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What is Embedded Finance and how it will change FinTech

Devashish Mulye   /    Product Manager    /    2021-05-25

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Embedded Finance, also known as embedded banking, is the seamless integration of financial services into a traditionally non-financial service. It enables customers to access financial services within the app and in-context. For example, customers can make cashless payments within a ride-hailing app. Embedded Finance enables businesses in the MSME, B2C, and B2B segments to increase their customer lifetime value, monetize their customer base, and vertically scale their product offering. It’s a potentially 7+ trillion dollar market and has been called the fourth platform by Bain capital.

Download our exclusive Embedded Finance E-book here.

What is Embedded Finance

Embedded Finance, also known as embedded banking, is the seamless integration of financial services into a traditionally non-financial service. Embedded Finance Infrastructure enables customer-facing digital platforms (the ‘anchor platforms’) to ‘embed’ financial services into themselves.

Until recently, if a business wanted to offer financial services, they had to create a FinTech arm within their organization. It includes significant expenditure, takes years to build, and even longer to be profitable. Embedded Finance Infrastructure reduces the barrier (by 10x) for digital platforms to natively offer financial services to their customers.

For the customer, Embedded Finance enables ‘native’ FinTech experiences inside the non-FinTech digital platforms which are closest to the customer, and at the point of demand creation.

Examples of Embedded Finance

Businesses are increasingly collaborating with Embedded Finance companies to offer financial services. Here are a few major manifestations of Embedded Finance:

Embedded Payments

Embedded Payments refers to the integration of payments infrastructure to create a seamless payment flow within an app or a platform. Payments were the first financial service to be embedded into non-financial product experiences. Today, they have become an obvious part of the value proposition of any e-commerce app or SaaS platform.

Embedded Payments enable rich use cases such as in-game purchases in video games, payroll automation softwares, integration of e-wallets in e-commerce apps, seamless payment via ERPs of educational institutions, subscription-based payments for SaaS, and more.

Many Embedded Payment systems also allow users to pay in installments. This case is covered in the Embedded Credit section.

Embedded Credit

Embedded Credit refers to the embedding of credit products into non-financial digital platforms. This allows consumers to apply for and acquire loans, (and also repay the same) in-context, within the platform. A customer purchasing a kitchen appliance on Amazon can convert their purchase into an EMI at checkout, without ever having to leave the digital platform.

We will further explore Embedded Credit in a later section.

Embedded Insurance

Embedded Insurance refers to the bundling of insurance within the purchase of a product or service. For example, Tesla offers auto insurance at the online point-of-sale and also as part of in-showroom purchases. Embedded Insurance companies offer transactional APIs and technologies that allow insurance solutions to integrate with mobile apps, websites, and other partner ecosystems.  

Platforms prefer to partner with external insurance companies instead of building the complex capability internally. However, insurance companies work with outdated tech stacks which present a challenge to integrate. Embedded Insurance Infrastructure companies provide an easy way to connect with insurance companies through their tech stack.

Embedded Investments

In its most basic form, Embedded Investment allows platforms to integrate stock market investing into their vertical offerings. API-based brokerage firms have led the trend of Embedded Investing. They have built APIs to reflect every microservice ranging from opening an account, funding, trading, portfolio management, and market data. This allows various kinds of platforms to offer investment services to their customers in-context.

One example is Acorns, an app that invests people's spare change by rounding up purchases in a seamless and touch-free process. Embedded Investments allow investors to invest in the stock market without leaving the platform they’re on, be it messaging, payment, or social. Some employee portals allow employees to buy stocks directly from the portal.

Key players in the Embedded Finance ecosystem and their roles

An Embedded Finance Infrastructure consists of 3 key institutions that work together to provide financial solutions to users.

Digital platforms

Non-FinTech companies / businesses that own a customer-facing digital platform such as a mobile app, a website, or a desktop application. With their deep understanding of target audience segments, they can offer customized financial solutions to customers, 'embedded' within their platform.

Financial institutions

Banks / NBFCs / small finance banks. Their function is two fold. They provide financial services, and are best positioned to manage regulatory, compliance, and credit risk. They use their network and manpower to manage and service loan requests from the Embedded Finance ecosystem.

Embedded Finance Infrastructure company

FinTech company that creates end-to-end software tools (APIs and SDKs), and connects financial institutions with the digital platform. An SDK (Software Development Kit) enables easy integrations to import functionalities quickly with a mobile / web app. In case of Embedded Finance, the entire loan journey is embedded within the platform / app. It also provides crucial value-added services like loan lifecycle UI, alternate data underwriting engines, customer servicing, and more

FinBox’s Embedded Finance infrastructure can be used to offer credit solutions on your platform.

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.

Benefits of Embedded Finance

In this fireside chat between FinBox Founder and CEO Rajat Deshpande and Deepak Dhanotiya, Founder of ShopKirana, the two discuss the ways in which Embedded Finance impacts the latter’s business metrics. ShopKirana is a B2B E-Commerce platform that connects over 5,00,000 retailers across India with brands. Full transcript available here.  

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.

 

Benefits to digital platform:

  • Increases in CLTV and other key business metrics - Platforms see a boost in their revenues through a boost in their Average Order Value (AOV), customer retention, and CLTV (Customer Lifetime Value).

  • Unlocks an alternate source of revenue - Platforms benefit from a revenue share while taking on none of the financial liability. 

  • Increase in customer activation - Typically merchant-oriented businesses face very high acquisition costs. They provide expensive offers/incentives for the activation of the merchant on the platform. Adding credit is known to increase the activation of merchants on a platform in multiple ways.

  • Stand out from competitors - Offering financial services improves the product offering, vertically scales the platform, and helps it stand out from competitors.

  • Get valuable data to help understand customers better - Offering financial services unlocks valuable data about customers and their behavior which can be leveraged in interesting ways.

Benefits to financial institutions:

  • Access to large pools of customers - Financial institutions can access diverse borrower pools that have specific characteristics. They do so by leveraging the distribution capabilities of platforms (businesses) that have Embedded Finance. Example: A B2B E-Commerce platform (like Amazon) is connected with thousands of small businesses. Financial institutions can tap into this network by offering financial solutions to vendors on Amazon.

  • Build a more profitable business - Enhanced underwriting and efficient loan lifecycle management enable financial institutions to increase their margins and reduce costs for end customers.

Benefits to users:

  • Increased access to affordable financial services - Users get access to an array of flexible, easy, and cheaper financial services. They are approved for more financial services and on user-friendly terms. 

  • Receive customized offerings - Users can avail tailored financial solutions that perfectly fit their requirements.

  • Improved customer experience - In-context financial service offerings improve users’ experience on the platform.

Thus, Embedded Finance brings together several parties and helps them to play to their strengths. The final combination is much greater than the sum of its parts!

Impact of Embedded Finance

Digital platforms will play a key role in the distribution of financial services

Digital platforms are in a unique position to serve their customers better than ever before, and in ways that traditional financial institutions cannot. Customers now expect digital platforms to fulfill their needs more deeply. With their deep knowledge of customers, they can foster innovation and play a pivotal role in the distribution of financial services to consumers.

Banks will partner with tech players

Partnering with digital platforms allows financial institutions to leverage their vast amounts of consumer data. Banks can use this data to acquire new customers, understand existing ones better, tailor financial products accordingly, and drive repeat transactions.

Data will drive innovative financial products

Data enables banks to tailor their financial products to the end customer. New sources of data such as platform data will facilitate advanced underwriting and enable them to approve customers. This will give rise to a new generation of innovative financial products.

Vertical SaaS will continue to grow

Embedded Finance Infrastructure has made it possible for SaaS companies to add financial services to their core software product. Customers in vertical markets leverage purpose-built software that solves the highest majority of their problems. As a result, the customer works with that company for every software need. Saas markets usually have one dominant player that fulfils the widest range of customer needs.

Improved unit economics of financial services

Financial institutions can acquire more customers at a lesser cost and more efficiently, while also driving repeat transactions. This improves their margins, which means they can offer the same financial products to the customers at an optimized cost.

Better experience of consuming financial services for the consumer

With a plethora of Embedded Finance companies coming up, and our most-loved brands now offering financial services, customers are now spoilt for choice. Existing services are only getting better, and accessibility is only set to improve.

Now that we’ve covered Embedded Finance, the rest of this article is a deep dive into Embedded Credit. FinBox is an Embedded Credit Infrastructure company. It provides full-stack API and SDKs for digital businesses to embed credit products into their platform, and connects them with a diverse network of lenders.

What is Embedded Credit and how it will transform the credit ecosystem

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.

This is made possible through Embedded Credit Infrastructure companies, which provide full-stack lending solutions to digital platforms. It includes the software infrastructure for underwriting, KYC, partnering with banks, and customer servicing. It enables them to quickly deploy lending plans and execute them at a lower cost. Ultimately, Embedded Credit produces better margins on FinTech products and new go-to-market options.

Use cases of Embedded Credit

B2B e-commerce marketplaces: MSMEs have a huge demand for short-term credit, and often face difficulty in availing it. B2B E-Commerce platforms are providing Buy-Now, Pay-Later (BNPL) options to retailers at checkout. This B2B credit option powered by credit lines is the fastest-growing payment option for e-commerce and is quickly becoming the standard. BNPL apps have seen a 162% increase in customer acquisition, with BNPL expected to account for 3% of the global E-Commerce spend by the year 2023.

BNPL enables MSMEs to purchase on credit and repay later as per their preference. This empowers them to grow their business and manage working capital gaps, while also boosting the digital platform’s AOV and CLTV. Read more about How Buy-Now, Pay-Later will revolutionize B2B e-commerce

Khata apps: These offer business loans and cash advances to its MSME and SME customer base using their platform data. This opens up alternate revenue streams and makes their platform more reliable for the customer, improving customer acquisition and retention.

HR tech and payroll platforms: They offer tailored credit products such as salary advances and small personal loans to employees (to help them meet contingencies) on employee portals. When it comes to repayment, the borrowing employee's salary is transferred post EMI deduction, and the repayment is made directly from the employer's current account to the lender.

Credit rates are affordable and not available to the employees from the open market. This boosts employee morale and performance and improves talent acquisition and retention.

Logistics platforms: These serve trucking fleets and truck drivers through offer fuel and maintenance financing. This makes it easier for their partners to acquire funds during periods of demand fluctuation, without having to go to third parties. Consequently, the perception of the logistics platforms proves to be more reliable, improves their customer acquisition and retention, and unlocks new revenue streams.

Blue-collar worker aggregator companies: Ride-sharing companies like Uber and Ola can offer personal loans to their driver-partners by leveraging driver ratings, trip information, and more. They can also implement deduction at source strategies for collection.

Business aggregator companies Companies such as Zomato and Swiggy can use Embedded Finance to provide small-sized loans to their partners to help improve their service level. For example: Vehicle purchase/maintenance loans for delivery partners or working capital loans for their restaurants. 

Read more about the various applications of Embedded Finance here.

Challenges that Embedded Credit solves

There are deep-seated inefficiencies in the Indian lending space which are addressed directly by Embedded Finance. Let’s take a look at what these are and how they can be tackled.

The challenge: India is primarily a new-to-credit society. Credit is unavailable or expensive because data to assess borrowers is either unavailable or insufficient. This increases turnaround time for loan approval and makes the process of underwriting expensive.

The solution: Embedded Finance leverages alternate data such as device data, cash flow data, or platform data to underwrite borrowers faster and more economically.

The challenge: Digital discovery of credit products is hard. Most of the Indian population is new to the digital world and finds it difficult to search, compare, and choose credit products on traditional digital channels.

The solution: Embedded Finance solves this by conveniently positioning credit products ‘in-context’ and by educating consumers.

The challenge: Digital small-ticket loans are too expensive. Digitally acquiring, processing, and servicing a loan is currently very expensive for a lender. These fixed costs make the majority of the Indian population ineligible for credit, along with the sparse availability of the right customer credit data. 

The solution: Embedded Finance unlocks massive operational efficiencies by eliminating overheads (such as marketing costs), shortening the digital lending journey, and providing hooks for servicing the loans, significantly reducing the cost of processing a loan.

The challenge: Lenders offer rigid credit products that don’t suit the exact needs of the customer.

The solution: Embedded Finance enables effective collaboration between lenders and anchor platforms. It leverages the platform’s deep understanding of the customer and tailors the credit product for the specific needs of the end-customer. One such example is Buy-Now Pay-Later in B2B and B2C e-commerce.

Takeaway

Embedded finance is driving companies to drastically change the way they conduct their business. Digital platforms will play pivotal roles in the distribution of financial services. It will create a new generation of innovative and effective financial products. Businesses in all domains and lenders must leverage Embedded Finance Infrastructure to stay dominant in their market. Digital platforms must leverage Embedded Finance to improve their CLTV and monetize their customer base.

Lenders will enjoy better margins. They must partner with digital platforms to acquire the diverse pool of customers available to them in the market.

The most exciting part is for the consumers. Embedded Finance will enable access to affordable, tailored, and easy-to-access financial services that will serve customers in all economic and social demographics.

How FinBox enables embedding financial services

FinBox provides effective customer-centric Embedded Credit solutions that comply with the highest regulatory standards with its tech-focused approach and proven underwriting stack. The best part? You can go live in 3 weeks. Contact us to know more!

Download our exclusive Embedded Finance E-book here.