An introduction to embedded finance
Embedded finance is transforming the finance industry, enabling non-finance companies to become fintech brands. But how does embedded finance work, exactly? And how is it transforming the customer experience?
In this article, we’ll explain everything you need to know about embedded finance and discuss some of the key trends to watch out for in 2023.
What is embedded finance?
Embedded finance refers to the integration of financial services and products into non-financial products and services, such as mobile apps, social media platforms, and e-commerce websites. This allows companies in non-financial sectors to offer financial services to their customers, such as payments, lending, and insurance, without having to build a financial infrastructure from scratch.
This creates new revenue streams and customer engagement opportunities for these companies, while also making financial services more accessible to customers.
Embedded finance examples
In this section, we’ll describe the scenarios in which businesses use embedded finance, and explain the types of embedded finance they use.
Businesses typically use embedded finance for these reasons:
- E-commerce companies offering buy-now-pay-later options, such as Klarna, or in-store credit to customers.
- Ride-sharing and delivery companies offering insurance to drivers and delivery individuals.
- Social media platforms and messaging apps offering peer-to-peer payments, such as Venmo, or digital wallets like Apple Pay.
- Retail companies offering loyalty or rewards programs that include financial incentives.
- Mobile apps that offer micro-lending or savings options.
- Digital banking platforms that offer services like account opening, deposit-taking and lending via a non-bank channel, such as online platforms or mobile apps.
- Insurance companies that use telematics data to offer usage-based insurance policies to customers.
- Companies that offer employee benefits packages that include financial wellness tools, such as retirement planning or student loan repayment help.
These are the most common types of embedded finance:
Embedded payments refer to the integration of payment functionality into a non-payment application or service, enabling customers to make payments without having to leave the app or website they’re currently on.
An example of embedded payments is the ability to buy something on a retail website or mobile app without having to navigate to an external checkout page, or to re-enter payment information.
Embedded payments can also be used for recurring or subscription-based payments, such as monthly subscription fees for a streaming service like Netflix. Additionally, embedded payments are used for peer-to-peer payments within a social media or messaging app, allowing users to send money to each other directly.
You can also use embedded payments to pay for services like ride-hailing, food delivery, and other on-demand services, where the payment can be made directly within the app.
As more businesses look for ways to streamline the checkout process and offer customers a seamless and convenient payment experience, embedded payments are becoming increasingly popular.
Branded payment cards
Branded payment cards, also known as co-branded credit cards, are payment cards issued by a financial institution, i.e. a bank, but are branded with the name of a non-financial company, such as an airline, hotel or retail store. Branded payment cards can be either a credit card, debit card, prepaid card or charge card.
These cards typically offer rewards or benefits that are specific to the company whose name is on the card, such as frequent flyer miles, hotel points, or cashback on purchases made at that company's stores.
For example, an airline may offer a branded credit card that earns frequent flyer miles for purchases made on the card, and offers discounts on airfare and other travel-related expenses. Similarly, a hotel chain may offer a branded credit card that earns points that can be used to book free nights at the hotel.
Branded payment cards can be a win-win situation for both the financial institution and the non-financial company. The former can attract new customers and increase revenue through card usage, while the latter can attract new customers and increase brand loyalty by offering rewards and benefits specific to their products or services. They may even be able to earn a share of interchange, providing a new revenue stream for the business.
Embedded lending integrates lending solutions into a non-lending-specific app or service. This type of embedded finance allows customers to apply for and receive loans without having to leave the app or website—like the seamless experience offered by embedded payments.
One of the most common types of embedded lending is ‘buy now, pay later’ solutions. This is when online stores enable customers to pay in regular instalments over an agreed period with zero interest, embedding the online checkout page with ‘‘buy now, pay later’ solutions..
Embedded lending can take many forms. For example, e-commerce companies may offer customers the ability to apply for and receive a loan to purchase a product on their website, while a ride-hailing app, such as Uber, may offer drivers the ability to apply for and receive a loan to purchase a car.
Additionally, a digital banking platform may offer customers the ability to apply for and receive a personal loan through the platform.
Embedded lending can also be used to support small-dollar loans, such as payday loans or instalment loans, which are typically used to cover unexpected expenses or bridge cash flow gaps.
For businesses, embedded lending can create new revenue streams, while making lending more accessible to customers. This is particularly the case for the underbanked and unbanked population that may have a harder time accessing traditional lending channels, such as banks or credit unions.
It’s worth mentioning that embedded lending can have a risk of high interest rates and high fees, which is why it's highly-regulated in many countries.
Embedded insurance allows companies in non-insurance sectors to offer insurance coverage to their customers, such as property, casualty, health, and life insurance, without having to build an insurance infrastructure from scratch.
This type of embedded finance refers specifically to the integration of insurance services and products into non-insurance products and services, such as mobile apps, social media platforms, and e-commerce websites.
For instance, e-commerce companies may offer customers the ability to purchase product insurance at the checkout, or ride-hailing apps may offer drivers the ability to purchase insurance coverage for their cars through the app.
Embedded insurance can also offer new ways of underwriting and pricing insurance policies, using data and new technologies such as IoT (Internet of Things), wearables, and telematics to better assess risk and personalize policies. It can also provide businesses with increased data insights, cost-savings, and faster time-to-market.
These are just some of the benefits of embedded finance for businesses. We’ll explain more below…
The benefits of embedded finance for businesses
Embedded finance offers many benefits for businesses, opening up new revenue streams while improving the customer experience:
New revenue streams
Your business can create new revenue streams and increase customer engagement by offering financial services such as payments, lending, and insurance, directly from your website or app.
Increase customer loyalty
Your customers will likely become more loyal if you offer financial solutions that are tailored to their specific needs and to your services.
By using embedded finance, your business can avoid the costs and complexities of building and maintaining your own financial infrastructure.
Improve the customer experience
Embedded finance can make financial services more accessible and convenient for customers, leading to an improved overall customer experience, increasing your customer retention and boosting sales or conversions.
More data insights
You can gain insights into your customers' financial behavior and use this information to improve your products and services, creating a more personalized buying experience for your audience.
Through leveraging existing platforms and infrastructure, your business can launch financial services more quickly, allowing you to take advantage of new market opportunities.
Increase customer base
Embedded finance can help your business reach new customers, including those who may not have access to traditional financial services.
Diversification of services
By diversifying your services, your business can reduce the risk of relying too heavily on one product or service, helping to make your business more dynamic and better-equipped to deal with change.
Embedded finance trends for 2023
In 2023, embedded finance will be at the forefront of fintech. With today’s modern, impatient consumer, non-financial businesses should look at ways to streamline the customer journey with one-stop, embedded finance solutions.
Jonathan Rambal, General Manager for Southern Europe and LATAM at Checkout.com, also predicts that embedded finance will, and should, become more widely available:
"Embedded finance embodies the integration of financial services like lending, payment processing, or insurance into non-financial businesses’ platforms. Embedded financial services, while not new, will become more widely available across multiple consumer touchpoints."
“Examples could include a travel operator providing insurance or a retail business offering branded credit cards. Businesses that implement embedded finance will increase engagement, and also it helps them acquire new customers.”
For more insight into the payment trends to watch out for this year see our guide: The Digital Payments Agenda 2023.