The Rise of Embedded Finance

The Rise of Embedded Finance


How Non-Financial Companies Are Revolutionizing Banking

Embedded finance is quietly transforming the way consumers and businesses interact with financial services. By integrating financial products such as payments, lending, and insurance directly into non-financial platforms, companies are creating seamless, customer-centric experiences. This trend is reshaping the banking landscape, forcing traditional financial institutions to adapt or risk becoming obsolete.

What is Embedded Finance?

Embedded finance refers to the integration of financial services into non-financial platforms, such as e-commerce websites, ride-sharing apps, or even social media platforms. Examples include buy-now-pay-later (BNPL) options at checkout, instant insurance offers during travel bookings, or small business loans embedded within accounting software.

Key Drivers of Embedded Finance

  • Consumer Demand for Convenience: Modern consumers expect seamless, frictionless experiences. Embedded finance meets this demand by eliminating the need to switch between apps or platforms to access financial services.
  • Advancements in API Technology: Open banking and APIs have made it easier for non-financial companies to integrate financial services into their platforms.
  • Regulatory Support: Regulations like PSD2 in Europe have encouraged innovation by mandating banks to share customer data with third-party providers (with customers’ consent).

Use Cases of Embedded Finance:


The benefits of embedded finance for small businesses

Micro- and small businesses that are already on the path to digitalization stand to benefit significantly, as embedded finance takes advantage of data generated on platforms to better target them with products. These solutions can overcome practical and systemic barriers to finance that small businesses may face in several ways.

1. Platform data underwriting

Digital platform data can enable underwriting via embedded finance, which can benefit small businesses that may lack the traditional data to assess credit risk. Data available through different digital platforms can be used to determine small businesses’ creditworthiness.

2. Tailored user experiences through collaboration with digital platforms

Digital platforms can offer a better loan application experience than traditional banks. A simple and guided customer experience would allow small businesses to apply for credit in context, reducing the effort required for loan applications elsewhere. For example, Dinie, a pioneer in embedded lending, enables digital platforms to offer business-to-business credit and payment products in Latin America. Dinie also offers overdrafts, risk management, and capital market services. By June 2023, it had disbursed approximately 15,000 loans to 4000 merchants.

3. Offering small businesses customer insights

Companies that offer embedded finance create an anchoring system to educate small businesses about financial services, navigating them to the digital sector in the process. Platforms that embed financial services can also provide additional value-added services, such as financial management and analytics tools. For example, digital platforms have the potential to provide small businesses with customer demographic data that might not otherwise be easily accessible. Merchant marketplaces, such as Shopify, Etsy, and Mercado Libre, can offer small businesses customer engagement information. Similarly, Boost Technology, a Strive Community partner
, uses data analysis, behavioral science, and conversational commerce to generate insights for micro and small retailers via WhatsApp to support more informed decisions and drive improved business outcomes.

Challenges and Risks

  • Regulatory Compliance: Non-financial companies must navigate complex financial regulations, which can be a barrier to entry.
  • Data Privacy: Integrating financial services requires handling sensitive customer data, raising concerns about security and privacy.
  • Partnership Complexity: Collaborating with banks and fintechs to offer embedded finance solutions can be challenging due to differing business models and priorities.

The Future of Embedded Finance

As embedded finance continues to grow, traditional banks will need to rethink their roles. Some may become "invisible" infrastructure providers, enabling financial services behind the scenes, while others may partner with non-financial companies to stay relevant. The lines between banking and other industries will blur, creating a more interconnected financial ecosystem.


Quote
''There's a future where embedded finance is as ubiquitous as web technology is today.''
Remy Carole - Chief Operating Officer, Treasury Prime.

InfoSource: Strive Community by Master Card - Openpayd - pwc - investopedia - Scalefocus.

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