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Before the rise of embedded finance (EmFi), the majority of financial services provided to consumers and small businesses alike were handled by local bankers and providers. Business transactions and relationships with financial services are changing as EmFi gains popularity among businesses seeking to maximise productivity and efficiency.   

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Rather than having to access standalone financial services from traditional institutions, it is more convenient for clients to access payments, lending, insurance, and other financial services from one company. This proposition guarantees cost-reduction and risk-reduction benefits to businesses throughout the value chain.

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In this article, A Beginner’s Guide to EmFi: Part 1 Introduction to Embedded Finance, we dive deep into the world of EmFi. Find out how it is mutually beneficial for both businesses and consumers, why it is trending, and its place within the financial value chain. 

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What is Embedded Finance?

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In a nutshell, EmFi integrates financial services into products or services provided by non-financial businesses. Some examples include an e-commerce merchant providing insurance at check-out, a coffee shop app that offers one-click payments or a branded credit card of a department store. EmFi offers all businesses the platform to innovate beyond prior systems while simultaneously making quicker, simpler, more delightful experiences.

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Effective solutions meet customers' needs and provide the financial options they require, whether a loan, a payment or an insurance plan. This approach makes buying products faster and easier for customers while providing opportunities to streamline back-end processes for businesses. EmFi enables financial services to be used in conjunction with a customer’s product or service, in real-time, rather than being entirely separate. Shopify, an e-commerce platform, is a good example, as it has started to offer lending services as well as bank accounts to businesses.

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A customer-centric approach is key to EmFi's success. This can be achieved by offering convenient value propositions and aiming for a mutual benefit for the business and its customers. The outcome is that customers increase their financial management productivity whilst businesses boost their resources, automate operations and give rise to more revenue opportunities. By incorporating banking software into the website or mobile app, businesses offer people the possibility to purchase a product through the digital channel, finance their purchases, and even apply for an insurance policy in the checkout process, all with a single click.

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Good for customers, good for businesses

EmFi is beneficial for both customers and businesses as it removes various problems faced by current or prospective customers while simultaneously creating new growth and retention opportunities.

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Advantages for customers:

• Enhances the user experience and increases customer convenience by removing unnecessary steps and friction in the purchasing journey. 
• Offers new purchasing opportunities through BNPL or point-of-service loans, creating an affordable payment plan in just a few clicks.
• Streamlines financial services by eliminating the need to shop around for a provider and get the service they need right from the brand they trust.

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Advantages for businesses:

• Diversifies its revenue streams by integrating financial services into the core product and service offerings without incurring the overhead associated with operating a banking or payment business. Moreover, increased customer loyalty and more frequent interaction generate additional revenue streams.
• Leverages the advanced customer insights gained to increase brand loyalty and offer a more compelling user experience. Understanding these customers better within multiple touchpoints can also help businesses innovate.
• Unlocks growth opportunities by reaching out to previously untapped markets such as the unbanked. EmFi creates a platform for fintechs, banks and lenders to offer more tools and resources for users that may not have access to traditional banking. According to a report from Plaid and Accenture, 85% of businesses implementing EmFi report that it helps to acquire new customers.

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The growth of Embedded Finance

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Forbes estimates EmFi will generate $230 billion in revenue by 2025 globally, an increase of tenfold from $22.5 billion in 2020. The LATAM region is growing more rapidly than other regions, and EmFi revenues are expected to increase even further from $7,495.9 million in 2022 to $28.735.7 million.

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Collaborations, however, are crucial, especially in Latin America, where banks still need help with technologies and interfaces. Non-financial businesses that cannot yet provide financial services can also benefit from this. Furthermore, EmFi is poised to flourish as government regulations improve and frameworks are brought in due to peak customer demand. 

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Increasing products and service delivery with a strong user experience and little resistance is expected to, in turn, increase cross-sector strategic alliances in LATAM over the upcoming quarters. For example, Pomelo builds state-of-the-art fintech infrastructure that enables businesses to create a fintech business and launch cards “much faster” across LATAM. With its launch in 2020 in Argentina, Pomelo has quickly expanded into other countries in LATAM, including Brazil, the trophy country.

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"The adoption of EmFi solutions will increase as the use of digital solutions increases. With smartphone penetration already high, COVID simply fast-tracked the adoption of digital services that are now part of people’s everyday life.”

By Peter Barcak, Founder and CEO of credolab

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What is the reason for its increasing popularity?

Fintech infrastructure and online integrations have matured immensely since the recent global pandemic. Due to the increasing reliance on digital services, users have become accustomed to online shopping and experienced the convenience of one-stop shopping. Crucial changes in commerce, merchant and customer behaviour, and technology have also enabled this progress:

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1. The digitisation of commerce and business management: The COVID-19 global pandemic heightened digital commerce for B2B and B2C buyers. Customers have sampled the convenience of e-shopping and experienced its benefits. According to a McKinsey report, 33% of global card spending now takes place online, which means businesses must be prepared to meet this demand and win in that space. Customers expect a seamless experience with personalised messages and products, plus a multi-channel and multi-touchpoint experience.  
   
   
2. Fintech infrastructure: The revolution of Open Banking via Financial Application Programming Interfaces (Financial APIs) offers the secure exchange of banking data. This enables the communication between third parties and online banking systems to retrieve of customers’ banking data and carry out transactions, accessing inactive demand.
   
   
3. The rise of a new digital generation: The digital native generation expanded the number of customers and businesses using digital platforms for all their financial needs. This includes the millennial generation and those that came after, which make up over a third of the workforce today. Over the next decade, it is expected to reach 58%, making this generation the most dominant in the workplace.
   
   
4. Lower digital customer acquisition costs: According to Dealroom, acquiring a customer for a bank or insurance costs four times more than e-commerce. Hence, banks and insurance companies are more inclined to embed offers into consumers' existing digital mindsets and behaviours to minimise customer acquisition costs. By combining user and behaviour data with payment data, customers can receive bespoke services tailored to personal needs and circumstances. Because these customers already have relationships with the company, they are more likely to purchase the recommended offers. As a result, these businesses have significantly lower customer acquisition costs than traditional banks.
   
   
5. Acceptance rate is already high: Based on a survey by Solarisbank, 15% of customers are prepared to use a checking account from a non-financial service, and 61% can envisage using an integrated financial service. As the convenience offered by EmFi is the catalyst for this increased customer demand, these percentages are no surprise. New players are encouraged to compete in this market because of the high acceptance rate.
   
   
6. Partnership ecosystem: EmFi has also been able to grow through the increasing number of partnerships that arise from “super apps”. More parties are exploring partnerships to leverage and expand multiple financial services into one everyday-use service. 

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Embedded Finance value chain 

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It is important to distinguish between the different types of EmFi and their key advantages before diving into the value chain. The key categories of EmFi include, but are not limited to:

1. Embedded banking: Reduces first and third-party fraud at the onboarding stage seamlessly 
2. Embedded lending: Improves risk assessment of any customer, regardless of credit bureau history
3. Embedded insurance: Increases cross-sell, upsell and retention rates
4. Embedded payments: Detects real-time chargebacks and transaction fraud 
5. Embedded investments: Streamlines the integration of investing into various platforms’ vertical offerings.

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There are three key categories of players within the EmFi value chain: provider, enabler and embedder. 

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Provider:

• This refers to large banks, small finance banks, non-banking financial institutions and startups which provide financial services like payments, lending and insurance.
• Manages regulatory risks, credit risks and compliance risks and offers access to loans, payments, and insurance products.

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Enabler

• This refers to companies that build applications to enable and support embedders and providers in activities like credit scoring, payments, data security, connectivity and insights.
• Credolab, for example, offer risk, fraud and marketing solutions all via a single API to connect embedders with providers to enable distribution in areas such as credit, payments, compliance, data connectivity and KYC. In some cases, enablers can also provide financial services directly to the embedder.

Embedder

• This refers to non-financial businesses that own the website, mobile app, and other customer-facing digital platforms that intend to embed finance offerings in their platforms and marketplaces.
• Permits services such as B2C shopping, the gig economy and B2B procurement.

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Previously, each player had a distinct role. Now, with the advancement of technology and the market, players compete with each other to gain higher revenue by growing across the value chain. As a result, these three individual categories start to overlap and lead to a multi-directional exchange.

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With EmFi, all participants in the ecosystem can offer customers the services they need to improve their experience in a secure, simple, and cost-effective manner through a single interface. Stripe, for example, has partnered with Goldman Sachs and other banks to offer embedded financing to third-party platforms and marketplaces. Apple Card also partnered with Goldman Sachs to allow iPhone users to apply digitally (integrated with Apple Pay and the device's Wallet app). In this way, cashback on purchases and interest-free purchases are offered with no fees and no handling charges.

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The future of EmFi

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EmFi offers financial businesses the opportunity to establish important partnerships with non-financial businesses. For B2B marketplaces and e-commerce platforms, choosing the right partner is crucial to driving payments or offering credit terms to their customers. Making the right decision for the future can be challenging, and a partnership's full integration into a business makes it even harder to change. 

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However, as these partnerships progress, EmFi will become more prevalent. A wide range of businesses, including retailers, travel, and software firms, have started adopting EmFi into payment services to improve accessibility. Dealroom describes EmFi as a "multi-trillion-dollar opportunity" that generates more potential than the combined total of all fintech startups and top global banks and insurers. By 2030, EmFi is predicted to reach $7.2 trillion, twice the combined value of today's top 30 banks and insurers.

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Predictions and insights 

“In the next few years, we will see Embedded Finance(EmFi) expand into various sectors: Education, Healthcare, Real estate and Agriculture. All are attractive in terms of the size of the opportunity as well as the potential to offer innovative EmFi products. We will also see increasing partnerships of Fintechs with leading consumer brands and leveraging Open Banking APIs to integrate EmFi within the overall customer journey.”

By Bharath Kumar Vellore, General Manager of APAC at Provenir

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In the Education Technology (EdTech) sector, global policies have helped students gain greater access to loans. Unfortunately, these often come with high-interest rates, which negatively affect the financial health of students. EmFi and its access to deep customer analytics make it possible to more accurately evaluate a student's ability to repay loans and lend accordingly. 

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In the healthcare industry, patients are hindered or delayed in receiving treatments because of high costs, lack of transparency in pricing and payment options. EmFi can make the healthcare industry more profitable by decreasing costs, connecting and providing flexible and convenient payment options while simultaneously solving these issues.

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According to a report by Bain, different industries show varying maturity levels in EmFi. Retail, e-commerce, food and mobility show a high degree of growth, while industries including real estate, travel and health are still in their early phases. These differences are directly related to barriers, including regulation, compliance and digitisation of services. Despite the slow advancement of some industries, there is still tremendous potential for growth.

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Therefore, it is no surprise that Venture Capital (VC) investments are expressing a deeper interest in this sector. According to Statista, VC investments in EmFi skyrocketed in 2021, gaining a value of$4.25 billion, which is almost three times more than in 2020. Thus, businesses constantly seek partnerships to expand business models and raise VC investments.

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Revolution of EmFi in the financial sector

Today's business environment emphasises delivering a superior customer experience, valuing customer time, and building a seamless ecosystem for the customer. EmFi enables businesses to understand customers' habits and needs better, thereby driving business development. Simultaneously, fintechs have evolved due to new customer and provider relationships, increased revenue streams, partnerships, and competition from previously unrelated industries.

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However, EmFi is only just beginning its transformation in the financial sector. With increasing recognition of customer needs, businesses will adapt business models to maximise revenues and deliver the best customer experience.

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