The era of embedded finance is taking hold, and with an estimated market value of $3 billion by 2030, it’s clear that it’s not just a financial fad, it’s the future.
Between 2020 and 2021, the coronavirus crisis caused businesses to rethink and accelerate their digitization strategies unlike ever before. Digitization projects planned for years in advance were completed within months. As we head further in 2021, it’s clear that these changes are here to stay. One of the most notable examples of digitization is in the fintech sector, and particularly how traditional businesses are engaging finance on an entirely new level by integrating financial mechanisms into their overall business plan.
by Dmitry Dolgorukov
What is embedded finance?
Like all new concepts, for those just becoming acquainted with the idea, it can be challenging to get a grip on what the term means. Simply put, embedded finance is the use of financial tools or services, such as lending, payment processing, or insurance, etc., by a non-financial provider. For example, an electrical shop that offers point-of-service insurance for goods sold in-store.
Embedded finance is designed to streamline financial processes for consumers, making it easier for them to access the services they need when they need them. In previous years, to make a substantial purchase, consumers may have had to go to a physical bank branch to apply for credit or get insurance for a product. Now, with embedded finance, they can do it all in one place—the point of service. Some of the most well-known examples of embedded finance today include:
- Amazon’s EMI loan options
Even executives at traditional financial organizations agree that the future is changing. The CEO of JPMorgan, Jamie Dimon, noted in his April 2021 shareholder’s report that it is evident that the future of finance is changing, and both traditional providers and new competitors need to adjust their business to new market realities.
Benefits of embedded finance
Solves consumer pain points
One of the primary benefits of embedded finance is its ease of use for consumers. By removing consumer pain points, such as the need to seek credit elsewhere, customers are more likely to complete a purchase and experience customer satisfaction, which is essential in achieving brand loyalty.
Is financially profitable
For businesses, this can lead to the opportunity to make an increased profit. Ease of service means that consumers are more likely to purchase an item or service and return to do so again and again.
Delivers usable business insights
Embedded finance isn’t all about convenience. In addition, it’s a tool for better understanding consumers and their spending habits and needs. This data can later be used to drive future business development.
5 ways embedded finance is changing the future
The benefits of embedding financial tools into your business are clear, but how exactly can it be done? Let’s look at the top 5 embedded finance uses that are changing the future as we know it.
Buy now, pay later
From Klarna to Amazon, buy now, pay later systems are creating a new line of credit for modern shoppers. Giving access to a wider range of products that can be paid over time empowers consumers to shop like never before, whether this means investing in a higher-quality piece of home technology or a travel system for a newborn, or something else entirely, this integrated payment system allows users to access the goods they need when they need them.
POS (point-of-service) lending
Evolving from buy now, pay later, integrated lending takes loans one step ahead. These types of financial tools can be embedded by businesses that are seeking to finance larger or more significant purchases. As a result, they may often require further information, such as data on creditworthiness, that allows them to lend responsibly. By integrating lending tools, such as the technology offered by experienced software developers, companies can safely and quickly allow their customers to access credit, while accessing their risk, all in one place.
Integrated insurance services
When purchasing a new product or service, customers often want to ensure that should the worst happen, their money will not have been wasted. And that’s where integrated insurance comes in. By embedding insurance financing tools, businesses are better placed to not only deliver insurance quickly but help the customer select the correct cover at the time of purchase.
Investments and trading
One the domain of stock exchanges and banks, investment banking has come a long way. New fintech platforms allow clients to engage on a whole new level with the industry and invest in a way that suits them. Embedded finance tools in investment applications allow users to connect with their brick-and-mortar bank and even invest in a way that meets their current financial situation and spending habits.
From invoicing to customer acquisition and everything in-between, financial technology-as-a-service tools as a whole are increasingly being added to company offerings, making the customer journey easier. Such tools allow clients to make financial transactions and complete their purchase without ever leaving the shop they’re making a purchase with.
What’s next? How can your company engage embedded finance in a meaningful way?
In the coming years, it will no longer be a question of if embedded financial services are available but why your business has not made them available. Consumers will expect brands to make their purchase journey simpler and less stressful. If they fail to do so, they can expect to lose business in favor of more digital-ready competitors.
By onboarding, the latest tools the market has to offer. Companies can start to design an embedded finance strategy that works for their needs, whether this is insurance, lending, or something else entirely, to bring profit to the organization and satisfaction to their customers.
For companies seeking to onboard this new technology but don’t know quite how, the advice is simple—analyze your digital needs, design which tools you want to embed, and get in contact with a reputable provider who can deliver your solution seamlessly.
Dmitry Dolgorukov is CEO and Co-Founder of GiniMachine.com, an AI-based credit scoring platform that fights bad loans. In 2019, Dmitry was ranked as one of the most influential AI leaders in Eastern Europe. Since 2020 Dmitry Dolgorukov is a member of the Forbes Finance Council.
This article originally appeared in FinExtra. Photo by Morgan Housel on Unsplash.