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Presently a $22.5 billion market (revenue), Embedded Finance is projected to expand to $230 billion by 2025. Evidence of its eager adoption is everywhere - from ride-hailing apps and e-commerce websites to online investment platforms and ticket selling portals. The fact that it helps platforms check all the boxes when it comes to enhancing user experience has fuelled its growth.
Embedded financial services enable speed, seamlessness and an intuitive flow by eliminating interruptions in a platform’s user journey. Moreover, these services are characterised by affordable credit and customised, in-context financial offerings. This ease of use prompted 63% respondents of an EY study to declare that they would ‘highly value’ open banking and Embedded Finance solutions aimed at creating personalized experiences.
(Source: EY https://go.ey.com/3BYaWFj)
Because the user journey - from product selection to payments and financing - is confined within the platform itself, products offered become stickier, thereby reducing the cost of customer acquisition (CAC). This increases contact between the user and the platform, giving the platform recurring opportunities to build trust and lay the groundwork for future interactions.
Leveraging Embedded Finance for product releases
A platform conducive to providing embedded financial services automatically becomes one that is also highly scalable. As its captive customer base repeatedly returns to have its needs met, the merchant can introduce auxiliary products and services with the promise of the same ease as its core offering.
Consider this -
A small electronics dealer with a brick-and-mortar shop is beleaguered from all sides. He doesn’t have the required cash flow to adequately stock inventory, so he plays it safe by sticking to small-ticket product offerings. Like most small businesses, he is denied loans on account of poor or nil credit history, and he needs loans to prove his creditworthiness before credit bureaus.
By placing orders on a B2B seller platform with embedded financial services, he can avail of credit in the form of buy-now, pay-later (BNPL). Thanks to alternative data underwriting, his smartphone metadata and text messages can be scoured to get a sense of his cash flow health, instead of relying on traditional credit assessment methods.
Once alternative data parameters are analysed to greenlight the loan, the platform can push its high-ticket products while also resolving the dealer’s cash restraints. The platform empowers him to diversify his inventory, removes last-mile hesitation and wins his loyalty. The dealer will likely return to the platform for his future needs.
Inevitably, the next logical development in the Embedded Finance story is the rise of the superapp. While already established in China, Malaysia and Indonesia, tech giants in the West like Uber and PayPal are hot on the heels of their Asian counterparts to become superapps.
These apps use their embedded payments infrastructure as a pivot to branch out to other services. Alipay boasts 1.2 billion daily users availing transportation, food delivery and entertainment services. Its ever-growing suite of services is connected by its digital payments infrastructure and reserves of data that enable a personalised experience.
Superapps analyse users’ money flows corresponding with their daily online activities to serve them better. They use this data to identify dynamic customer demand and likewise deploy Embedded Finance to extend more products and services. GoJek, which started out as a bike-hailing service, identified that traffic and Indonesia's geographical fragmentation hinder not only transportation, but also delivery services. Eventually it expanded to 18 more verticals, becoming a superapp.
The role of data
When a platform successfully makes its customers stick, it creates a valuable repository of data that is telling of their spending habits, product preferences, and potential need for credit. Analysed and leveraged, these varied data points can help them plan the rollout of new products.
Armed with knowledge pertaining to various aspects of consumer behavior like their cart values, abandonment rates and overall choice of products, platforms are in a position to understand them more intimately. They can plug Embedded Finance offerings like BNPL, credit lines and wallets at the check out point and improve cart conversion rates.
Customers are therefore more likely to return to the platform and buy from it repeatedly, making way for higher average order value (AOV) and gross merchandise value (GMV). ShopKirana, a B2B e-commerce platform operating in the FMCG space, was able to double its AOV by solving cash flow problems through Embedded Finance. Ultimately, this also contributed to a higher customer lifetime value (CLTV).
Just as e-commerce platforms, data can be leveraged by software service platforms to expand their product offerings as well. For instance, payroll automation services can use data on salaries, tax obligations and investments to extend salary advances and investment advisory services.
Embedded Finance has equipped platforms to offer unprecedented ease of use, capture more customers and significantly increase loyalty. Platforms can evaluate behavioural data available with them and match the relevant customised financial service with the right product to encourage adoption. By thus building bridges, platforms smoothen the release of new products to captive customers. The role of Embedded Finance in increasing platform profitability has become indubitable - a fact demonstrated by a sharp rise in AOV, GMV and CLTV for all platforms that deployed it.