerce or accounting platform.

According to a Statista report the embedded finance industry in the United States generated $22.5 billion of revenue in 2020 and is projected to reach an impressive $230 billion by 2025 – a tenfold increase over five years. This rapid growth speaks to the potential of this rapidly growing embedded finance market segment. Investors, fintech, banks, payments providers, and software firms have many questions about what embedded finance entails, how to participate, and ultimately – how to win. This article will discuss these topics in detail and provide valuable insight into what it takes to succeed in an embedded-finance revolution.

What is Embedded Finance for Enterprise?

Embedded finance for enterprises is the process of incorporating financial products into digital customer journeys and experiences. This concept has been introduced for a long time, and banks have used private-label credit cards at retail chains, auto loans at dealerships, and sales financing for appliance retailers. 

However, the next generation of embedded finance for businesses is so powerful that it’s being integrated into digital interfaces such as shopping carts or accounting software platforms. As a result, customers can now acquire financial services simply as an extension of their nonfinancial journey or experience. 

Recent advancements in technology and behavior have enabled the emergence of embedded finance for enterprises. Various forms of digital commerce, software solutions for business management, digitally-native consumers, and open banking mandates have all catalyzed this transformation. This exponential market growth has generated 33% of global card spending is now conducted online (50% in the US). 

Small and mid-size enterprises have also seen increased software solutions to manage their businesses. By allowing third parties to access consumers’ banking data and conduct transactions on their behalf, open banking innovation can help create latent demand for embedded finance products.

Superapps are a great example of embedded finance, as they incorporate different financial services into their platform. This provides users with easy access to multiple services in one place and makes their lives simpler and more efficient. WeChat, for instance, is a popular superapp in China with more than one billion users. It went beyond being just a messaging app; WeChat also offers payments, banking, investment options, and insurance – all within the same platform.

Revolutionizing the Financial Landscape: The Game-Changing Potential of Embedded Finance

Embedded finance for enterprises is a powerful tool which revolutionizes worldwide nonfinancial operations. Leveraging data to refine the value of financial services, this transformative technology could replace or eliminate traditional banks and streamline various complex processes such as international money transfers, vendor payments, and, most significantly, buying insurance and other essential instruments. 

The current market outlook is highly optimistic – the Vietnam Embedded Finance Markets Report 2022 predicts that by this year alone, it will have grown at an annual rate of 66.3% to reach $336.4 million. Oracle’s research similarly estimates that over the next 10 years, its worth will exceed $7 trillion – eclipsing twice the combined capitalization of the world’s top 30 banks today! 

Why is Embedded Finance the Future of Business Growth for Enterprises?

Embedded finance can be key in resolving liquidity issues during these recessionary times. It simplifies obtaining trade credit by making it a natural part of daily business activities. Companies seek to identify and alleviate the primary point for their customers – cash flow management – by incorporating payments and Credit into their automated payable process. 

To give one example of embedded finance, let us suppose a small retail store requires new equipment for its production line. In that case, they can take advantage of embedded financial services to make the payments towards their purchase rather than waiting an extended period while the bank validates a loan. Here are some more use-cases of embedded finance:

Influence Growth Trends

Several forces are pushing embedded finance fintech development in business supply chains. Governments and regulatory bodies are implementing policy initiatives promoting digitalization while banking as a service continues to rise. All these embedded finance trends, taken together, create an environment where embedded finance for businesses can thrive.

Accelerated Digitalization

As organizations look to regain competitive advantage, accelerated digitalization has become a priority. Numerous studies have highlighted a steep increase in the adoption of digital solutions – up to 3-7 years faster than predicted. Companies are investing in technology that enables transformation across core business processes and workflows, from customer experience to supply-chain interactions. With such investments, businesses can increase operational and business agility.

Encouraging Regulatory Environment

Recent efforts by the central regulator and government encourage lenders to go beyond balance sheet-based Credit in providing access to formalized Credit. Due to the lack of available credit data, traditional financial institutions have underserved small and medium enterprises (SMEs). 

Innovators of the financial industry are finding creative ways to fill this gap and solve problems like data inequality where alternative sources such as bank accounts, cash flow transactions, invoicing information, social networks, cellular phone records, and psychometrics can be used to assess SMEs’ creditworthiness. Additionally, digitization and growth in digital payments have further facilitated these developments so that liquidity barriers can be eliminated for all businesses and consumers.

Advancement of Banking as a Service

The embedded finance market is quickly moving towards openness and connectivity. Open banking and the development of Banking as a Service (BaaS) are major drivers of embedded finance platforms. Financial institutions now offer BaaS, connecting non-bank companies to their services through application programming interfaces (APIs). For these organizations, BaaS presents a unique opportunity for cost-effective market entry and the potential to earn increased revenue.

[Also Read: How Banking-as-a-Service is enabling financial inclusion for non-bank companies]

Lower Costs

Developing custom software to offer financial services to customers was expensive, so many merchants chose not to pursue it. Not only did they need more resources and knowledge to build out these systems properly, but there were also high upfront implementation costs that caused them to rethink the idea. 

Now, however, with embedded finance fintech solutions, companies have access to third-party service providers for API integrations that are much more affordable in comparison. This makes offering their customers banking services easier and more cost-efficient.

Growing Consumer Needs

The continuing rise of embedded finance can be attributed to the consumer demand for streamlined customer experiences due in part to the prevalence of financial transactions. This has engendered a new breed of ecosystem companies offering various digital products and services. These firms have become hugely successful and continue to emerge – evidenced by IKEA’s recent 49% acquisition of Ikano Bank – demonstrating that embedded finance remains a key factor in their strategy.

Embedded Finance for Enterprise Examples

In recent times, organizations have been partnering with Embedded Finance businesses to provide financial services. Here are some significant examples of embedded finance for enterprise:

Embedded Payments

Embedded Payments provide the perfect solution for any platform or app that requires seamless payment flow. This financial service was the first to be embedded into nonfinancial product experiences, setting a high standard today; users expect a simple and intuitive payment process with every eCommerce app or SaaS platform they use. 

Embedded finance payments offer a variety of use cases: video games can facilitate in-game purchases, payroll automation software can automate their operations, educational institutions’ ERPs can benefit from integrated e-wallets and subscription-based payments, and more. Furthermore, many integrated embedded finance Payment systems now allow customers to pay in installments – a feature discussed in the next section.

Embedded Credit

Embedded Credit is a valuable digital financial solution that provides consumers an easy way to take out loans. By incorporating a credit product into nonfinancial digital platforms, customers can apply for, acquire and repay loans immediately instead of needing to leave the platform. An example of this in action is purchasing a kitchen appliance on Amazon with the option to convert it into an EMI during checkout.

Embedded Insurance

Embedded Insurance provides an opportunity to offer third-party insurance solutions with ease. This approach enables companies – like Tesla – to provide auto insurance at the point of sale, either online or in their showrooms. As such, Embedded Insurance providers have developed technologies and APIs that facilitate the integration of insurance solutions into mobile apps, websites, and partner ecosystems.

Companies generally collaborate with external insurers rather than invest significant resources into building comprehensive internal capabilities. However, connecting various traditional insurers can be difficult due to outdated technology stacks. Embedded Insurance companies have evolved to overcome this challenge by providing a unified tech stack for easy integration.

Embedded Investments

Embedded Investment is a way to integrate stock market investment services into existing platforms. This trend has been led by API-based brokerage firms, which provide microservices such as opening accounts, funding, trading, portfolio management, and market data. Many examples of embedded finance of this Investment are currently available, such as Acorns, which round people’s purchases up and invests the spare change in the stock market.

By using Embedded Investments, investors can manage their investments directly from their platform rather than having to leave to do it. Some companies even allow employees to buy stocks from within their employee portal.

Embedded Finance for Enterprise Use Cases

Embedded finance for enterprises has numerous applications, given the prevalence of financial transactions in businesses. Here, we’ll explore the most potent embedded finance use cases across industries.

Ride Now, Pay Later

Uber is an excellent example of a company that successfully implemented an embedded finance platform; they’ve revolutionized the taxi industry by digitizing payments, addressing one of the customers’ major pain points. Their Uber Wallet, Uber Pay, and Uber Cash services are highly successful due to their driver cashback rewards and the ability for passengers to pay for rides later. These powerful tools confirm that having an advantageous ecosystem is essential for consumer service companies and can give them a competitive edge.

Buy Now, Pay Later

Buy Now Pay Later (BNPL) embedded finance models have grown in popularity lately due to their ease of use and accessibility. This payment method allows customers to purchase online or in-store items with minimal interest and monthly installments. Fintech organizations can monetize these transactions by collecting a percentage from merchants’ fees. An example is Affirm, one of many BNPL providers collaborating with big-name brands such as Walmart and Amazon to offer customers an installment plan with zero-interest rates, depending on the agreement, over a period of 12 months.

Insure Seamlessly

The evolution of embedded insurance has been critical in simplifying customer journeys. Thanks to API technology, customers no longer have to engage with dedicated insurance companies or agents when looking for physical or digital coverage. In fact, according to The Evolution of Embedded Finance Report by Salesforce, 35% of general insurance sales are projected to be embedded within five years. 

For example, Uber drivers can purchase personal injury and vehicle insurance right through the Uber application; at British Airways, travel cover comes as a package deal when booking your flight. Other industries, such as vehicle rentals, can also benefit from the convenience of embedded insurance — with fewer cart abandonments and higher user satisfaction.

Decoding the Embedded Finance Landscape: Understanding the Players and Their Functions

The Embedded Finance infrastructure comprises three centralized entities that partner to create user financial solutions. These are digital platforms, financial institutions, and embedded finance companies. 

• Digital Platforms are non-financial businesses that own a user-facing digital presence through mobile applications, websites, or desktop software. They deeply understand their target audience, making the task of offering personalizing financial services within their platform easy. 
• Financial Institutions bridge the gap between regulators and companies in the ecosystem with their ability to manage credit risk, regulations, and compliance for loan requests.  
• Lastly, there are financial companies who build end-to-end software tools (APIs and SDKs) connecting all parties in the chain together, including loan journey embedding within a mobile or web app as well as other value-added services such as customer servicing, alternate data underwriting engines, loan lifecycle U.I., etc.

The Future of Embedded Finance Trends

Embedded finance for enterprise is not a passing trend; the numbers speak for themselves. According to a recent estimate, the industry is expected to be worth $7.2 trillion by 2030, and 92% of businesses say they will roll out embedded finance future projects within five years.

Openpayd research shows that 63% of consumers would highly value open banking or embedded finance solutions that could connect them and personalize their experiences across third-party ecosystems – meaning businesses respond directly to consumer demands. Moreover, 70% said they would implement embedded financial services faster if they had increased customer demand. This speaks volumes about how businesses prioritize customer experience nowadays.

In short, companies are taking notice and prioritizing the embedded finance use in business to meet customers’ needs – meaning those who don’t adapt soon may risk being left behind by competitors. There’s no denying that the embedded finance future holds great promise – not only among providers but also among business leaders and customers alike.

How can Appinventiv help?

Embedded finance use in business is revolutionizing how companies and lenders conduct business. Digital platforms are transitioning from playing minor roles to becoming major pillars in distributing financial services. As businesses and lenders leverage Embedded Finance Infrastructure, it creates new opportunities for innovation and effectiveness on both sides of the market. Outsourcing these services could give lenders access to a new demographic with more efficient monetization strategies, thus increasing profit margins.

But above all else, consumers have the most to gain from this shift. By digitizing financial services through Embedded Finance technology, customers can access affordable and tailored services that were once only available under certain conditions or circumstances.

Appinventiv offers top-notch financial software development services that can help companies seamlessly integrate embedded finance into their platforms. Embedded finance for enterprises can streamline your financial operations and take your enterprise to the next level. Contact our experts today to learn more.

It’s an exciting time indeed!

FAQs

Q. What Is An Example Of Embedded Finance?

Popular embedded finance examples include loan and financing applications that can be integrated into merchant websites at checkout and payment services embedded into social media platforms and messaging apps for easy peer-to-peer embedded finance payments. With embedded finance use in business solutions, users can make purchases or send funds without needing any additional services or websites.

Q. How Does Embedded Finance Differ From Traditional Finance?

Embedded finance models are quite distinct from traditional financial models. Instead of the customer directly engaging with financial institutions such as banks, embedded finance services are integrated into existing nonfinancial applications and platforms. Its streamlined and user-friendly structure makes it easy for customers to access financial services without leaving their current context. It can also expand financial inclusion by creating opportunities for underserved or unbanked populations.

Q. What Are The Benefits Of Embedded Finance For Businesses?

Embedded finance for enterprises offers a range of advantages as they look to scale and grow. It allows them to bring financial services into their platforms or apps, generating extra revenue and deeper customer engagement. Additionally, by leveraging customer data insights from financial transactions, enterprises can create unique products and services that meet customers’ needs—helping them build loyalty and retention. In short, embedded finance use in businesses equips them with the tools they need to succeed.

THE AUTHOR

Sudeep Srivastava

Co-Founder and Director