Clearly there’s an actionable market opportunity here in a
space which is quickly becoming a hotly contested battleground.
Although something of a buzz phrase within consumer
financing in recent years, some noise is now being made within B2B e-commerce,
with a batch of start-ups providing businesses with embedded services such as
buy now, pay later (BNPL) and trade credit insurance.
If you’re not already familiar, it’s time to get to know why
embedded finance is the next big thing.
What is embedded finance?
Put simply, embedded finance is the integration of financial
services or tools – traditionally obtained via a bank – within the products or
services of a non-financial organisation. Think of an online store offering
short-term loans in the form of BNPL, or the digital wallet on your phone
enabling instant contactless payments. But this is just the beginning.
Embedded finance has already started to streamline financial
processes in both consumer and business commerce by reducing barriers to entry
for various products and services. Previously, a consumer might need to visit a
physical bank to get a loan for a substantial purchase, or a business buyer may
spend hours on cumbersome paperwork in order to access trade credit. Now, these
services are being made available easily at the point of purchase.
Embedded finance examples
Let’s take a look at some of the most developed areas of
embedded finance.
Embedded payments
Embedded payments make life easier for consumers and
business buyers by enabling instant payments at the touch of a button.
An example of this is when payment technology is integrated
within the infrastructure of an app or e-commerce site, meaning that buyers
don’t have to enter their credit card details for every transaction. Rideshare
apps like Uber utilise embedded payments so customers don’t need to pull out
their credit card or scramble around for cash, instead paying automatically via
the app upon completion of their journey.
Digital wallets that enable contactless mobile transactions
and instant online purchases are a further form of embedded payments which have
become wildly popular since the launch of Apple Pay in 2014.
Embedded lending
This is where credit or financing products are integrated
into a non-financial services company, such as a retailer or marketplace,
essentially allowing buyers to access deferred payment facilities at the point
of sale without having to go to a bank or other lender.
More commonly referred to as BNPL, embedded lending is well
known within consumer-focused embedded finance thanks to the ubiquity and
success of major players like Klarna and Clearpay. However, there is a
burgeoning B2B BNPL market enabling businesses to access an improved digital
version of traditional trade credit, removing the need for cumbersome paperwork
and lengthy approval waiting times.
Embedded insurance
In the past, a buyer looking to insure a new purchase would
have to go through the arduous process of finding and securing the best
insurance product they could find – and that’s after they’ve already spent
time, money and effort researching and buying the product in the first place.
Now, insurance products can be found and added on to a
purchase at the point of need with just one click, making contact with a broker
or insurance agent unnecessary and practically negating the need to trawl
through options from different insurers. A typical example of embedded
insurance can be found in travel, when we’re offered travel insurance each time
we purchase a flight or train ticket.
Looking ahead
Evidently, embedded finance has the flexibility and
universality to be applied to any company or industry with a transactional
element. It also has the potential and momentum to fully revolutionise payments
and broaden the horizons of innovation within financial services. Even
incumbent players, traditionally slow to take up new practices, have begun to realise
the world of possibilities presented by embedded finance.
Legacy systems and processes are not designed to make the
real-time decisions required for the sale of embedded finance products, and
while it would be possible for banks and insurers to migrate to a fresh tech
stack, it would be a massive and perilous endeavour. Instead, many have chosen
to partner with agile tech start-ups to achieve this goal.
Embedded finance requires a “paradigm shift” in thinking.
The finance product is ancillary to the underlying sale and no longer the main
thing that buyers were looking for in the first place. For example, a consumer
goes on the British Airways website to buy a flight, not to buy travel
insurance, even though they might end up purchasing both. Most banks and
insurance companies have distribution networks whose raison d’être is to push
products, while embedded finance relies on a “pull” logic where the consumer
takes out the financial product at the point of need.
As a consequence, embedded finance requires providers to
view their financial product through a technical lens. It’s a digital product
that combines the underlying financial product and the API to make it available
to partners. Traditional banks and insurers are not equipped to build, document
and promote an API to an ecosystem. They haven’t yet realised that the “API” is
just as important as the contract – and that they actually have two clients, the
first one being the developer or the partner in charge of embedding the
product, the second one being the end user who will take out the product.
For businesses looking to capitalise on these new
opportunities, the first step should be to assess existing processes and tools
and determine which can be readily enhanced through an embedded solution. Then,
research and get in touch with a relevant partner able to provide a modern,
frictionless solution.
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