Embedded Finance: A Complete Guide

What is Embedded Finance?

Embedded finance is a term for integrating financial services—such as lending, payment processing, or insurance—into nonfinancial businesses' infrastructures.

It allows companies to offer financial tools or services directly within their existing products or services without redirecting customers to traditional financial institutions.

For instance, an electrical shop could provide point-of-service insurance for in-store goods, streamlining consumers' financial processes and enhancing convenience.

Notably, this trend is reshaping the future of finance, with an estimated market value of over $228 billion by 2028; that’s a 148% market growth from 2024.

Core Components of Embedded Finance

Embedded finance comprises three primary components that work together to enable businesses too ffer embedded financial services:

1. Infrastructure:

This component includes the software and technology that connects businesses with financial institutions and enables seamless integration of financial services into their products or services.

Example: Omniwire connects financial institutions with apps, enabling secure access to financial data.

2. APIs (Application Programming Interfaces):

APIs allow companies to securely and efficiently exchange data and services with external parties, such as financial institutions.

Example: Omniwire Card Issuance API allows businesses to issue virtual, physical, and co-branded cards to their customers.

3. Partnership with Financial Institutions:

Embedded finance relies on partnerships between nonfinancial businesses and financial institutions to offer financial services to customers. It requires atrust-based relationship where both parties collaborate and coordinate to ensure a seamless customer experience.

Example: Omniwire partners with other financial institutions, such as banks, payment processors, and insurance companies, to offer businesses a comprehensive suite of financial services.

Examples of Embedded Finance Applications

1. E-commerce Platforms:

Payment Gateways: Many e-commerce websites integrate payment gateways like PayPal, Stripe, or Square to facilitate seamless transactions without redirecting users to external sites.

Buy Now, Pay Later (BNPL): After pay, Klarna, and Affirm allow customers to make purchases and pay for them in installments, which are directly integrated into the checkout process.

2. Ride-Sharing Apps:

In-App Payments: Apps like Uber and Lyft embed payment options within their platforms, allowing users to pay for rides without leaving the app. They also offer features like fare splitting.

Driver Financial Services: Some ride-sharing platforms offer financial services to their drivers, such as instant payouts, savings accounts, or access to affordable insurance.

3. Retail Stores:

Point-of-Sale Financing: Retailers like Best Buy and Apple offer financing options at the point of sale, allowing customers to pay in installments. This is often facilitated through partnerships with financial institutions or fintech companies.

Embedded Insurance: Stores can offer insurance for products, such as extended warranties or protection plans, directly at the point of sale.

Benefits of Embedded Finance for Businesses

1. Enhanced Customer Experience:

Embedding financial services into a business's existing products or services eliminates the need for customers to visit third-party financial institutions. This streamlined process can improve customer satisfaction and loyalty by providing a convenient and seamless experience.

2. Increased Revenue:

Embedded finance can generate additional revenue streams for businesses through commission fees or interest on financial services offered. This can also increase customer spending and retention.

3. Access to Real-time Data:

Embedded finance technology and APIs provide businesses real-time data and insights about their customers' financial behaviors. This information can help drive targeted marketing efforts and inform business decisions.

4. Cost Savings:

By partnering with financial institutions, businesses can eliminate the need to build their financial infrastructure, reducing the costs and resources required to offer financial services.

5. Competitive Advantage:

Since embedded finance is still a relatively new concept, businesses that adopt it early can gain a competitive advantage by offering their customers innovative and convenient financial products or services.

6. Greater Control and Flexibility:

Embedded finance gives businesses more control and flexibility over their customers' financial services. They can choose which services to integrate and how to customize them according to their customer's needs and preferences.

7. Faster Time-To-Market:

Integrating pre-builtfinancial solutions or partnering with financial institutions can significantly reduce the time businesses can offer financial services to customers, accelerating the time to market for new products or services.

8. Avoiding Regulatory Hurdles and Compliance Costs:

By partnering with established financial institutions, businesses can avoid the complex and costly regulatory hurdles in offering financial services. Financial institutions already have the necessary licenses and regulatory compliance to alleviate this burden for businesses.

Conclusion

Embedded finance is changing the game for businesses of all sizes and industries, offering opportunities for innovation, revenue growth, and improved customer experiences.

As the market continues to expand and evolve, businesses that embrace and integrate embedded finance into their operations will have a competitive edge in the evolving world of finance.

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