Our first article on embedded finance covered the basics of the fast-growing trend transforming the world and how these integrations allow financial services providers to expand customer relationships, increase revenue and profitability, deliver new and innovative offerings without all the hours and cost of traditional customer acquisition while simultaneously opening up hundreds of opportunities for brands to reimagine their relationship with their customers.
In a few years time, it will be difficult to imagine a business that doesn’t offer some kind of financial service alongside its core product offering and because the future of finance is digital, ubiquitous and invisible, we are fast moving to that world where financial services will be so embedded into other technologies.
Globally, a number of providers from all different backgrounds, including incumbent banks such as BBVA, fintechs like Synapse, (In the US) and neobanks like Starling Bank (UK), are key players in the embedded finance space, driven by incentives like revenue, the potential for customer acquisition and insights they can gain from working with clients that can improve their own offerings. Here are a couple of quick examples to give you an idea of what is being discussed:
- An e-commerce retailer adds a payment financing option at checkout.
- An “e-wallet” for a gig economy platform enables both consumers and providers to exchange money directly via the app.
- An online store like Amazon or similar offers a “Buy Now, Pay Later” option that converts the cost of a purchase into an automatic loan from the online store itself instead of a third-party lending institution.
- A car dealership includes insurance offerings that are texted to the customer at the moment of purchase or as they try a car.
- Google Maps allows users to find and purchase parking straight through the app interface instead of having to use another app.
As you can imagine, the possibilities are practically endless. From a regulatory perspective, these companies have little to worry about. Instead, the regulated entity — be it a bank or a fintech, deals with these tedious yet crucial details. So it is all about enabling finance on the customer’s terms at the point of need, rather than as a standalone product.
Opportunities for Embedded Finance
Embedded finance companies have found a way to act as the bridge or close the gap between themselves and the consumer:
Embedded payments make buying pretty much pain-free for customers. Instead of having to pay cash or pay via card, a consumer using an app with an embedded payment program simply taps a few buttons and they’re all set. From ride-sharing to personal shopping to meal delivery, embedded financial services can play a crucial role. Examples of programs that feature embedded payments include ride-sharing apps like Uber or Lyft. Similarly, fans of the coffee chain Starbucks also use embedded payments. The app lets people order and pay from their phones. It also rewards them with points, which can be redeemed for future purchases. Starbucks in 2012, says that 1 million people per week use its mobile payment app to pay in-store. Its existing mobile payment customers will now be Square’s customers, giving Square an immediate boost in the number of locations and consumers it reaches within the market.
Also, Apple’s collaboration with Goldman Sachs to produce the Apple Card, which leads to the seamless use of Apple Pay. The partnership gave Apple, an essential financial tool embedded within its owned ecosystem. On Apple Pay, even if you miss a payment, you won’t be charged a penalty rate like most banks do. Purchases are grouped in color-coded categories like food, entertainment and more, and spending trends are shown over weeks or months.
Shopify, a canadian multinational e-commerce company created a financial arm to help merchants secure credit. Since getting an accurate loan is difficult for many merchants, the Canadian firm leveraged its internal data to better forecast a merchant’s future sales. With that information, the company can offer better-suited loans to lenders in need of financing. Additionally, Shopify offers shoppers a “buy now, pay later” financing option at check-out, bringing invisible banking to both sides of their business.
In the past, if someone needed to borrow money, they could apply for a loan from a bank or open a credit card. Now, embedded lending lets someone apply for and get a loan right at the point of purchase. Embedded lending use cases include Swedish company, Klarna and Australia’s AfterPay. Both programs let a consumer split an online purchase into several smaller monthly payments.
Embedded banking programs that simplify the investing process aim to change that. One example is Acorns, a program that invests people’s spare change by rounding up purchases. Using Acorns, investing becomes seamless and touch-free. A user doesn’t even need to remember to transfer money to their account, as the app takes care of that. Their portfolio is automatically adjusted based on what the market does, so an Acorns user doesn’t have to pay attention to the values of stocks or mutual funds.
To speed things up and increase their bottom lines, some companies have found ways to embed the action of applying for an insurance policy into the process of making a major purchase. The automotive industry is no stranger to financial services. After all, financing and leasing are amongst the key drivers in the industry, to the point that some manufacturers have their own banks and even APIs. These companies offer a broader range of funding and insurance options to car buyers and better avoid arrears and costly repossessions through embedded financial services. One example is the carmaker, Tesla. It offers an insurance program that lets people purchase the appropriate amount of coverage nearly instantly. Insurance available directly from Tesla also tends to cost less than a policy from a third-party insurance provider.
Embedded finance plays an important role in the agriculture domain. Agriculture loans are normally offered to farmers to fund seasonal agriculture operations, various activities and purchase of inputs such as fertilizers, seeds, insecticides, and many more. Embedded finance programs help the farmers and agricultural companies to manage and minimize the risk and offer custom finance options to grow with a better understanding of the agricultural process. In India, Arya is addressing a vastly underserved market of farmers, half of whom previously had little access to post-harvest finance. Their unique approach, providing a full-service digital platform with embedded finance and differentiated efficiencies for small farm holders is driving the future of farming in India.
The never-ending possibilities of embedded financial services
Because today, customers yearn for greater personalization and less friction while brands are looking for ways to improve monetization seamlessly, the ability to be at the right place at the right time, supporting consumers and merchants alike, where they want it, how they want it and when they want it — cannot be understated.
The above use cases are only a small part of how embedded financial services are changing our world. Indeed, we could go on with the different, exciting use cases and It’s a win-win-win for everyone involved.
Incidentally, sub-saharan Africa also has a “crusader” of Embedded Finance – OnePipe, currently domiciled in Lagos, Nigeria the brand has the vision to make embedded finance mainstream in Nigeria and sub-saharan Africa. It has achieved this in a number of industries; FMCG, Agriculture, Digital Lending and Real Estate.