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Embedded Finance

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Embedded finance – a brief introduction
“Embedded Finance” is the coupling of a non-financial offering with a financial service. The applications offering sports goods, dress materials, medicines and groceries are catering a service for a price paid by the customer where no external finance is involved. The user may use a payment gateway or cash on delivery to avail the service. But in case, if the application provider is experiencing a trend of customers not buying the goods added to shopping cart due to shortage of fund, then he might need to offer loans in the form of BNPL to its customers. Hence, he partners with a financial partner to extend the credit services to augment the revenue of the business. In a brief, Embedded finance enables customers to obtain financing while buying the product / service without going to the bank to apply for loan and make the purchase. These services are made available at the point of sales. 

Example: The ticket booking system recommends travel insurance while booking an international air ticket.

 

Few Embedded finance models

  1. Embedded payments
    This helps in faster checkout and settlement process on offering a great payment experience by not letting the customer to switch between apps to make payments for the product. In simple terms, you will get embedded banking service without the need for savings account and it enables customer to skip the usual checkout and process the payment with a single click directly on application or website. 
    For Example: Apple pay, which is a payment gateway that act as digital wallet and supports all payment networks and also credit cards. 
  2. Embedded investment
    Customer can access funds and stocks where it allows user to make use of investment services like investing in stock market, mutual funds, account creation, secured portfolio management and also retirement plans using the product. 
  3. Embedded banking
    The banking services are provided by non-financial players (FinTech). User can hold and transact funds, make investment, apply loans, smart cards using a single platform. The banking services are more efficient and they are cost effective compared to normal banking. 
  4. Embedded lending
    Enables customer to get credit right at the point of purchase and eliminates need for third parties or any lengthy paper work for the credit.For example: BNPL service allows user to apply for the required credit and to repay the loan in a specific period of time within the platform. 
  5.  Embedded insurance
    Enables customer to get a personalized and secured insurance at the point of sale. Software platforms allows user to connect with the insurance providers where it is easy to bundle insurance with the product / service. Simply, the insurance plan is integrated with the product/service that is being purchased.For example: Train tickets allows user to buy travel insurance with a minimal cost. 

 

Major participants in embedded finance services

  • Digital platform:
    The digital platform should be functionally scalable to accommodate the growing demands (like block chain, NFT’s, crypto currencies) of end customers or target enterprises with the help of mobile application or website which is owned by non-financial / fintech for customer interaction. They can offer embedded customized financial solution to customers in the platform. The marketable features of the product should ease automated expansion of its offerings in multiple geographies. The platform should ensure enhanced security adhering to the laws of the country. 
  • Embedded finance infrastructure:
    While the customer facing interface helps in increasing the footprints to the digital platform, the end-to-end Software tools (like APIs and SDKs), the code repositories, the underlying software and a secured hardware infrastructure, owned by non-financial platform owner or fintech to onboard the products or services, acts as a strong backbone to accomplish the objectives of the end users. It will also help in extending the services to confirm the credibility of users / guarantors and documents given by them, using third party integrations. The critical goals of business continuity and disaster recovery will be achieved using the infrastructure.  
  • Financial institution:
    The financial institutions extend their services to the digital platform in various formats – like loan providers, payment gateway providers and other fintech players. They are best positioned to manage the product / service requestor and associated credit risk. They use their infrastructure and network to manage and service financial needs from the perspective of embedded finance ecosystem. The more exciting part is, they use latest technologies too, which will allow companies to expand and reach profitable areas quickly. 
  • Financial Risk mitigation partner:
    They help to mitigate the financial risk of end customers and the financial institutions by extending their risk management skills. They own the risk exposures and navigate complex business issues seamlessly without affecting the profit books of digital platform and financial partner. We can also look them as a subset of financial partner who comes into picture post the delivery of product or services to end customers. 
  • Service / Product risk mitigation partner:
    They play a very crucial role in confirming the customer feedback or complaints, post the sales life cycle. They own the skills to analyze the issue reported and assign ownership with a liability percentage. In real time, they may not be exposed to the end customers until the complete analysis of claim and identification of the ownership. The process adhered by them helps in minimizing the damage to the profit and organization brand. 

 

How would they benefit

Digital platform:

  • Customer data acquisition can be used in another business vertical 
  • Expansion of business without financial liability 
  • Ever expanding business engagement models with vendors matching customer demands 

  Financial institution: 

  • A new channel of business to offer their services 
  • Innovative service / product offering to the end users 
  • Data to analyze seasonal demands and customer needs 
  • Access to risk minimized independent dynamic ecosystem to maximize revenue 

Users: 

  • Enhanced user experience via the digital platform 
  • Access to convenient and affordable financial services 
  • Feedback on the credit rating of the user 
  • Risk free product or service acquisition 

Benefits to Financial Risk mitigation partner 

  • Certified reputation and credibility due to partnerships 
  • Spreading of risk across multiple players, negative impact will get reduced
  • Knowledge in new business areas and models 

  Benefits to Service / Product risk mitigation partner 

  • Skill augmentation of its employees in products / tools / services 
  • Increasing the revenue base and its operations 
  • Process innovations to solve issues / complaints

 

Future of embedded finance
Embedded finance has grown in a relatively brief period of time, and it has the potential to grow exponentially. As we know traditional banks are not good in developing strong digital platforms and their response to tweak their products / services to match the growing demands of customers is remotely possible. But the new age digital platforms or fintech’s can efficiently partner with a bank and quickly customize their offerings based on the customer demands. In the days to come, the embedded finance is going to rule the finance market. Businesses and customers expect financial services to be available at the point of sale in a more convenient and easier to access mode. Without a doubt embedded finance is booming and it will create a new generation of best financial services.