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What is Embedded Finance?
Embedded finance occurs when non-financial companies begin offering a financial product or service. For example, a local hardware store that offers one click payments or a retail store that has its own credit card.
The goal of embedded finance is to meet the financial needs of consumers, from installment payment plans to different financing options. Effectively implementing embedded finance means you are able to meet consumers’ needs at the exact moment financing options are needed.
What are the Types of Embedded Finance?
Embedded financing can take on many different forms depending on what your consumers are looking for; however, there are some common types, including:
This area is often referred to as banking as a service since most financing solutions are provided by banks. This is commonly seen when a non-financial company uses a branded checking account to house transactions. For example, Dominos offers employees a checking account where wages are immediately deposited at the end of each shift. The convenience adds to the experience and loyalty to the company.
Having to type in credit card numbers for each transaction can become burdensome for consumers. By using embedded payments, the entire process is quicker and more effective. For example, Chick-fil-a allows customers to store their payment information in the app to make purchases in-store or online. Recently, embedded payments have expanded to include direct fund withdrawals from bank accounts, saving on third-party merchant fees.
Before embedded financing, consumers that needed money would have to use a credit card or set up a traditional loan. However, embedded lending now gives consumers the ability to use short-term financing at the point of sale. Buy now, pay later programs like Klarna and Affirm facilitate regular installment payments, giving consumers another financing option.
Purchasing insurance at in-store checkouts isn’t new; however, now we are seeing shifts to the online marketplace. Have you noticed that Amazon offers the option to insure certain items? There is no need to go through a traditional insurance agent and purchasing insurance is as simple as clicking a button at checkout.
Embedded investing is another type of finance product that consumers are using. Platforms like Robinhood and Cash App have the ability to integrate with the stock market, eliminating the need to login into another account to complete transactions. Wealth management groups are also leaning towards embedded investing, improving convenience for their customers.
How is Embedded Finance Changing Fintech?
Embedded finance has the capability to alter both non-financial and financial companies. First, there will be a rearranged relationship between consumers and companies. As more companies begin to step into the role of financers, financial service companies will see shifts in consumer demand. This makes it important to find ways to align with consumers and maintain your customer base.
In addition, embedded finance offers a new revenue stream and decreased costs for companies. Companies can now generate income through financing, which is generally interest, or reduced costs when third-party payment processors aren’t used. This has a direct impact on the financial statements of companies, often growing revenue.
Moreover, as more companies begin to adopt embedded financial services, financial service companies need to rethink their business models to remain competitive. For example, forming a strategic partnership with a company that is considering offering short-term loans to customers can improve the value offered to customers on both ends.
Why is Embedded Finance Important?
Implementing embedded finance leads to benefits for both consumers and businesses. First, offering embedded finance leads to an enhanced customer experience. When customers perceive value, they are more likely to purchase your product or service. In addition, embedded finance leads to quicker payments from customers. When accounts are already linked, customers are more likely to remit payments on time, resulting in a decreased chance of forgetting to make a payment.
Working embedded insurance into your organization is also important to promote long-term success and scalability. Disruptive technology, like embedded finance, has proven its place as consumer demand continues to grow. In order to stay competitive and maximize customer value, implementing embedded finance into your financial service business is important.
How Can Financial Service Businesses Stay Relevant?
The adoption of embedded finance by traditional non-financial companies creates a new challenge for banks, insurance companies, and wealth management businesses. For banks, non-financial companies are now acting as a lender and payment processor, a role that was traditionally reserved for financial institutions. To avoid losing their customer base, many financial institutions are working with non-financial companies and fintech firms to create a banking-as-a-service offering. This gives banks the opportunity to capitalize on the growing market opportunity.
Insurance companies are also seeing shifts. Instead of focusing on the main groups of insurance, like home and auto, these companies are leveraging digital commerce options. In addition, insurance companies are working embedded finance to support faster claims and payment processing. An embedded finance platform ensures that the claim is properly calculated according to the policy. Once approved, the claimant instantly receives payment.
The wealth management sector may also need to rework existing business models to stay relevant, specifically with investing. Automated investing and embedded payments are two ways that wealth management companies are meeting consumer expectations and integrating embedded finance into their business.
Understanding how embedded finance impacts your financial service business is important to implement effective strategies to maintain and grow market share. Working through this situation can feel overwhelming at times, which is why many financial service companies turn to our trusted help. Our team at Naehas continuously tracks the latest changes affecting the financial services industries, helping with everything from integration to evaluating effectiveness.