Embedded Finance: What is Driving the Financial Boom
Introduction
In recent years, a new trend has emerged in the financial industry that is revolutionizing the way we think about banking and payments. Embedded finance, also known as embedded financial services, has rapidly gained traction and is reshaping the landscape of traditional finance. This innovative approach integrates financial services seamlessly into non-financial platforms, allowing businesses to offer banking, payment, and other financial services to their customers. So, what exactly is driving this financial boom, and how does embedded finance work?
Driving Factors Behind the Financial Boom
The way we think about and use banking and payment services is evolving as a result of recent developments in the financial sector. By embedding financial services inside otherwise non-financial platforms, companies can provide their clients with a broader range of financial products and services. This trend toward the integration of financial services within preexisting platforms is gaining steam and changing the face of traditional banking.
According to a report by Juniper Research, the embedded finance market, which was worth USD$43 billion in 2021, will reach a staggering $138 billion by 2026. If current trends continue, it is anticipated that by 2030, 74% of digital consumer payments will be processed on platforms owned by non-financial institutions. The rapid development of cutting-edge embedded finance solutions is excellent news for businesses and consumers.
Several factors are driving the financial boom associated with embedded finance. One of the primary drivers is the growing demand for convenience and accessibility in financial services. Customers today expect a seamless and integrated experience, where they can access banking and payment services without the need to navigate multiple platforms or visit physical branches. Embedded finance fulfills this need by bringing financial services directly to the platforms customers are already using, such as e-commerce websites, ride-sharing apps, or social media platforms.
Furthermore, embedded finance fuels the financial boom by allowing firms to improve their value proposition and remain competitive. Non-financial platforms can provide an extensive variety of solutions to their consumers by integrating financial services. This enables them to capture a larger share of their customers’ financial operations and deliver added value in addition to their main offerings. An e-commerce platform, for example, can provide quick financing, smooth payment processing, and insurance services, making the shopping experience more convenient and streamlined.
How Does Embedded Finance Work?
Embedded finance works by leveraging application programming interfaces (APIs) that connect the non-financial platform with the embedded finance provider or enabler. APIs enable seamless integration and communication between the platform and the financial services, allowing users to access and utilize financial services without leaving the platform.
The role of technology and digital innovation cannot be overlooked in the rise of embedded finance. Advancements in APIs have been instrumental in enabling the integration of financial services within non-financial platforms. APIs provide the necessary connectivity and data exchange between the platform and the embedded finance provider, facilitating a seamless user experience.
Embedded finance operates through a combination of partnerships and collaborations. Non-financial platforms often collaborate with embedded finance providers or enablers who specialize in offering the necessary technological infrastructure, tools, and APIs. These partnerships enable non-financial businesses to expand their offerings and enhance the overall user experience.
Embedded finance’s continued expansion could accelerate a shift away from incumbent institutions in the payments space. Despite recent decreases in private-market values, the rise of global decacorn payment service providers (PSPs)—companies valued at $10 billion or more—has led to players offering improved solutions for both merchants and payers. According to PWC, these go beyond safely integrating the payment into the overall transaction, thereby reducing friction and conversion loss.
As embedded financial services gains traction, it is projected to transform how we think about and interact with financial services, providing ease and innovation to customers all over the world.
Understanding the Difference Between BaaS and Embedded Finance
While embedded finance and Banking as a Service (BaaS) are often used interchangeably, there are some key differences between the two. BaaS refers to a model where banks or financial institutions provide the infrastructure, tools, and APIs for other businesses to build and offer financial services. Embedded finance involves integrating financial services directly into existing non-financial platforms, enabling a more unified user experience.
In a more detailed analysis, BaaS can be seen as a broader concept that encompasses the provision of infrastructure, tools, and APIs by banks or financial institutions to enable other businesses to offer financial services. BaaS platforms typically provide the necessary back-end infrastructure, such as payment processing, account management, compliance, and security features. They also offer APIs allowing them to create customized financial products and services tailored to specific needs. BaaS enables companies to leverage the expertise and established infrastructure of banks while maintaining their own brand identity and customer experience.
Embedded finance, on the other hand, is a specific application of BaaS that enables businesses to offer a wide range of financial services seamlessly within their own platforms, such as lending, payments, insurance, or savings accounts. By embedding financial services, companies can provide a more holistic and streamlined user experience, eliminating the need for customers to navigate multiple platforms or applications to access financial products. Embedded finance allows businesses to enhance their core offering and increase customer engagement by providing convenient and integrated financial solutions.
One of the key differences between BaaS and embedded finance lies in the level of involvement and control that businesses have over the financial services they offer. With BaaS, businesses have more flexibility and control as they can build and customize their own financial products using the provided infrastructure and APIs. They can create unique user experiences and differentiate themselves in the market. However, this also requires more development resources and expertise.
Embedded finance offers businesses a faster and more simplified approach to offer financial services. By integrating existing financial services, businesses can leverage the expertise and regulatory compliance of established financial institutions without the need for extensive development and regulatory processes. This allows companies to focus on their core competencies while still providing comprehensive financial solutions to their customers.
Moreover, while BaaS is typically associated with banks or financial institutions offering their infrastructure to third-party businesses, embedded finance is not limited to traditional financial institutions. It can also involve collaboration between non-financial platforms and fintech companies or the integration of specialized financial service providers.
BaaS and embedded finance are related concepts but with distinct characteristics. BaaS focuses on providing the technological infrastructure and tools for businesses to build their own financial products, while embedded finance involves integrating existing financial services directly into non-financial platforms to offer a unified user experience. Both approaches have their advantages and suitability depending on the business’s specific needs and resources.
Evolving Partnerships in the Embedded Finance Space
The embedded finance space is witnessing a proliferation of partnerships and collaborations. Non-financial platforms are teaming up with embedded finance providers and enablers to offer a wide range of financial services. These partnerships enable non-financial businesses to expand their offerings.
Wallet providers are also playing a significant role in the embedded finance ecosystem. They enable customers to store and manage their digital assets, make payments, and access a variety of financial services seamlessly. By partnering with wallet providers, non-financial platforms can offer their customers a comprehensive digital wallet solution, integrating payments and other financial services into their platform.
For example, Whillet, a cutting-edge fintech solution, that offers embedded finance services, empowering clients to create and manage digital wallets for their users through seamless application programming interface (API) integration. By acting as a BaaS (Banking-as-a-Service) provider, Whillet handles all the necessary licensing requirements, relieving clients of that burden.
With Whillet’s fintech solution, clients can effortlessly implement and support various processes across different platforms, including websites, apps, and marketplaces. These platforms are tailored to meet the needs of client users, facilitating services such as bank accounts, electronic money accounts, and bonus accounts.
Customers can access their wallets conveniently through multiple channels, whether it’s through a user-friendly mobile app or a user-centric website. By leveraging embedded finance technology, clients can significantly boost their revenue and enhance key economic indicators.
An illustrative example of Whillet’s capabilities lies in its multilevel processing solutions for loyalty programs. Through this innovative approach, partners can easily manage customized loyalty programs while simultaneously rewarding loyal users with bonuses and real money. These rewards can be utilized for future purchases, enhancing customer satisfaction and loyalty.
Payments are a central component of embedded finance, and payment providers are capitalizing on this trend. They are partnering with non-financial platforms to offer integrated payment solutions, allowing customers to make transactions directly within the platform. This streamlines the payment process, enhances the user experience, and drives customer loyalty.
Conclusion
Embedded finance is transforming the financial sector by integrating banking and other financial services into previously independent platforms. Embedded finance is a major factor in the current economic boom because of its accessibility, ease, and superior user experience. Businesses can save their clients time and money by integrating banking, lending, payment processing, and insurance into their own platforms via application programming interfaces (APIs). This cutting-edge method replaces cumbersome and time-consuming banking procedures with streamlined ones that benefit customers.
It is important to differentiate embedded finance from Banking as a Service (BaaS). While BaaS focuses on providing the technological infrastructure for businesses to build their own branded financial products, embedded finance allows businesses to integrate existing financial services seamlessly into their platforms. This key distinction enables businesses to offer comprehensive financial solutions without the need to build from scratch.
The success of embedded finance relies heavily on partnerships and collaborations. Non-financial platforms are teaming up with embedded finance providers and enablers to expand their offerings and enhance the overall user experience. Wallet providers play a significant role by enabling customers to store and manage their digital assets, make payments, and access various financial services seamlessly. Payment providers are also capitalizing on the trend by partnering with non-financial platforms to offer integrated payment solutions.
In order to enable the transformation towards embedded finance, software providers are developing robust APIs, secure payment gateways, and compliance tools. These providers ensure a smooth integration process while maintaining the highest standards of security and regulatory compliance.
Embedded finance represents a modern and user-centric approach to the financial industry. By integrating financial services into everyday platforms, embedded finance is revolutionizing the way we think about banking and payments, making financial services more accessible, convenient, and tailored to the needs of customers. With the continued growth of partnerships and advancements in technology, the embedded finance space is set to expand further, driving the financial boom and transforming the financial industry as a whole.