Embedded finance: What it is and how it can be the future of financial services.

What’s embedded finance? And how is it going to change our daily life?

Zimpler Avatar

We’re in the midst of a financial services revolution. The integration of financial services into our daily lives is leveling up, and it’s not just a fancy trend; it’s a new era.

For all consumers and savvy businesses, the challenge lies in weaving financial services seamlessly into the fabric of our interconnected journeys. No more standalone interactions; it’s all about the flow.

Enter Embedded Finance – the art of providing financial services where you least expect it, on platforms, apps, or web pages that, at first glance, have nothing to do with banking.

This isn’t just change; it’s a complete overhaul of when, where, and how we handle our finances and offer huge opportunities for both financial and non-financial players to tap into much bigger markets.

The numbers don’t lie. The global embedded finance market, once a modest US$264 billion in 2021, is set to balloon to a jaw-dropping US$606b billion by 2025. This isn’t just growth; it’s a financial revolution in full swing.

A survey conducted by EY revealed that 94% of the respondents emphasize the importance of a financial product’s relevance in meeting customers’ real-time needs. 70% of respondents believe that more than half of financial services will be provided through nonfinancial services platforms in the near future.

In this article, we’ll explore what embedded finance is, how it works, where it came from, and why it matters.

What is embedded finance?

Embedded finance, the synergy of financial services seamlessly integrated into non-financial realms, represents a sophisticated marriage of convenience.

Consider this: financial products and services harmoniously coexisting within mobile apps, social media platforms, and e-commerce websites, eliminating the need for these non-financial entities to construct elaborate financial infrastructures from scratch.

Think of it as an e-commerce merchant discreetly offering insurance, a coffee shop app providing effortless one-click payments, or a department store’s exclusive credit card, accepted far and wide. These examples epitomize the essence of embedded finance.

Beyond mere convenience, this innovation is a strategic masterstroke. It not only diversifies revenue streams but also cultivates heightened customer engagement. Simultaneously, it democratizes financial services, making them more accessible and inclusive.

Embedded finance stands as a testament to customer-centricity, delivering tailored financial solutions right where they are needed, whether it’s a loan, a flexible payment plan, comprehensive insurance coverage, or a frictionless payment mechanism.

It’s a blend of sophistication and business acumen that is second to none.

The power of embedded finance.

The persistent issue of slow and late payments presents a significant challenge, affecting businesses across various sectors.

In the UK, three in five businesses contend with overdue payments, with over 400,000 British SMEs potentially at risk due to invoice payment delays.

Beyond its impact on individual businesses, this slow payment conundrum poses a substantial obstacle to the global economic recovery.

It restricts the flow of working capital throughout supply chains, leaving suppliers financially strapped and ill-equipped to address shortages and escalating costs, curtailing production and exacerbating bottlenecks and delays.

Enter embedded finance—the strategic tool that can empower B2B networks to address the challenge of slow and late payments and facilitate smoother, more efficient financial transactions.

Embedded finance is a strategic boon, poised to enhance the customer experience while offering businesses a lucrative market opportunity.

Projections indicate that by 2029, embedded financial services will generate approximately $384.8 billion in revenue, marking a nearly seventeen-fold increase from the $22.5 billion recorded in 2020.

In the evolving landscape, consumers and businesses increasingly demand the seamless integration of financial products and services into their daily routines. This entails capabilities such as real-time point-of-purchase financing or hassle-free payment for services like parking.

Beyond the confines of traditional digital financial services, this integration represents a significant step toward a new era in finance, where financial services become a seamlessly embedded component within broader value chain experiences.

Interestingly, non-financial businesses have quickly grasped the significance of the digital citizen and have embraced the era of borderless and seamless financial services.

They have harnessed customer data and insights to elevate customer experiences, cultivate brand loyalty, enhance conversion rates, and encourage repeat purchases.

In the experience age, financial services shine brightest when they reduce friction in financial interactions, enhance ease of use, and elevate overall convenience.

To understand the essence of Embedded Finance, it’s essential to peak into the annals of financial history.

The evolution of embedded finance.

In 1926, Ford introduced Ford Credit Bank, an automotive industry pioneer and an early glimpse into what Embedded Finance could become nearly a century ago.

Fast forward to 2015, when the European Union and the European Economic Commission introduced the Payment Services Directive 2 (PSD2), supplanting its predecessor, the Payment Services Directive.

This pivotal regulatory update ushered in a new era where a third party, with prior consent, gained access to customer data.

This access, known as Account Information Services (AIS), facilitated the retrieval of comprehensive financial data, including current account details and transactions.

Furthermore, it regulated Payment Initiator Services (PIS), enabling users to electronically transfer funds without needing direct banking interface access. This incremental progression laid the foundation for the contemporary financial landscape.

The significance of PSD2 in the banking and transactional sphere is significant.

It birthed the concept of Open Banking, a transformative paradigm shift that digitized widespread access to customer bank accounts, offering a significantly improved and expeditious user experience.

Previously, customer data access necessitated customer provision, a cumbersome and time-consuming process. With the advent of instant access, contingent upon prior consent, protracted delays became a relic of the past, replaced by streamlined and agile procedures.

In this evolving digital landscape, Open Finance emerged as a natural extension of Open Banking.

This paradigm positioned user information as a valuable commodity, particularly for businesses seeking to leverage customer data strategically.

While Embedded Finance predates the advent of PSD2, it is within this regulatory framework that new opportunities flourish.

Some platforms that transitioned to digitalization early on and experienced exponential growth now found themselves capable of offering financial services as an auxiliary facet of their original business models.

Unveiling the inner workings of embedded finance.

Understanding the mechanics of Embedded Finance requires a clear grasp of the foundational concept that behind the banking services offered by companies, an entity invariably exists providing financial services.

This leads us to Banking as a Service (BaaS), which entails providing financial services to non-banking entities.

BaaS is the bedrock upon which embedded finance is constructed, offering the requisite infrastructure and technology to operate seamlessly within a given context.

It’s important to note that not all companies may furnish such services. Different types of licenses are required based on the nature of the services offered.

The integration of banking services with modern platforms is achieved through using open banking. Although it does not provide a new set of payment rails, open banking creates a new mechanism for payment initiation, in effect, open payments.

Application programming interfaces (APIs) can be used to easily trigger single payments, but also give greater flexibility, such as creating a mandate for VRPs. It serves as an intermediary facilitating seamless software interactions.

This integration consolidates multiple functions into a single platform, simplifying the user experience by abstracting the complexities underlying these operations.

In this evolving landscape, traditional banking has become increasingly inconspicuous in users’ eyes.

It’s a paradigm shift where banks continue to provide the essential infrastructure while new FinTech companies assume the forefront, presenting a rejuvenated image of the banking sector and delivering more agile and dynamic services.

Users are drawn to the offerings: dynamic, agile platforms. Consequently, the front-end experience is the main focus, while BaaS operates discreetly in the background.

The integration of frictionless payments into the B2B sector, driven by machine learning, involves the analysis of historical payment patterns to predict invoices likely to remain unpaid.

This enables automatic payment processing for the majority of invoices upon receipt. Importantly, this technology can be seamlessly embedded throughout suppliers’ payment processes. The objective is to expedite capital flow to suppliers, granting them instant access to cash.

This, in turn, empowers them to adapt to escalating costs and invest in their businesses. For buyers, it facilitates normal payment terms and fortifies supply chains by ensuring that many small suppliers can actively participate, a benefit that would otherwise be elusive.

Embedded finance in action.

Embedded finance seamlessly integrates financial services into consumers’ everyday moments rather than remaining a separate facet of their lives.

Consequently, a diverse range of embedded finance products and services has emerged with various applications.

There is no one-size-fits-all approach to its utilization. The most common applications include:

Embedded lending:

Embedded lending, a subset of embedded finance, empowers users to access more favorable loan options at the point of sale.

Before embedded finance, consumers had to utilize their credit cards or seek traditional loans from financial institutions, often accompanied by high interest rates.

Embedded lending broadens consumer access to lending and bolsters companies’ sales figures.

Embedded lending, as the name implies, embeds loans within a third party’s offerings, typically non-financial service companies. It’s about meeting users’ needs promptly within your ecosystem.

Through Embedded Lending, users avoid the need to venture outside your ecosystem for loans, enhancing the user experience. It also fosters trust in your platform, establishing valuable connections. 

The AutoGiro functionality enables customers to select and pay fixed or variable amounts to pay back their loan installments. The AutoGiro mandate is provided by the A2A payment provider and customers sign it using bank verification methods. Each customer gives permission to the provider to collect fixed or a variable amount from their respective bank account on a specific due date.

Embedded lending enables businesses of all sizes to offer customers diverse payment options effortlessly.

This is a boon for consumers who often prefer installment payments and for companies aiming to boost sales and engage customers more effectively.

Embedded investing:

Embedded investing allows non-investment service companies to provide investment opportunities, enhancing the customer experience and generating additional revenue streams.

Traditionally, investment required consumers to establish new accounts with established financial institutions.

While this represents a relatively new facet of embedded financial services, it holds substantial growth potential as consumers increasingly expect their familiar platforms to offer additional services. 

This may include discussing stocks in a chat room and easily purchasing shares or buying stocks within a checking account app in the future. 

Non Financial services companies that provide opportunities to invest, can also give out investment returns or payouts to customers seeking investment returns. It solves a dual purpose where customers can invest in high-performing funds or stocks, and seek a payout as well.

Customers have the option to either invest in a fund once off or invest a fixed amount or a variable amount every month on a specific due date. 

An A2A payment provider gives the flexibility to the customer to pay when it is convenient for them by signing the AG (AutoGiro) mandate. 

This is done via the latest bank verification methods, and either a fixed amount or a variable amount is auto-debited on a specific due date from the customer’s bank account.

Advantages and disadvantages of embedded finance.

Advantages:

  • Enhanced payment control: Integrated financial services provide better control over payment processes.
  • Added customer value: A unified, dynamic, and visually appealing platform enhances the shopping experience, adding value for discerning customers.
  • Greater efficiency: Streamlined, agile processes have replaced outdated, time-consuming procedures, leading to efficiency gains.
  • Increased revenue: Additional services like Embedded Lending and insurance can boost revenue without relying on interest. Flexible financing options can lead to increased sales.

Embedded finance presents certain drawbacks, including regulatory hurdles stemming from stringent compliance demands and the need for ongoing adjustments to stay abreast of the dynamic and innovative nature of the financial sector.

One surefire way to enjoy the advantages of embedded finance is by using established A2A payment solutions like Zimpler.

Making embedding finance Zimpler.

In the realm of payment processes, simplicity is often overlooked. A2A payment systems offer a hassle-free alternative by eliminating unnecessary steps and complications.

With A2A payments, both parties involved in a transaction can swiftly access their bank accounts and establish a direct link between them. This streamlined approach ensures a seamless and efficient payment experience without unnecessary complexities.

A2A payments provide the fastest, most reliable, and cost-effective payment solutions available. One significant advantage of A2A payments is the ability to provide instant payouts and receive instant payments.

Leveraging the A2A payment solution and Zimpler’s extensive bank coverage, businesses can easily access an automated environment that facilitates prompt payments. This streamlined process ensures that funds are swiftly transferred, enhancing customer satisfaction and improving cash flow.

Security is a top priority in payment transactions, and A2A payments address this concern. Real-time transaction monitoring systems like Zimpler’s are critical in detecting suspicious activity and triggering Enhanced Due Diligence measures.

By incorporating the latest bank verification methods, A2A payments ensure secure and transparent transactions, safeguarding the interests of both lenders and borrowers.

A2A payments revolutionize payment processes by eliminating unnecessary steps, reducing complexities, and providing a seamless experience. Zimpler’s bank account network that payments move instantly and without unnecessary delays.

Final thought.

Embedded finance is changing the game by bringing financial services into our everyday routines. It’s a win-win, with benefits like better payment control, improved shopping experiences, efficiency gains, and revenue boosts.

Embedded finance plays out in various ways, from convenient embedded lending at the checkout to user-friendly embedded investing and hassle-free embedded insurance for online shopping.

This evolution in financial services signifies a fundamental shift toward user-centric, all-encompassing ecosystems.

As we continue to witness the evolution of embedded finance, it remains crucial to navigate its advantages and challenges judiciously, adapting to the ever-changing financial landscape to create a more integrated, efficient, and customer-centric financial world.

Want to know more about how Zimpler’s account-to-account payments can uncomplicate your business and help it join the embedded finance revolution? Contact sales@zimpler.com.

The information contained in this post is intended for informational purposes only, and should not be relied upon for professional advice of any kind. Zimpler does not make any representation or warranty as to the completeness or accuracy of the information, and assumes no liability or responsibility that may result from reliance on such information.