Embedded Finance

Embedded finance is the integration of financial services into a non-financial system, app or platform. It’s changing the way we experience financial services. It has already made its way into our daily lives whether we know it’s called or not. Every time we make a payment on a mobile app to order food, we are using embedded finance. When we use the ‘buy now pay later’ feature on an e-commerce site, we are using embedded finance. When we buy insurance for a new laptop directly at the retail store, we are using embedded finance.

 

Embedded finance is becoming a key component for brands to provide their customers with a seamless experience, where finance is involved. Embedded finance represents a digital revolution that reduces the reliance on legacy financial systems, and creates a world of instant transactions and seamless experiences.

Benefits of Embedded Finance for Consumers

Convenience and speed: Through embedded finance, our favourite brands are now offering end-to-end experiences, from browsing to payment. No longer are we forced to stumble through clunky legacy banking apps or do we have to refer to third-party platforms to complete a transaction. Embedded finance makes it all happen at a single touchpoint. In a world where everything is about convenience, our desire for instant, uninterrupted access to financial services is rapidly becoming the norm rather than the exception.

Cost efficiency: Platforms that utilize embedded finance often have a large subscriber base and a significant business volume. Payment facilitators and other companies that seek to tap into this base provide advantageous terms to win the business, which in turn benefits the consumers. Increased efficiency through technology is another factor that enables businesses to offer cost efficiency to their customers.

The Impacts of Embedded Finance on the Global Economy

Embedded finance has the opportunity to truly change the financial sector forever. Some analysts believe that by the year 2026, the embedded finance industry could be worth upwards of $138 billion. Other estimates have the market being worth in the trillions of dollars over the next decade. That is an incredible rate of growth for an industry that can be considered to be still in its infancy. 

Embedded finance enables opportunities for more consumers than ever before and could single-handedly make a lasting impact on the global economy. 

Opportunities and Challenges of Embedded Finance for Brands and Non-Bank Companies

While embedded finance benefits the consumer, can we say the same about the brands who implement it? For the most part, the answer is emphatically yes. 

Loyalty: The effort to utilize embedded finance by brands is driven by customer preferences. Consumers are trending towards all-in-one functionalities, finance included. Brands that do not offer financial services directly in convenient and secure ways are in danger of losing their customers to brands that do. While missing out on embedded finance is a thread, the reverse leads to a larger and more loyal customer base. 

Cost, Revenue & Financial Control: Embedded finance provides incredible benefits to brands including but not limited to brand loyalty, repeat customers, and lower overall costs. The utmost benefit of embedded finance is streamlining the financial processes. It takes the reseller role away from third-party companies. By providing ancillary services without any third party, companies can reduce not only the costs but create new sources and revenue while they remain in control of the financial flow.

Data, data, data: Data extraction and analysis are also key parts of embedded finance to provide brands with insight into purchasing habits and user preferences. This can help to create an even more customized and consumer-friendly experience that benefits all parties.

This isn’t to say that embedded finance does not have its challenges though. As with all new technology, there will always be a period of growing pains as brands and industries try to scale to high consumer demands. 

Widespread adoption of embedded finance may not be immediate, as traditional banks are well known to be slow to improve technology. Finally, embedded finance needs to have government and regulatory approval before being implemented. Some countries or regions could be slower to adopt embedded finance, especially if there are regulatory hurdles that must be overcome. 

“In embedded finance, both the consumer and the merchants are the winners. The consumer gets a better offering at a cheaper price with spending less time and less headache. The merchants are able to secure their sale and at the same time they can upsell or provide other types of services which are related to their overall offering.”

-Dr. Ozan Özerk, Founder of EMBank

Banking as a Service API-driven Embedded Finance Platform

Since the infrastructure of embedded finance is purely digital, Banking as a Service API is the essential component to set up an embedded finance platform. The platform allows the company to offer legacy banking services. BaaS API ensures the safety of data communication. Using a BaaS API-driven embedded finance platform, brands can embed financial services to their online platforms and apps.

To learn more, you can check Developer Portal for our Embedded Finance services.

Banking as a Service API-driven Embedded Finance Platform

Since the infrastructure of embedded finance is purely digital, Banking as a Service API is the essential component to set up an embedded finance platform. The platform allows the company to offer legacy banking services. BaaS API ensures the safety of data communication. Using a BaaS API-driven embedded finance platform, brands can embed financial services to their online platforms and apps.

Embedded Finance Use Cases Examples

Neobanks

Neobanks are fintech companies that are challenging brick-and-mortar banks by offering financial services exclusively through a mobile app or website. These companies can offer traditional banking services like savings accounts, and generally make revenues off of merchant fees and ATM charges. Neobanks utilize embedded finance in order to be agile and remain one step ahead of their brick and mortar competitors, albeit with pared-down services. 

Commercial Fintechs

Commercial fintech companies have become increasingly popular as the financial world shifts to a digital landscape. The ability to offer financial services with fewer regulatory hurdles as they are not technically banks, allows fintech companies to offer opportunities that traditional banks are unable to match. 

Platforms like PayPal or Square, allow their users to pay directly from within the ecosystem, rather than relying on another company or bank to provide payment services. 

Embedded Banking

Embedded banking is a close relative to embedded finance. It is the integration of financial services into a non-banking third-party platform through a series of APIs. It provides full banking services right at the point of need for the consumer and not at a brick and mortar legacy bank location.

The ride-share company Lyft uses its own debit cards to make instant payments to the drivers. Drivers are allowed to create separate savings accounts without leaving Lyft’s financial ecosystem as well. 

Embedded Payments

Most well-established brands and consumer-facing platforms are integrating embedded payments into their ecosystem. Embedded payments allow consumers to fully purchase products at the touch of a button, allowing for faster and more seamless checkout experiences. No cash or physical cards are necessary as the entire process takes place on the digital platform.

Starbucks, Uber, and many other brands are receiving cashless payments. The customers use mobile apps to pay for the services effortlessly in the blink of an eye.

Embedded Lending

Similar to embedded payments, embedded lending allows non-financial brands and companies to offer lending products or credit, through the platform directly to the consumer. Companies can now have instant access to loans or credit to help scale their business, without ever having to step foot in a bank.

One of the more obvious use cases for embedded lending is the ability to offer buy now pay later services to consumers. According to a survey by Insider Intelligence, nearly 70% of millennials and 42% of Gen Z users are more likely to buy a product if it has the option to buy now and pay later. 

Brands can offer their own BNPL options or customers may proceed with instant lending services such as Afterpay to split into monthly instalments.

Embedded Insurance

Insurance has always been a headache for both consumers and brands to figure out. Now, with embedded insurance, brands can offer insurance and payment simultaneously to the consumer in one easy step during checkout. With most forms of insurance, it isn’t about saving money, it’s about convenience. Consumers do not want to head to other companies or insurance offices to buy it. Brands are now able to provide the insurance at the point of sale, which is beneficial to all parties that are involved.

Tesla offers insurance plans without directing the customer to a third party. The customer is allowed to buy the insurance at the point of sale at lower costs. Travel insurance is another frequent example, practised by airlines and travel agencies.

Embedded Investments

Don’t be surprised if you are already involved in embedded investing yourself! Essentially, embedded investing is when platforms or apps can allow you to invest in assets like stocks, funds, or cryptocurrencies without ever leaving the ecosystem. 

Apps like the Cash App from Square and Venmo from PayPal are key examples of this and are rapidly changing the way we view the world of digital and embedded finance. 

Embedded Card Payments

Embedded card payments allow brands to issue their own debit or credit cards, from which consumers can draw funds to digitally pay for products. 

One example of this is PayPal which allows users to draw directly from their PayPal account, rather than transferring that money to a legacy bank account. You can pay with your Paypal debit card or pay with your mobile phone, embedded card payments provide faster access to funds and an easier method of payment. 

How Can EMBank Help?

European Merchant Bank (EMBank) offers accessible financial products for fintech companies and local/regional SMEs across various industries. Established in Lithuania and licensed by the European Central Bank, EMBank provides a Banking-as-a-Service offering, combined with Safeguarding, Business, Payment, Accumulative account types as well as payment options through SEPA, Swift, and Target2.

Call us today on +370 700 11200. Alternatively, please send an email to [email protected] to arrange a telephone or video call.

Please keep in mind that the above information has been prepared or assembled by the EMBank and is intended for informational purposes only. Some of the information may be dated and may not reflect the most current legal developments.

Frequently Asked Questions

What is embedded finance?

Embedded finance is the integration of financial services directly into a brand’s app or platform. It allows companies to provide financial services like payment, lending, insurance, and card payments directly at the point of sale.

How does embedded finance work?

Embedded finance is connected directly into the backend infrastructure of online platforms and apps via proprietary APIs. This eliminates the need for legacy banks or other financial institutions and streamlines consumer-facing processes into a seamless experience.

Why is embedded finance important?

Embedded finance is important because it provides consumers with a seamless payment experience. It also allows brands to become their own end-to-end services destination and removes third parties from the process. It eliminates any friction between the provider and the consumer and provides a smoother and efficient transaction process for both parties.

What is embedded fintech?

Embedded fintech is the financial revolution that is happening right before our eyes. Software companies that are not originally financial companies, can now embed financial services directly into their apps. In essence, embedded fintech can enhance any application or platform with financial capabilities that can provide almost any banking services that a legacy bank can. 

What is embedded banking?

Embedded banking allows brands to provide a segregated banking experience directly for their consumers. Companies like PayPal are creating digital bank accounts that are fast replacing those offered by legacy banks. Embedded banking allows apps or platforms to provide banking services, in a mostly digital form that can be accessed without having to attend at a physical bank location.