What Is Embedded Finance?

Embedded finance has emerged as a new model of technology that allows companies to develop and execute end-to-end processes outside of the boundaries of the bank. According to an investment fund called LightYear Capital, the embedded finance market will be worth almost $230 billion by 2025, an increase of tenfold over 2020. The term “embedded finance” refers to financial services provided through third-party platforms. It involves collaborating with partners to build and operate end-to-end processes outside of the bank’s traditional boundaries.

Embedded finance is a type of financial service offered by companies other than banks, with the aim of retaining and increasing the lifetime value of customers. The trend is growing rapidly, with many fintech companies and non-fintech players now jumping on the bandwagon. Embedded finance has emerged at a time when online shopping was more complex than it is today, and customers were directed away from websites to complete their transactions. Embedded finance became a logical step when the advent of fintech made it possible for companies to integrate more efficient payment methods into websites and apps.

Embedded finance is already in use in the B2C sector, but it has the potential to change how small businesses operate. Small businesses can benefit from a variety of solutions, such as delegating payment authority to an external receiver. This approach improves relationships with suppliers, as they are more likely to offer discounts and extended terms in the future. Embedded finance can help businesses diversify their product offerings and lower their risk profile.

Embedded finance has multiple benefits for businesses and consumers alike. Some examples include Uber and Starbucks. Embedded finance allows consumers to top up their card with money without carrying a wallet. By removing friction from transactions, consumers can be more likely to return. Furthermore, it allows businesses to make credit card payments more convenient for employees and customers. Embedded finance also allows companies to offer multiple payment options to customers, thereby increasing operational efficiency and customer experience.

Embedded finance is the use of API-driven banking services. This enables brands and companies to create their own financial products without incurring high development and compliance costs. In addition, it allows fintech companies and banks to compete with each other in the market. The potential for this approach to become a defining trend in the next few years cannot be denied. The future of financial technology is now brimming with possibilities. So, how can businesses take advantage of this emerging trend?

The key to enabling these services is building an ecosystem of partners. Fintechs need banking partners to access payments, lending, and other financial services. While big technology companies and nonbanking players can build financial services, they can’t become a bank. Therefore, they must develop banking as a service (BaaS) infrastructure to provide end-to-end financial solutions to consumers. However, these partnerships will require regulatory approval and balance sheet funding sources.