Embedded finance and its game-changing potential– Part 1
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‘Embedded’ means entrenched or implanted deeply. Embedded finance has many subsets namely Embedded Lending, Embedded Insurance, Embedded Payments, Embedded Banking and the likes.
Buy Now Pay Later is a leading example of Embedded Lending, where customers can avail credit access at the point of sale to fund their purchases. Embedded finance has been touted as the fourth platform by experts and become an expected $7Trillion business opportunity globally by 2030. In this article series, we shall understand the impact that the confluence of tech and financial services can bring.
Redefining customer experience (CX) like never before
Embedded finance puts customer convenience first. The moot concept behind embedded finance is that any non-bank entity or non-financial entity can enable financial services for its customers through technology via embedding the facility at the point where it is required most i.e. customer touchpoints in a timely manner, without being a financier itself or operating its own software.
A study by Lightyear Capital predicts that Embedded Finance is slated to cross $230 Bn in revenues by 2025 (a 10x jump from $22.5 Bn in 2020) and exceed $1 trillion in value.
Buy Now Pay Later: Leading the way in embedded lending
Buy Now Pay Later, a subset of embedded lending, is an example of innovative credit lending with a customer-centric focus.
It’s considered embedded as it is present in an invisible manner at the PoS, where one would least expect to find credit or access to financial services.
At the checkout page, one would normally expect a cash outflow or a credit purchase with associated interest costs (read: credit card or personal loan). BNPL breaks this traditional silo by offering credit with an interest-free credit period that makes it an attractive option for millennials and young buyers.
• On-demand credit channel
The retailer is assured of upfront payment for the full value of the purchases from the BNPL fintech and the end-customer repays the BNPL fintech.
BNPL players use advanced credit models, data analytics and ML tools to ascertain the credit risk of each customer. All of this data is available right away at the merchant’s platform and is accessed to offer instant credit – reducing costs of loans, enhancing the speed of credit disbursals and eliminating the need to maintain customer financial data like credit card details etc.
Even those without credit history or a high CIBIL score are included in these small ticket sized BNPL credit facilities. By integrating info from multiple sources, often BNPL players have deeper insights into the credit patterns of customers than traditional manual channels. All of this makes BNPL cost-efficient, prompt and inclusive.
• What’s fuelling the BNPL wave?
A McKinsey study pegs the growth in consumer use of POS credit at 3x times higher than credit card usage and 5x times higher than private-label card usage. In other words, POS credit is counted amongst the rapidly growing payment modes.
Just like online shoppers have a sense of urgency in buying their desired products with concerns about out of stock or price surges, a similar sentiment has got extended to the credit angle. Thus BNPL enables higher affordability compared to traditional credit mediums which would require a longer waiting period to get a credit approval or involve cumbersome paperwork.
• Simpl’s BNPL offering:
Let’s consider the example of Simpl’s Buy Now Pay Later offering. Partner merchants seamlessly integrate or embed Simpl’s Buy Now Pay Later at the checkout page via APIs.
- Without having to navigate outside the merchant website or online retailer app, the customer can easily pay for the purchases by opting for Simpl.
- With Simpl, customers enjoy a hassle-free process of instant credit without detailed documentation or a tedious credit application process for an interest-free credit period. The convenience is delivered in an almost ‘invisible’ manner to the end customers.
- The end-customers interact and transact with the merchant platforms, despite the credit facility and software infrastructure being provided by an embedded finance party like Simpl.
- The customer purchase patterns and merchant recommendation makes the underwriting process easier for the fintech player.
- Merchants are able to benefit from increased order value and reduced cart abandonments
All in all, Buy Now Pay Later works as a win-win scenario for all the ecosystem stakeholders – customers, merchants and the fintech players.
Popular formats in embedded finance
We saw the specific example of BNPL under embedded lending. We shall now look at other popular formats across financial services that fall under the broad embedded finance canopy.
• Embedded payments
During the predominantly cash-driven transactions era, forgetting one’s physical wallet at home meant postponing the purchases. With multiple digital payment options, that’s not the case anymore. Embedded payments have further augmented the convenience levels that enable purchases at any time and from anywhere. In essence, non-financial players have crossed over into offering financial services i.e. payments options to their customers at the time of need.
• Popular examples: The most popular example is ride-sharing apps like Ola or Uber which have their own payment app. Rather than paying the driver, one can preload cash into digital wallets or link with their bank account through password-protected access and the amount is debited and payment successfully made in almost an instant upon reaching the destination.
» Expansion: This feature has exploded to many other verticals- e-commerce, telecom players, eateries and beyond.
» Rewards: Some of the players even offer reward points that may be redeemed in their other stores. For example, through a mobile plan recharge, one can earn cashback or Wallet points which may be used in a store or app.
» Diverse options: Through an embedded payment app and a click, one can easily pay for their desired transactions, book a cab, pay utility bills, transfer money to their friends and even receive money.
• Embedded banking
Embedded banking entails an expansion of the traditional banking functions i.e. save, lend, invest etc, being offered by non-financial players. This may be made possible by connecting an entity that’s core expertise lies in finance & banking with a non-financial entity by API integration. Goldman Sachs and Apple collaborated to launch the Apple Card.
Alternatively, a non-financial player may offer certain bank-like services. For example, Airtel Payments Bank offers basic banking products via the digital route for it customers like a savings account etc. The following stats point to the immense growth potential:
- 78% of banks rely on banking APIs to enhance customer experience
- 91% of banks are keen to partner with fintechs and wish to grant them access to their APIs
• Embedded insurance
Traditionally buying insurance policies involves multiple parties – agents, websites, brokers to compare the options and read the literature regarding the insurance policy. This was a complicated process that involved considerable due diligence prior to making a decision. Further the pandemic accelerated the demand for health insurance and life insurance.
For example, Tesla includes insurance in the purchase price of the vehicle. Embedded insurance may work out to be lower in costs compared to insurance offered by third party providers.
• Embedded wealth management and investment
Embedded wealth management has the potential to open new vistas in long-term wealth creation for customers without the need to leave the app.
Shaping the future of financial services
Technology is bridging the digital gap between financial services and customers, enabling democratization and wider access, along with the added advantages of convenience, better control, ease of use, and speed towards enhancing the customer experience. In the coming days, we can expect to witness higher competition in the embedded finance space with intense competition between direct customer-facing companies.