Embedded finance has become an integral part of many industries as it allows for easy access to payments. Thanks to Banking-as-a-Service (BaaS), smaller companies and businesses have access to more financial services than ever before. With the right partners and systems in place, embedded Fintechs can fulfil the growing needs of consumers and capitalise on this expanding opportunity.
In this article, we will look at what embedded finance is, the role of BaaS, and examples of how they function in the global market.
What is embedded finance?
Embedded finance is the integration of traditional finance and banking service tools into a non-financial business. This can include providing bank accounts and facilitating payments to lending and insurance agencies. This integration allows for a more streamlined user experience for customers, removing the need to manually hunt for the best deals, or filling out endless paperwork for a single purchase.
Many financial institutions now offer BaaS bundle offerings. These consist of either white-labelled or co-branded products structured to meet the demands of the ever-increasing need for embedded finance. By utilising a BaaS bundle, businesses can offer services without having to focus on individual purchases.
Embedded finance, banking & payments - what do they all have in common?
The key word here is embedded. All of these financial functions bolster a company’s offerings to seamlessly provide the end user with financial options at the click of a mouse, whether that would be a ‘Buy Now, Pay Later’ option on ecommerce sites, or budget household insurance schemes. These offerings can either be embedded as individual options, such as lending, or several features, using a BaaS product to create their financial environment.
APIs for embedded banking
Banking Application Programming Interfaces (APIs) play a crucial role in allowing BaaS bundles to be offered by a non-financial organisation. They integrate the banks’ products into the non-banks by communicating between the two entities. Creating the APIs to facilitate this whilst ensuring they adhere with strict risk and compliance protocols is one of the biggest hurdles to embedded banking; a burgeoning market of intermediary Fintechs aim to reduce this task by building the necessary API infrastructure for other nonbanks.
As a result, integrating financial services will become even easier so startups and established businesses can quickly and easily add financial products to their offerings and improve their user experience to become more competitive in an ever-evolving market
The rise of embedded finance
For many different industries, the COVID-19 pandemic has accelerated their transition to incorporate embedded finance. This is due to the restrictions of national lockdowns that limited a customer’s ability to access these resources in person.
Moreover, offering embedded finance and BaaS products could lead to a multi-trillion dollar market, which is enticing for fledgling entrepreneurs and legacy financial institutions alike. However, the future of this market remains uncertain, possibly ranging from becoming ubiquitous in financial institutions, new and old; or returning to scale and being dominated by only a few BaaS providers. This is a large amount of potential space for Fintechs and other financial institutions to manoeuvre and create the best product in the long run.
What is the difference between embedded finance and banking as a service?
Embedded finance and BaaS are very similar, as they both deliver financing opportunities from providers other than traditional bank systems. Although, some key differences are crucial to understanding their respective roles in the Fintech industry.
The main differences between the two are their focus. Embedded finance concentrates on offering financial solutions in conjunction with the purchase of goods or services. However, BaaS focuses on the provision of financial services that allow digital banks and non-banks to facilitate these services themselves.
Another key difference is how embedded finances and BaaS are branded. As embedded finance offers individual solutions, it is common for the integration to be clear to the consumer so they can understand where this financial product is coming from. On the other hand, BaaS is typically white-label to support the front-end provider that the consumer interacts with.
The other differences include embedded finance being defined by front-end access, whereas BaaS is defined by the back-end financial functionality. Moreover, embedded finance is generally used to streamline the buying process, whereas BaaS encourages greater use of business as it offers additional financial products.
Embedded finance use cases and examples
Here are a few use cases and examples for everything we have discussed so far.
The difficulty of a payment process can vastly influence a customer’s experience, even going so far as to dissuade them from purchasing. Embedded payments make this process as easy to use and understand as possible by condensing it down to a few clicks through an app.
One of the most well-used examples of this is ride-hailing services, such as Uber or Lyft. Users can complete the transaction in the app after arriving at their destination, instead of fumbling with cash and credit cards. The same is true for food delivery services Deliveroo or Just Eat – customers pay for their orders before the delivery driver arrives.
Traditionally, a customer would have to apply for a loan or credit card to borrow money for a large purchase. With embedded lending, they can now apply for a loan and decide on their terms of repayment during the purchase pipeline.
Successful examples include Klarna and AfterPay as they allow customers to split online purchases into smaller monthly payments.
Previously, obtaining insurance for a car or house was an entirely separate process from the actual purchase of these assets. By using embedded insurance, customers can have access to insurance policies as they are making purchases.
Airbnb makes use of this as they provide Host Protection and Guarantee insurance for their hosts. The programme ensures that hosts are confident any damage or injuries on their property will be covered and not come out of their pocket.
This makes crypto even more accessible to the masses since buying, selling or storing cryptocurrency is all possible from a single app. An example of this is a blockchain banking company that offers all of the above services so customers can acquire crypto straight from their salary account.
Investing can seem very complex and remain an enigma to the average person. Banking applications with embedded investment aim to make the process more accessible by simplifying it.
One example is Acorns, where payments are rounded up and the customer’s spare change is invested. The app also adjusts its portfolio according to what the market does so the user doesn’t need to focus on the values of stocks and traded entities.
The key value of embedded cards for merchants and service providers is to build a seamless buying experience with as few clicks as possible. In addition to frictionless user experience, embedded cards lower transaction costs, enable loyalty programmes, and provide customer insight in the form of transaction data.
To build a truly value-adding payment card, you need to know what your customers appreciate in your service. What makes them feel special and well-served? What makes them come back for more? And that existing value you can then enhance with a payment card and loyalty programmes.
The right payment card product is a tool for customers to manage their finances. When they are in control of the card through an app, they feel safe using the card. While keeping the payments safe, an embedded card can also offer choices for payment methods. Tokenisation keeps card details protected and enables the use of digital wallets.
Embedded cards will help you to make your service even more relevant for your customers. When you own a bigger chunk of the customer journey, you also get access to a larger pool of data. This data provides you with customer insight that you can harness for further developing your service.
Benefits of embedded financial services for Fintechs
Embedded finance – or BaaS for Fintechs – empower your customers with more financial options whilst streamlining their experience to provide flexibility and reduce pain. This helps to cater your product to the intended customer persona. As a result, embedded financial services pull customers towards your Fintech compared to conventional banks and financial institutions that rely on their distribution networks to push their products.
Develop unique digital banking experiences fast and at scale
Embedded finance technology and its ability to modernise B2B commerce mean banking APIs can easily facilitate data sharing between services and providers. However, bundling multiple APIs and dealing with legacy banking integrations can be painful. Integrated Finance can take that pain away with access to a suite of pre-built connections to financial service providers via a simple and easy-to-use API.
Our BaaS orchestration platform lets you focus your time, effort and investment on what you do best, delighting customers with unique new products. Your Fintech product can sit on top of our financial infrastructure to save your development team multiple complex integrations. You can easily add new providers across products or geographies as you scale and reduce overall development costs by 76%.
You can build a Fintech in weeks, not months. Request a demo today to see how you can quickly bring your digital banking idea to life.