Embedded finance on the cusp of a breakout

Subject :Economy

Section: Monetary Policy

Key Points:

As financial institutions press the pedal on digital adoption to enhance customer experience and widen their reach, embedded finance has emerged as an innovative approach to connect with a vast pool of consumers who may have a digital footprint but no direct interaction with the financial institution.

What is embedded finance?

Embedded finance is the integration of financial services into non-financial offerings.
Examples of embedded finance might include an e-commerce merchant providing insurance, a coffee shop app that offers 1-click payments, or a department store’s branded credit card.
Effective embedded finance solutions meet the customer where they are with a financial option they need, whether that be a loan, payment program, insurance plan, or easy way to make a payment.
Some embedded financial services have been around for a while, like airline credit cards, car rental insurance, and payment plans for high-priced items.
Now embedded finance is taking hold online, as e-commerce retailers are offering banking services directly on their websites without re-directing customers to a bank.
This phenomenon is enabled by third-party ‘banking-as-a-service’ companies that use API integrations to embed financial services into the user experience of non-financial companies.

Some use cases of embedded finance are:

Non-financial companies offer their users a branded checking account to hold funds and make payments. Embedded banking typically makes the most sense for sellers or service providers using a company’s platform to conduct business. It likely offers faster access to funds and perks that only platform users can access.
Branded credit cards predate fintech, as shoppers have long been able to get branded cards from their favorite department stores. However, fintech has expanded companies’ ability to offer branded credit cards and increased the use cases where it makes sense.
Embedded lending is a type of embedded finance that allows users to access more favorable loan options at the point of sale. “Buy now, pay later” (BNPL) is one of the most visible forms of embedded lending seen by online shoppers.