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Rather than a structural change in the financial services offerings, embedded finance has reimagined the distribution model of financial services. This translates into a win-win scenario for stakeholders. Tech companies can focus on their core business centred around tech product offerings while third-party fintech vendors build API-rich infrastructure layers that enable anytime-anywhere delivery of financial services to end-customers. The ultimate beneficiaries in the ecosystem, however, are the end-customers, who gain from the offerings provided by start-ups offering ’payments-as-a-service’, ‘banking-as-a-service’, and the likes. In this article, we shall look at the other dimensions of embedded finance.
How the distribution model works
Many tech companies have channelized the focus of their resources on their core competence and opted to outsource the building of financial services infrastructure to third-party vendors, to operate these services at scale. The secret sauce is the API layer, which may then be integrated or embedded into multiple applications – be it apps, platforms, websites or marketplaces. The API fabric may be used for diverse use cases either payments processing, credit or lending. The tech company can efficiently manage their internal resources on the core business and realize greater value by outsourcing the allied and critical functions.
Let’s take an example. In a purchase transaction, the payments part though a crucial function is not directly linked to the manufacture of the product. Many reputed D2C brands focus on the products, categories, pricing, marketing strategies, inventory management, etc, and have entrusted Simpl with the payments aspect by integrating the API into their platform.
Practical applications of embedded finance in the real world
We shall look at some practical applications, where embedded finance has improved the customer experience or convenience, along with realizing cost-efficiencies for the merchants.
Accounting fintech players
Studies reveal that SMEs, the backbone of our economy face a whopping $330 billion credit gap. Fintech apps enable business loans, advances, and working capital loans to SME customers and proprietary concerns by utilizing financial data obtained from platforms. SMBs can conveniently apply for credit facilities with flexible repayment options from the accounting apps, that have detailed records of the Balance sheet, P&L and liquidity position of the customers. The app can monetise the information to earn additional revenue streams from allied business activities in the existing value chain.
Buy Now Pay Later
MSMEs often require short-term liquidity assistance, especially in the case of a seasonal business – for example winter clothing or woollens, etc. Along with BNPL credit lines for retail purchases, multiple B2B e-commerce platforms have rolled out BNPL facility to retailers at the checkout page with an instalment repayment option. For example, consider a retailer buying bulk products on instant credit for his/her business, rather than for self-consumption. A study reveals that BNPL apps have delivered a whopping 162% jump in customer acquisition and would command a 3% market share of global e-commerce by 2023. This enables better working capital and inventory management for small business entities.
HR and payroll platforms
To aid employees to meet sudden financial exigencies, certain HR tech portals offer microcredit, small-value personal loans, and salary advances to employees, which may be accessed via the corporate intranet. The amount of advance may be linked to the days of work completed in the month or as a percent of the years of service associated with the organization. The repayment may be structured as a transfer from the current account of the employer to the lender or as an EMI deduction from the monthly salary and then a credit to the employee’s salary account. The interest rates of borrowings are generally kept competitive and lower than the prevailing interest rates in the market. This also serves as a powerful tool to control attrition levels and aids in employee retention.
Aggregators like Zomato, Swiggy, or PaisaBazaar can leverage upon embedded tools to extend credit or nano insurance products to their partners like small restaurant operators and insurance agents respectively. This would provide liquidity to the partners and enhance service levels. For example, nano insurance cover for dengue is available for as low a cost as INR 49.
Ride operators like Ola can extend loan products to their drivers to upgrade their vehicles and earn higher revenue from higher price points. The evaluation may be done via the years of service, customer feedback and number of rides offered, etc.
Under the API sharing model with neo-banks, non-financial players can offer digital banking and 360-degree financial services to customers across lending (invoice financing, overdrafts, etc), wealth management and investing insurance and savings.
Logistics companies could extend vehicle insurance for trucks and extend financing options for drivers to upgrade their vehicles. The truck drivers need not go to third-party vendors for the same. This would build long-term relationships with the truck and fleet drivers.
The above are some of the examples, where embedded finance can work wonders. Currently, only the tip of the iceberg has been harnessed. There is still immense scope to realise multiplier benefits.
Players in the ecosystem
The embedded finance landscape is being spearheaded by the active participation of four key player segments as follows:
1. Embedded solution providers: These fintech players implement the API-enabled plug-and-play financial services into digital platforms or apps towards empowering customers. The pricing model may be a subscription-fee, usage-based charge, on-demand availability, and payment or a hybrid i.e. a percent of the transaction value.
2. Data providers: It is well known that ‘data is the new oil’. Along similar lines, these intermediaries fill the crucial data gap by transmitting information from the platform to the solution providers. They deploy a powerful arsenal of tech tools i.e. API, SDK or SaaS, and cloud-based connectivity tech infrastructure. This is a crucial step as any data mismatch or loss of data privacy during the transmission can adversely impact the brand value of the platforms.
3. Platforms or apps: This forms the base where the financial solutions are embedded or integrated into. This may be a website, app or network where the service is easily accessed by the end-customer via the internet, mobile, or POS. The goal is to provide a prompt, superior, efficient experience for the customer.
4. Financial players: These are the banks, NBFCs, insurance players, or financial intermediaries whose solutions are offered by the solution providers on the platforms. The services may range from underwriting, risk assessment, loan disbursal, and compliance services.
The close coordination between the above participants enables the delivery of unique embedded finance products that meet specific business needs and ultimately the expectations of the customers.
Multi-product experiences bundled into one
As customers seek integrated experiences along with simple and hassle-free processes, there is a big rush to jump onto the embedded finance bandwagon. Be it e-commerce players, retailers, telecom companies, tech giants, cab operators, data aggregators, car manufacturers, logistics players, etc- the list is endless when it comes to those seriously considering adopting embedded finance as a differentiation strategy and customer retention approach. Pay via merchant apps, get a loan from one’s accounting app, transfer money to a friend while travelling in a cab- clearly, the winners are the customers, who are spoilt for choice.