What is Embedded Finance and how it will change FinTech in India

Devashish Mulye   /    Product Manager    /    2020-12-02

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Embedded Finance Infrastructure reduces the barrier (by 10x) for digital platforms to natively offer financial services to their customers. More than 100 million potential borrowers will benefit from tailored and embedded financial products. This makes it the biggest wave in FinTech yet.

Embedded Finance is the culmination of multiple waves of development of the FinTech infrastructure in India. The evolution of UPI and the introduction of Account Aggregators (NBFC-AA) and Open Credit Enablement Network (OCEN) has enabled new ways of building FinTech apps. 

Embedded Finance infrastructure combines forces of sophisticated tech infrastructure with capital from financial institutions, to provide best in class tools to customer-facing digital platforms. Just a little while ago, offering financial services by digital platforms required building a fintech company within the company - a process that would take up to a year to come to fruition. This is where Embedded Finance shines. It enables any platform to start offering financial services, in less than 3 weeks.

To envision how pervasive Embedded Finance will be, consider payments. Payments were the first financial service to be embedded into non-financial product experiences, and have now become pervasive in digital platforms.  Other financial services such as credit, insurance, etc. have lagged due to their complexity, but are now catching up swiftly.

Embedded Finance is one of those rare phenomena that both deeply change the landscape and are also widely applicable. It is being adopted by diverse sets of digital platforms working in the MSME, B2C and e-commerce segments to augment their business by providing financial services. 

Digital platform businesses are leveraging Embedded Finance to become the dominant solution in their industry by supercharging growth and improving margins. Platforms risk becoming obsolete if they don’t catch on quickly.

What is Embedded Finance

Embedded Finance is the native integration of financial services (such as credit products) into a traditionally non-financial service or product. It can augment the current offerings of the non-financial service, or even completely reconceptualize it. Done well, the “FinTech” part of the app becomes indistinguishable from the digital platform where it is embedded.

It is best explained by examples -

  1. A B2B eCommerce marketplace offers Buy Now Pay Later options to retailers to grow its average order value (AOV) and increase its customer lifetime value (CLTV).

  2. A Khata app offers business loans and cash advances to its MSME userbase using the understanding of the data generated on its platform.

  3. HR Tech and Payroll platforms offer tailored credit products such as salary advances and personal loans to employees on employee portals at rates that are not available to the employees from the open market.

How Embedded Finance works

In Embedded Finance, a digital platform, an Embedded Finance Infrastructure company (fintech), and a financial institution like a bank or NBFC cooperate to deliver value.

In embedded finance,  A digital platform, an embedded finance infrastructure company (fintech), and a financial institution like a bank or NBFC cooperate to deliver value.

In embedded finance, A digital platform, an embedded finance infrastructure company (fintech), and a financial institution like a bank or NBFC cooperate to deliver value.

  1. Digital platform - A non-FinTech company that owns a software platform such as a mobile app, a website, or a desktop application. It “embeds” into its platform the necessary SDK (a Software Development Kit from an Embedded Finance Infrastructure company) to enable financial services such as credit, insurance, etcetera to its customers.

  2. Financial institutions - Banks/NBFC/Small Finance Banks provide capital and access to core banking networks to the Embedded Finance Infrastructure company to build on.

  3. Embedded Finance Infrastructure company - A FinTech company that creates end-to-end software tools (API's and SDK's), processes transactions and connects financial institutions with the digital platform. It also provides crucial value-added services like UI as a service, underwriting engine (using Alternative Data, ML systems and Business Rule Engine), and more.

Why Embedded Finance works well

Financial Institutions have lagged when it comes to creating digital “in-context” customer experiences. Embedded Finance Infrastructure shines by enabling  “native” FinTech experiences “inside” the non-FintTech digital platforms which are closest to the customer.

Embedded Finance brings together multiple parties and enables them to play to their strengths. The final combination is much greater than the sum of its parts and all parties involved are benefitted.

Here’s how.

Role of digital platforms

  1. Bring customers -  Users in different domains have different financial needs. With their deep understanding of their customers, digital platforms can innovate efficiently for their customers and effectively market financial services.

  2. Develop customer trust - This trust can be leveraged to provide personalised financial services such as credit, insurance, and also cross-sell financial services to repeating customers.

  3. Leverage customer relationships to ease operations - These relationships unlock efficiency in managing the loan lifecycle. For example, the repayment of loans improves as payment reminders, deductions at source are enabled on the platforms.

  4. Bring differentiated data - Platforms have access to differentiated customer data related to the usage of the platforms and other borrower profile data. This enhances the underwriting capability and helps identify a customer's ability to pay better, reducing risk of lending. For example, a digital bookkeeping platform used by MSMEs would have information on the cash flow of that enterprise. This data can be used for credit scoring

Benefits to digital platforms

  1. They become more attractive to customers - Combining financial services with existing offerings makes platforms much more attractive to users, improving customer retention.

  2. Increase in revenue - Platforms see a revenue increase through an increase in average order value (AOV) and increasing customer retention leading to a higher CLTV (customer lifetime value). In certain cases they also benefit from a revenue share while taking on none of the financial liability. 

Role of financial institutions

  1. Bring capital to deploy - Financial Institutions are in the business of deploying capital most efficiently and have deep capability in managing regulatory, compliance, and credit risk.

  2. Manage loan lifecycle - Financial Institutions use their network and manpower to manage the servicing of loans originated by the Embedded Finance Ecosystem.

Benefits to financial institutions

  1. Access large pools of borrowers - Financial institutions can access diverse pools with specific characteristics by leveraging the distribution capabilities of platforms. For example, a digital B2B eCommerce platform like Amazon is connected with thousands of small businesses. Financial institutions don’t have close access to this network but can reach it if they collaborate with Amazon.

  2. Build a more profitable business - Enhanced underwriting (through differentiated data from platforms) and efficient loan lifecycle management unlocked through collaboration with platforms enables financial institutions to increase their margins, and reduce costs for end-customers.

Benefits to Users

  1. Better and affordable service - Users get access to better and cheaper financial services

  2. Customized offerings - Users can get tailor-made solutions that perfectly fit their requirements.

  3. Improved customer experience - Users receive financial services in-context and at the point of demand creation. They don’t have to go through a lengthy application process. This enhances their experience and makes them more likely to become repeat users.

Embedded Finance brings together multiple parties and enables them to play to their strengths. The final combination is much greater than the sum of its parts and all parties involved are benefitted.

Embedded Finance brings together multiple parties and enables them to play to their strengths. The final combination is much greater than the sum of its parts and all parties involved are benefitted.

Embedded Finance brings together multiple parties and enables them to play to their strengths. The final combination is much greater than the sum of its parts and all parties involved are benefitted.

Ultimately, Embedded Finance enables building a lending business with superior economic characteristics, leading to a win-win for customers-platforms-lenders.

Embedded finance will change credit

There are deep-seated inefficiencies in the lending value chain in India that are addressed directly by Embedded Finance.

India is primarily a new-to-credit society - Credit is unavailable or expensive because data to assess borrowers is not available - Embedded Finance surfaces data from platforms to solve this problem.

Digital discovery of credit products is hard - for most of the first new to digital population -  searching, comparing, and choosing credit products on traditional digital channels is hard. Embedded Finance solves this by conveniently positioning credit products “in-context” and by educating consumers.

Credit products need to be customized for the audience - Platforms represent their customers and are motivated by a need to improve their products and services. Platforms continuously drive customization of credit products that will create exceptional user experience

Digital small ticket loans are too expensive - Digitally acquiring, processing, and servicing a loan is currently very expensive for a lender. These fixed costs create a floor under loan ticket sizes, making the majority of the Indian population ineligible for credit. Embedded Finance unlocks massive operational efficiencies removing marketing costs, shortening digital lending journeys, and providing hooks for servicing the loans, significantly reducing the cost of processing a loan.

Embedded Credit is the biggest opportunity in Embedded Finance. 

What is Embedded Credit?

Embedded Credit is the seamless integration of Lending-as-a-Feature into digital platforms. Platforms can offer credit to their customers through a familiar interface at the point of demand creation rather than having to redirect them to a third-party site.

Embedded Credit infrastructure companies provide full-stack lending solutions to digital platforms. This includes the software infrastructure for underwriting, KYC, partnering with banks, and customer servicing. It enables them to quickly deploy multiple lending plans and execute them at a lower cost.

Ultimately, Embedded Credit produces better margins on fintech products and new go-to-market options.

All digital platforms can benefit from Embedded Finance

Companies are increasingly collaborating with fintech companies to offer financial services on their platforms to better serve their customers. This is opening new markets, and a new generation of companies emerging to serve these markets and innovate to create new products on the fintech infrastructure that is developed.

Here are a few examples of how different businesses can embed financial services.

How embedded credit can benefit different businesses

How embedded credit can benefit different businesses

B2B e-Commerce, Retail-Tech, O2O Platforms, Merchant Accounting Apps

MSME's and SME's have difficulty in availing short term credit. Digital platforms that cater to MSMEs can help them better manage cash flow and invest in growth by providing invoice financing and flexible business loans without having to redirect them to a third party. This opens up alternate revenue streams and makes their platform more reliable for the customer, improving customer acquisition and retention.

Read about how embedded finance can drastically improve Customer Lifetime Value for B2b eCommerce and Retail Tech platforms.

Payroll, HR Tech Platforms

With Embedded Credit, employers can offer advanced salary payments and small personal loans to help employees meet contingencies. This boosts employee morale and performance, and improves talent acquisition and retention.

Logistics Platform

Fuel and maintenance financing for trucking fleets and other logistics is complex. Combining logistic management with financial services can make it easier to acquire funds during periods of demand fluctuation, without having to go to third parties. This makes logistics platforms more reliable, improves their customer acquisition and retention, and unlocks new revenue streams.

Driving financial inclusion 

Embedded Finance eliminates major inefficiencies to lower the cost of financial services for end-users. It reduces the barriers for first-time customers and enables innovation where it has stagnated. It is an overall win-win for lenders, platforms, and most importantly, the consumers. This system becomes a reinforcing flywheel, ensuring its sustainability.

Embedded Finance is our best shot at driving financial inclusion. People in any socio-economic layer of society can look forward to getting access to cheaper and improved financial services.

How FinBox enables embedding financial services

FinBox Embedded Finance Platform is an API and SDK product that enables businesses to launch Embedded Credit in just three weeks with its end-to-end software and risk management stack.

With its tech-focused approach and proven underwriting stack, FinBox provides effective customer-centric Embedded Credit solutions that comply with the highest regulatory standards.