How Embedded Finance is Reshaping Transactions

Highlights:

• Embedded finance is the integration of financial products and services into APIs and platforms by non-financial entities.
• It expands its influence by incorporating diverse fintech processes into the website or app of a financial institution.

The seamless integration of financial services into everyday life is entering a new phase. Many consumers and businesses find financial services most effective when integrated into a connected customer journey rather than provided as a separate set of interactions accompanying the journey.

As consumer habits and technology advance, businesses are increasingly embracing embedded finance, streamlining payment options to make accessing financial services more convenient for customers. This trend not only transforms the delivery of financial services but also presents new opportunities for fintech companies and businesses to elevate customer experiences, foster loyalty, and diversify their revenue streams.

When it comes to the B2B landscape, embedded finance empowers SaaS providers to receive customer payments directly within their platform, eliminating the need for redirection to external websites and ensuring a seamless experience. Let’s start with the foundation.

What is Embedded Finance?

Embedded finance occurs when non-financial companies provide financial products and services through APIs and platforms. While the concept isn’t entirely new, recent technological advancements have made it more appealing.

The rapid integration of embedded finance into user-friendly digital platforms such as apps, digital wallets, reward programs, and insurance services is capturing the attention of both businesses and consumers.

It has the potential to empower millions of people globally by enhancing the convenience and accessibility of financial products and services. The primary advantage of embedded finance lies in making financial services more readily available to consumers.

By integrating these services into products already in use, customers no longer need to search for separate providers actively.

We’ve followed the basics to check out various embedded finance products and see how they’re changing the way we manage our money.

Embedded Finance Product Categories

Embedded finance solutions are reshaping our approach to managing money, which offers  convenience and innovation like never before.

From making payments easier to manage accounts, provide loans, and offer complete banking services, the categories listed below address different needs.

Look at the table below to get a clarity:

The table above highlights key product categories, demonstrating how embedded finance enhances accessibility for both consumers and businesses. Real-life examples will make everything even more clear.

Examples of Embedded Finance: Transforming Everyday Transactions

Embedded finance seamlessly integrates financial services into customers’ immediate needs, eliminating the need to search for services separately.

Here are some popular services:

• Embedded banking (Banking as a Service)

The terms ‘embedded banking’ or ‘banking as a service’ are sometimes used interchangeably with ‘embedded finance.’ It involves non-financial companies providing users with branded checking accounts for fund management and payments.

This model is particularly suitable for sellers or service providers using a platform for business transactions. It offers expedited access to funds and exclusive perks for platform users.

For instance, Lyft offers its drivers a checking account and debit card, providing immediate access to earnings after each ride.

Similarly, Shopify Balance benefits store owners by accelerating payments and eliminating the need for a separate business bank account.

These solutions aim to enhance platform loyalty through a streamlined user experience and unique rewards, fostering an exclusive connection between the user and the platform.

• Embedded lending

Traditionally, lending occurs separately from a purchase, and many buyers require financing for specific transactions. Embedded lending enables businesses to provide financing services at the point of sale.

Prior to embedded lending, customers typically relied on credit cards or traditional loans from financial institutions, often associated with higher interest rates.

The advantages of embedded lending for businesses include boosting sales by offering customers immediate access to loan options.

One prevalent form of embedded lending is the ‘buy now, pay later’ (BNPL) option. BNPL allows buyers to make payments in installments over a predetermined period without incurring interest. Buyers can choose from various options, including weekly or monthly payments.

• Embedded payments

Typically, entering credit card information can deter consumers from completing a digital purchase. Embedded payments eliminate this friction point by seamlessly connecting and storing payment methods for future use with just a click.

For instance, the Amazon app streamlines the payment process with 1-click transactions, securely storing card information for user convenience and offering rewards or discounts for loyal customers.

Embedded payments extend beyond credit cards, providing the option for direct payments from bank accounts and saving merchants on fees.

SmartPay Rewards, a mobile app for gas stations, encourages the use of its embedded bank account payments tool by offering discounts and rewards. This not only saves on fees but also fosters brand loyalty and customer retention.

• Incorporated investing

Embedded investing empowers non-investment service providers to offer clients investment choices, creating additional revenue streams for businesses. Traditionally, customers needed to open accounts with established financial institutions like Fidelity, Charles Schwab, or Edward Jones or explore online stock trading options such as Robinhood or E-Trade.

Today, customers can seamlessly invest in cryptocurrency using familiar platforms like PayPal or Venmo. Consumers increasingly seek platforms that provide diverse services, resembling a super app where they can efficiently perform multiple tasks within a single platform.

• Embedded insurance

While not entirely novel, embedded insurance has gained rapid traction in digital marketplaces, particularly with the surge of fintech. Users now have the ability to instantly purchase insurance alongside online transactions, providing timely coverage when needed.

Flexible options, such as term choices, may be available. Many embedded insurance offerings stem from collaborations with fintech companies, allowing customers to seamlessly add insurance, such as extended warranties, to their purchases.

• Embedded fintech

Embedded finance extends its reach by integrating various fintech processes into a financial institution’s website or app. For instance, a bank can enhance customer services by reviewing subscription plans helping users eliminate unused services to save costs.

Other benefits may include facilitating cryptocurrency investments directly from the banking app and eliminating the need for separate registrations on external platforms.

2023 Embedded Finance Report for B2B SaaS Companies

The 2023 embedded finance Survey Report by Payrix found that 98% of participants intend to introduce or enhance an embedded finance product within the coming 12 months.

SaaS 3.0 marks the evolution beyond traditional SaaS models. While SaaS 2.0 companies may have provided payment options, SaaS 3.0 ventures into lending, banking, card issuing, insurance, payroll, and employee benefits.

Moreover, they develop customized financial products for specific verticals, featuring contextual offers derived from proprietary data.

Key findings of the embedded finance report:

• It is deemed crucial by SaaS companies, with a majority currently offering three fintech product categories and planning to expand into two to three more categories within the next 12 months.
• B2B SaaS platforms place a strong emphasis on embedded finance, currently providing an average of three to four fintech product categories, and they are planning to add three to four more categories in the coming year.
• Survey respondents highlighted that over 40% of customers adopt embedded finance products, resulting in an average revenue increase of over 40% per built product.
• B2B SaaS companies outperform in revenue generation from products of embedded finance, experiencing a 9% point increase in Average Contract Value (ACV) lift compared to the overall respondent pool.
• Lending and payments, including AR/AP, stand out as the most prevalent embedded finance categories currently offered. At the same time, respondents prioritize expanding into lending and banking via card issuing in the next 12 months, followed by embedded payroll beyond that.

The SaaS 3.0 embedded finance report stems from a survey of 1600 participants, including founders, executives, engineers, and product development teams across diverse-sized SaaS companies serving B2B customers.

Conclusion

Embedded finance is changing the game by seamlessly integrating financial services into everyday life. This shift is transforming traditional banking, making services more accessible and convenient for both consumers and businesses.

The 2023 survey report emphasizes the significance of this trend, with a large majority looking to introduce or improve embedded finance products.

The evolution of SaaS 3.0 into various financial sectors offers customized products based on proprietary data, further cementing the transformative nature of embedded finance.

In essence, embedded finance is shaping the future of fintech, bringing forth competition, innovation, and user-friendly financial solutions. The excitement around this transformative trend is palpable.

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