Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Embedded Finance: Banking Meets the Customer
Embedded Finance Research | Nov 6, 2023
Courtesy of Visa Consulting & Analytics
Embedded finance is revolutionizing the way consumers and businesses interact with financial services from lending to wealth management, and embedding them into the very platforms we use daily.
The Visa Consulting and Analytics Team (VCA) has published a report titled 'Embedded Finance - What are the emerging opportunities in this new value chain' covering key players, trends, and various examples where financial services are seamlessly integrated into non-financial digital platforms.
The Essence of Embedded Finance
Embedded finance is the integration of financial functions into environments where they were previously unavailable. Imagine buying a car from an online retailer and getting loan approval on the spot, or a gig worker receiving payments on a virtual card without ever having to visit a bank. This is the power of embedded finance – it brings banking to the customer, rather than bringing the customer to the bank.
See: Marqeta 2023 State of Payments Report: Rise of P2P Payment and Embedded Financial Services, & Hybrid Future?
Key Players in the Value Chain
- Providers: These are typically financial institutions or fintech companies that offer financial products and services through application programming interfaces (APIs).
- Enablers: They are the middleware, offering the necessary software and regulatory support to bridge providers with distributors.
- Distributors: These are the non-financial platforms – such as e-commerce sites, gig economy platforms, or even social media apps – where consumers congregate and transact.
Key Trends
According to Visa Consulting & Analytics, the embedded finance market is poised for explosive growth, with a projected compound annual growth rate of 23.9%, reaching a staggering US$776 billion by 2029. This growth is fueled by three emerging trends:
- Deep Integration of Payment Solutions -> Payment options are becoming more ingrained in the merchant ecosystem, exemplified by Grab's e-wallet, Grab Pay, which rewards users for in-app payments.
- Rise of Unsecured Embedded Lending -> There's a burgeoning demand for unsecured lending, particularly in emerging markets where flexible lending solutions are in high demand.
- White-Label Solutions -> Smaller merchants are turning to third-party white-label solutions for embedded payment systems, allowing them to compete without the need for extensive resources.
Embedded Finance Examples
See: BCG and QED Investors Global Report: Reimagining the Future of Finance 2023
These examples showcase how embedded finance is being utilized across different sectors to provide value-added services, often leading to enhanced customer experiences and new revenue streams for businesses.
- Payments: Shopify Payments allows merchants to accept credit cards directly on their Shopify store without having to integrate third-party payment providers. This streamlines the process for both the merchant and the customer, providing a seamless checkout experience. (See: VoPay Launches VoPay360 – Embedded Financial Technology)
- Lending: Affirm's integration with online retailers enables customers to apply for and receive financing at the point of sale. This allows customers to make purchases immediately and pay for them over time through installment loans.
- Issuance: Stripe Issuing lets businesses create, manage, and distribute virtual or physical cards. This can be used for managing company expenses, enabling online spending for customers, or providing flexible payment options.
- Deposits: Rideshare companies like Uber or Lyft offer drivers the ability to open an account through their app, where they can deposit their earnings. In some cases, these platforms partner with banks or fintech firms to offer these banking services.
- Insurance: Lemonade provides API-based home insurance that can be integrated into real estate websites. When someone rents or buys a property, they can immediately purchase insurance coverage as part of the transaction process. (See: Duuo by Co-operators: A New Era of Embedded Insurance for Canadian Businesses)
- Wealth Management:Wealthfront and Betterment offer robo-advisory services that can be integrated into banking apps or financial management platforms, allowing users to access wealth management services and receive personalized investment advice based on their financial data.
The Impact on Financial Institutions
For traditional financial institutions, embedded finance represents both a challenge and an opportunity. Banks and credit unions must adapt to this new paradigm by becoming more agile, embracing API-driven architectures, and forging strategic partnerships with non-financial platforms. By doing so, they can tap into new customer segments and create alternative revenue streams.
The Role of Regulation and Technology
Regulatory frameworks like open banking have catalyzed the growth of embedded finance by mandating the sharing of financial data in a secure and standardized manner. Meanwhile, advancements in technology, particularly in API infrastructure, have lowered the barriers to entry, allowing even small players to offer sophisticated financial services.
Download the 13 page PDF report --> here
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