TL;DR: Being able to finance products and services without having to recur to a bank is all due to the rise of embedded financial services. This blog entry explains the basics, trends, and benefits to embedded finance’s provision to third-party service financial product offerings.
Whenever you’re shopping online, you might now notice that some stores are offering a “Buy Now, Pay Later” (BNPL) option. Typically, banks and financial institutions used to be the only ones using financial services like the one we’ve just mentioned. Yet, many nonbanks are embracing embedded finance — or the integration of financial services within products and services— to attract and retain more customers.
From a consumer standpoint, having access to banking-like services allows many of us sufficient flexibility to make financial decisions without going to the bank. Embedded finance reduces the barriers to products and services while making many financial processes less cumbersome for the consumer and the business.
Let’s explore in this post how embedded financial services are transforming fintech markets.
The world of Banking as a Service
We can’t talk about embedded finance without first understanding Banking as a Service (BaaS) and how it transforms traditional banking. This provision enables businesses, financial institutions, and other third-party services to offer banking products to their customers. The main idea behind BaaS initiatives is to provide new and more agile ways to finance products, disarticulating the idea of traditional banking and bringing added value to the market.
How is Banking as a Service reconfiguring the value chain? First, it provides key elements and services from different banking products and incorporates them into a novel and practical solution. Tailored to customer needs, the offer creates a modernized experience through proprietary customer channels.
From the use of co-branded and white-label credit cards to embedding financial products into many brands and services, BaaS is quickly evolving and transforming the face of traditional banking. The enabling factors that have paved such a change involve the use of cloud technology and automation, open banking, and APIs for companies to easily embed BaaS, and the increasing consumer demand for better and more effective financial experiences.
How embedded financial services can enhance your business
Consumers no longer need to spend hours on paperwork to access a loan or receive financing on a product. Embedded payments, one of the most recognizable forms of embedded finance, come into play as a consumer experience (CX) strategy that make digital payment processing and financing part of the shopping experience. Embedded payments work through an open API system, allowing the business to connect with different websites without forcing the user to ever leave the webpage.
Removing the friction during the checkout experience has become a valuable tool to increase conversions. In a system with embedded payments, shoppers can complete the transaction on the spot, without having to leave the page and return later on to finish their task.
Another example of embedded finance is embedded lending, which usually comes in the form of the BNPL option we spoke about earlier. According to a recent Forbes article, the BNPL market has exploded in recent years, “with players like Affirm and Afterpay projected to hit $181 billion this year, nearly doubling from $93 billion in 2020.” The concept of paying by installments isn’t new, but the way users are now able to pay for any item, on any card, without having to break the bank is novel.
This new feature has been met with some criticism and concern from experts, who view embedded payments as a danger to customers, especially as inflation soars over global markets. There’s also a “regulatory clampdown” on the horizon. Bloomberg states that, as countries and firms encourage stricter regulation, startups will have a harder time implementing embedded finance solutions.
The trends to watch in embedded financial services
Within embedded finance, Forbes magazine has identified three main trends: the proliferation of “plug and play” APIs, a boom in B2B applications, and the untapped potential of non-financial markets. The existence of embedded finance is partly due to platformification, a business model that builds upon existing ones. To make it work, programmers begin connecting different applications and services through APIs, which allows companies to easily bolt on new services. Why create a new service from scratch when you can connect it to something that already exists?
Consumer brands like Starbucks or Uber are using B2B applications with BNPL solutions. Doing so enables more user flexibility and loyalty. The use of B2B apps, especially in the service sector, is a sophisticated way of streamlining complex services and fulfilling the needs of a specific user target.
The use of embedded financial services brings online retail and e-commerce benefits that spread to other sectors according to Forbes’ “Follow the Money” report. Fintech experts surveyed in this document name travel and entertainment, and food and beverage as two industries with incredible potential.
What’s in store for embedded financial services
The world of possibilities of embedded finance is powerful enough to lure incumbent players. However, because many traditional institutions still rely on legacy systems and processes, embedded financial solutions require time… and a new tech stack. Any new solution should be put through a financial lens, requiring stakeholders to ask themselves what capabilities they need to develop and how to do so.
Here’s where platformification plays a part. Instead of building the product themselves, which many incumbents are not equipped to do, they can partner up with other companies that already have the know-how and resources to implement such solutions. At Blankfactor, we’ve helped many enterprises capitalize on new opportunities through technological solutions.