Understanding The Role Of Embedded Finance In The Fintech Revolution

Embedded finance is the integration of financial services into the offerings of non-financial companies. This innovative approach allows businesses to provide seamless financial solutions such as payment processing, loans and insurance directly within their platforms. This is especially effective for applications that allow users to either provide services for each other or interact in an exchange of value, be it monetary or not.

Companies like Uber, which offers in-app payment and financial services for both customers and drivers, and Shopify, which provides business owners with integrated banking solutions, are great examples of the application of embedded finance in mobile applications.

By embedding these services, these companies enhance user experience, offering convenience and efficiency that redefine how customers interact with financial services in everyday transactions.

How Advanced Is Embedded Finance?

Embedded finance is already so advanced that Uber drivers can open bank accounts within the Uber app. This not only allows all their finances to be in one place but facilitates drivers who don’t have a bank account to start their own business within Uber.

Uber is just the tip of the iceberg. As author Peterson K. Ozili notes in this white paper, there are plenty of companies taking a similar approach:

• Swatch – Swatch is a watchmaker. The wristwatch produced by Swatch has the ability to issue tokenized payment cards through SwatchPay.

• Amazon – The e-commerce giant offers financial products on its platform by selling Amazon reward cards and Amazon credit cards.

• Apple – Apple offers its own credit cards. Apple also allows users to use their mobile phones as payment devices online and offline.

• TikTok – TikTok is a video social platform similar to YouTube. The social platform partnered with Shopify to integrate shopping capabilities into the TikTok app.

• Grab – Grab is a delivery service app in Singapore that offers merchant point of sale, insurance and other financial products.

There are other, even smarter ways to diversify the portfolio of a company using embedded finance. Automobile makers can offer insurance packages. For example, Tesla provides embedded insurance services. Tesla provides insurance to all drivers who purchase a Tesla vehicle. It eliminates the need for drivers to look for alternative insurance carriers because Tesla already has information on the vehicle and the owner or driver.

Google, realizing most people use Google Maps as a navigation tool while driving, implemented a functionality in Google Maps. The feature is an in-app payment tool that allows users to purchase street parking tickets before arriving at their locations to prevent being towed or punished. The app's payment function is quick and easy.

Has Embedded Finance Reached Its Final Form?

Embedded finance is poised for significant growth, with its current market valuation already impressive. As of 2022, the embedded finance market is valued at $58 billion, showcasing its substantial impact on the fintech industry.

Looking to the future, this market is projected to expand at a compounded annual growth rate of 29% from 2023 to 2032. This rapid growth trajectory underscores the increasing adoption and integration of financial services into non-financial platforms, reflecting a paradigm shift in how consumers and businesses access and use financial products and services. The expansion is a testament to the potential of embedded finance to redefine the financial landscape.

The projected value for 2032 is a whopping $730 billion, meaning it will be more than 10 times its current market size. As of 2023, embedded finance is far from reaching its final form.

The Potential Challenges Of Embedded Finance

While revolutionary, embedded finance definitely faces several potential challenges. Like with most other financial innovations, a primary concern is regulatory ambiguity. Integrating financial services into non-financial platforms creates a complex web of responsibilities, especially when there are data privacy violations.

Once again, according to Ozili, determining which entity—be it the financial institution, the API developer or the non-financial company—bears the responsibility can be challenging and resource-intensive for regulators.

Another significant challenge is the intricate commercial relationships inherent in embedded finance, such as in embedded lending. Banks providing loans through non-finance platforms may struggle with direct borrower engagement, complicating loan recovery processes.

Embedded finance could potentially lead to traditional banks losing market share as non-financial companies start offering competitive financial services. The need for strong partnerships is crucial; however, a lack of collaboration between financial institutions and API providers can hinder progress.

Expect Change And Exponential Expansion

Embedded finance is becoming the cornerstone of the fintech revolution. It envisions a future in which financial services are seamlessly incorporated into the fabric of ordinary digital interactions. This integration offers improved user experiences and ease, but it is not without hurdles, including regulatory ambiguity and complicated collaborations.

As we watch this paradigm change, the market's expected exponential expansion emphasizes embedded finance's tremendous potential. The embedded finance path will be one of innovation, adaptation and transformation, changing how we view and engage with financial services. It's a journey that will continue to develop, bringing with it both new chances and new obstacles.