All About Embedded Finance: The Next Big Thing in Finance

In the last few years, we have seen an increase in digital waves in the world of consumer credit in India, which is marked by a shift from financial software development services. Consumer lending has seen an amazing transformation from filling out forms for loan applications and awaiting loan approval to the present moment, where obtaining a loan for a consumer can be done in a couple of clicks and the amount is paid quickly or in the space of a single day.

The consumer is now in the driving seat, and they are now able to decide when and from whom they would like to get a loan without worrying about lengthy forms. This shift also speaks to the changing nature of our society. Previously, loans were considered subject to stigma, but today people are willing to take credit. The modern-day consumer isn't opposed to taking out a loan or credit in particular small-ticket sizes, such as purchasing a smartphone or a small amount of cash, to help meet their needs, fulfil their dreams, and live life to the fullest.

The rapid expansion of digital lending within the United States demonstrates this rapidly changing attitude. According to reports in the media, the market for digital loans is predicted to expand from a mere $100 billion in the year 2019 to more than 350 billion by 2023.

How Do You Define Embedded Finance?

In simple terms, it is the incorporation of financial tools or services that are typically accessed through an institution like a bank into the services or products of a non-financial organisation. Imagine an online store that offers short-term loans in the form of BNPL or an electronic wallet you can use on your mobile to enable immediate contactless transactions. This is only the beginning.

Embedded finance is already in place to simplify the financial process in both business and consumer commerce by reducing the barriers to entry for a variety of items and services. Before, a buyer might require a visit to an actual bank to obtain the loan needed for a major purchase, and business buyers would have to fill out lengthy paperwork to get access to credit for trade. Today, these services are accessible upon purchase.

Examples of Embedded Finance:

Let's examine some of the most advanced fields of embedded finance.

Payments embedded in the payment

Embedded payments simplify life for both business and consumer customers through the ability to pay instantly by pressing one button.

A good example is where payment technology is integrated into the framework of an application or site, meaning that users do not have to input the details of their credit card in each transaction. Rideshare apps such as Uber use embedded payment methods so that users don't have to access their credit card or search to find cash; instead, they can pay using the app after the completion of their trip.

Digital wallets that permit transactions on mobile phones that are contactless and instant online shopping are another kind of embedded payment that is gaining a lot of attention after the introduction of Apple Pay in 2014. Apple Pay in 2014

Lending embedded

This is when financing or credit products are integrated into a financial services company, like marketplaces or retailers that allow customers access to deferred payments upon purchase without needing to visit the bank or any other lender.

More often referred to as BNPL embedded lending, it is well-known within embedded finance that is geared towards consumers because of the widespread popularity and success of big players such as Klarna and Clearpay. There is also a growing B2B BNPL market that allows companies to benefit from a more advanced digital version of trade credit than traditional trade credit and removes the requirement to fill out lengthy paperwork and long approval timeframes.

Insurance embedded

Before, anyone who wanted to insure a new purchase would need to go through the difficult process of locating and securing the best insurance coverage they could locate—and it's only after spending time, money, and energy researching and purchasing the product first.

Today, insurance products can be searched for and added to purchase at the time of need with just a single click, thereby making contact with an insurance agent or broker unnecessary and effectively eliminating the need to look through a variety of insurance companies. A common illustration of embedded insurance is found when travelling, and we are offered travel insurance every time we purchase plane and train tickets.

Next Disruption Financial services for consumers have changed due to the advancement of technology, and the next trend can be done with embedded financials. An embedded finance product is a term for a tool or financial service that integrates the products or services of a non-financial service as part of the user experience. For example, when buying from an online retailer and making contactless payments, receiving discount offers on digital wallets, or changing the cost of shopping into smaller E-money through EMI cards, Ridesharing companies online as well as their financial services, booking tickets for travel through websites, and obtaining options to purchase travel insurance are all types that embed finance.

A growing number of people are adopting open banking initiatives, as well as the development of banking as a service (BaaS), which are the main facilitators of embedded finance services.

Embedded finance offers a variety of services, such as digital wallets embedded into the payment system Net Banking, embedded lending, such as EMI finance BNPL, and embedded services in finance such as insurance and wealth management. These integrated financial services are part of an ecosystem that can help businesses improve customer engagement and the customer experience.

With the rapid growth of Internet penetration and an increasing number of smartphones, people in large and small cities are becoming more adept at online shopping and are comfortable with online payments, especially in post-Covid India. This is a major reason for the growing popularity of embedded payment systems in finance.

E-commerce sites such as Flipkart, Amazon, and others are rapidly adopting integrated payment methods using digital technology such as EMI credit cards and BNPL to provide easy, secure, affordable, and safe credit options to customers. Based on industry figures, recent news stories have reported that smartphone finance will be increasing in 2023, with ASP levels increasing, and 60 to 70 percent of consumers prefer purchasing smartphones through EMIs as opposed to 30 to 40 percent because it is pandemic.

Looking ahead

Embedded finance has the versatility and ability to be adapted to any organisation or industry that has an element of transactional finance. Accounting software platforms are there to help you out. It also has the potential to revolutionize payment systems and expand the scope of innovation in financial services. Even established players, which are typically slow to adopt new ideas, have begun to realise the wide range of possibilities that embedded finance offers.

The legacy methods and systems aren't built to take the instant decision-making required for the sale of financial products with embedded technology, and while it may be feasible for insurers and banks to change to a modern tech stack, it will be a risky and massive task. Many have instead decided to work with startups in the field of agile technology to accomplish this objective.

In turn, embedded finance demands that the providers evaluate their financial products using a technical lens. It's a product in digital form that integrates the financial product and has an API for making it accessible to other partners. Traditional insurers and banks cannot develop or document the API for an entire ecosystem. Software solutions would be of great help. They aren't aware how important the "API" is, as crucial as the contract, and they have two clients, with the first being the developer or person who is responsible for embedding the product. The other is the end customer, who is the one to use the product.

If you are a business looking to capitalize on these opportunities, the first step must be to evaluate the existing tools and processes to decide which can be improved by an integrated custom software solution. Next, do some research and connect with a reliable partner to offer a cutting-edge and seamless solution.