Embedded finance has become another hot tech-topic vying for the attention of treasurers. Ion Fratiloiu, Founder and CEO of strategy, product, and technology consultancy Finkr, and Philipp Buschmann, Co-Founder and CEO of embedded finance platform provider AAZZUR, explain why engagement is needed sooner rather than later.
In the ever-evolving landscape of multiple financing options, companies are constantly seeking innovative solutions to streamline their operations, enhance customer experiences, and drive growth. One emerging trend that has gained significant traction is the adoption of embedded finance solutions, a market boldly predicted to grow to $7.2tr. globally by 2030.
Embedded finance is the integration of financial services into non-financial platforms, products, or services. By incorporating financial transactions, payments, lending, and various other solutions into existing platforms, applications, devices, and ecosystems, companies and their customers can oversee their financial affairs without resorting to separate financial channels.
Efficient embedded finance solutions should strategically align with customer preferences, furnishing them with tailored financial alternatives such as loans, payment programmes, insurance arrangements, or streamlined payment methodologies.
Instances of ‘traditional’ embedded financial services include airline credit cards, car rental insurance, and payment plans for high-value items. However, a transformative evolution is underway, particularly in the online domain.
E-commerce firms are integrating banking services directly onto their digital platforms, eliminating the necessity for redirecting customers to external banking providers. This shift is being facilitated by third-party banking-as-a-service (BaaS) enterprises – leveraging APIs to embed financial functionalities into the user interfaces of these non-financial entities.
The integration of embedded finance has the potential to enhance the customer experience, while presenting a new market opportunity. More grounded figures anticipate that this market is poised to generate a revenue of $384.8bn by 2029. This projection reflects a 17-fold escalation compared with the $22.5bn in revenue recorded in 2020.
Because embedded finance eliminates the traditional notion of finance being a separate facet of the consumer experience, a diverse array of embedded financial products and services are emerging. These include:
- Branded payment cards
Reasons to explore
Companies should be looking at the ways in which embedded finance can be incorporated into their business. There are many reasons why, including:
- Enhanced customer experience: embedded finance solutions enable companies to provide a more efficient and integrated experience for their customers. By embedding financial services directly into their platforms, it creates a one-stop solution, eliminating the need for customers to navigate through multiple interfaces.
Example: lenders offering invoice-financing products can monitor existing activity and, based on customer financial data needs, other financial products can be offered as a credit top-up without having to leave the portal and go through a different credit application.
- Efficient payments and collections: companies often deal with complex payment and collection processes. Embedded finance solutions simplify these processes by integrating payment gateways, invoicing systems, and automated collections directly into business applications. This not only reduces the likelihood of errors but also accelerates cash flows.
Example: B2B companies can embed payment gateways into their invoicing systems, enabling clients to make payments instantly, thereby reducing the DSO and improving working capital management.
- Financial inclusion and accessibility: embedded finance can play a pivotal role in promoting financial inclusion by making financial services more accessible to a broader audience. By embedding banking and payment functionalities into everyday applications, companies can cater to the financial needs of underserved populations.
Example: digital wallets embedded in e-commerce platforms enable users without traditional bank accounts to make purchases and participate in the digital economy, fostering financial inclusion.
- Cost-efficiency and streamlined operations: integrating financial services directly into corporate systems streamlines operations and reduces costs associated with third-party intermediaries. This can result in cost savings, especially for companies dealing with high transaction volumes.
Example: a manufacturing company can embed financing options directly into its online ordering system, enabling customers to secure financing for bulk purchases at the point of sale without involving separate financial institutions.
- Data-driven decision-making: embedded finance solutions generate valuable data insights by capturing transactional data within the corporate ecosystem. This data can be leveraged to make informed business decisions, identify trends, and optimise financial strategies.
Example: an e-commerce platform that embeds payment processing can analyse transaction data to understand customer spending patterns, enabling personalised marketing strategies and product recommendations.
- Adaptability to market trends: the financial services landscape is dynamic, with new technologies and market trends constantly emerging. Embedded finance solutions provide companies with the flexibility to adapt quickly to these changes, ensuring they remain competitive in the market.
Example: fintech companies that embed cryptocurrency payment options in their platforms respond to the growing demand for digital currencies, staying ahead of traditional financial institutions.
Some 88% of companies report increased customer engagement with embedded finance. The expected revenue increase from its adoption is around 7% in two years, 11% in five years, and in the region of 15% in 10 years.
As the business landscape continues to evolve, it could be argued that embracing embedded finance is not just a trend but a strategic imperative for companies seeking sustainable growth and competitiveness in the modern era. It’s no coincidence that 73% of enterprise leaders plan to introduce embedded finance in the next two years, and 92% plan to in the next five years.
By leveraging the power of embedded finance, these entities can position themselves at the forefront of innovation, driving efficiency, and delivering value to both customers and stakeholders.