Travancore Analytics

What is Embedded Finance? How it works and will it end Traditional Banking?

May 4th, 2023

Category: Uncategorized

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Posted by: Team TA

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Embedded finance is one of the most frequently used buzzwords in the fintech industry. In recent years, a wide range of non-financial services firms has embraced financial services, producing new revenue streams and redesigning their client engagement. Embedded finance-focused banking and payment infrastructure will likely take over the payment environment sooner than you might expect. The embedded finance sector is expected to expand its global presence and reach $248.4 billion by 2032 according to the global survey report of Future Market Insights.

Embedded Finance – what is it?

Embedded finance is the integration of a financial solution into a company’s infrastructure. This simplifies access to financial services like loans, insurance, or payment processing without redirecting the user to other websites. Hence, a service provider can incorporate financial services onto its website or app so that the customer does not need to go through the laborious process of entering the banking information to access a service or product. In other words, this system serves as a link between a brand, a customer, and a financial solutions provider.

What are the prospects for embedded finance?

Due to embedded finance, every business can now innovate outside the constraints that have traditionally boxed them in. Additionally, everyone benefits as businesses become more adaptable. Most of us interact daily with integrated financial technology without even realizing it. Embedded finance has subtly changed how people make purchases, from ordering coffee through the Starbucks app to paying for an Uber or purchasing takeaway through Swiggy. Here are some examples of how embedded finance can help you.

  •   Embedded payments

The best tool for B2B networks to use to prevent slow and late payments is embedded finance. To get capital to suppliers faster, this technology can be embedded across their payment processes, including Purchase-to-Pay (P2P) platforms, Enterprise Resource Planning (ERP) systems, and payment processing systems. Embedded payments have grown to be a vital component of the business model of any E-Commerce app or SaaS platform, with end-users regularly utilizing this feature.

  •   Insurance

The real-time bundling and sale of insurance when a customer buys a good or service at the point of sale are known as embedded insurance. Thanks to the development of embedded insurance processes, insurers can now reach this untapped market by offering products like credit life insurance, hospital cash, and personal accident insurance through microfinance without relying on expensive distribution channels like traditional banks. For instance, travel aggregators include embedded travel insurance for lost luggage, and canceled or delayed travel.

  •   Embedded credit

Embedded credit is the term used to describe the seamless integration of Lending-as-a-Feature into digital platforms. Businesses can provide credit to their customers with a familiar interface at the moment of demand creation instead of sending users to a third-party website. For instance, a customer purchasing kitchen equipment on Amazon can convert their order into an EMI at checkout without leaving the website. Thus, customers from all social and economic backgrounds will be able to obtain inexpensive, customized financial services from embedded finance.

  •   Investment

Embedded investment programs hope to revolutionize the investment management sector by making funds and equities accessible and affordable. Small-case, IndMoney, and Zerodha are a few examples of embedded investment apps in use.

How embedded finance works?

To put it simply, embedded finance services enable any company to monitor and develop unique financial services. Now, any business can easily include innovative financial products into end-user experiences for payment, debit, credit, insurance, or even investing. Payment facilitation providers like Stripe and Square have grown in popularity over the last decade, giving these benefits to digital enterprises. They are now valued at $36 billion and $57 billion, respectively, as they develop their expertise in other domains.

Embedded banking operates by integrating a financial services company into the product line of a company that does not provide financial services. Online wallets are one example. To utilize a digital wallet, a person saves their credit card information in the app. Digital wallets like Apple Pay and Google Pay are two examples of financial innovators in value transmission. BNPL, integrated banking services, QR code transactions, and carpool insurance are just a few examples of how value is transmitted through time and risk is addressed.

Digital brands and merchants prefer embedded finance to resale financial services because it generates new revenue streams at low marginal costs. It offers brand-new client experiences that promote loyalty and repeat online purchases and enables businesses to better comprehend the economics of relationships. For software firms, it might be possible to increase income per client by up to five times. For instance, the B2B e-commerce platform Shopify presently generates over $500 million in revenue annually from financial services for its sellers (with a growth rate of about 50% annually).

Embedded banking benefits traditional financial services providers, fintech companies, and product users alike with a seamless experience. A consumer is more likely to finish a transaction if there is less friction involved.  For instance, online shoppers who forgot to save their payment information or whose credit or debit card was in their wallet in a different room would leave their carts. If payment information is entered through the app or if BNPL is an option, customers are more likely to finish the transaction.

Finally, will embedded finance spell the end of traditional banking?

PWC’s research indicates that 32% of Americans said they no longer conduct their business in brick-and-mortar locations, instead switching everything online. The bank branches will certainly vanish shortly if this pace is continued. The issue extends beyond antiquated institutions to antiquated payment systems. POS machines and plastic cards are no longer the most direct and pleasant payment options available.

Embedded finance services won’t be adopted globally overnight, of course. Due to the conservative nature of the payment business, the transformation of the financial sector would take place gradually over many years. Yet, the transformation’s course is obvious. Nonetheless, they would present fierce competition, providing the financial sector with fresh avenues and chances for growth. The process of implementing embedded financial solutions is extensive and complex. So, it is important to choose the solution provider carefully and meticulously. Travancore Analytics is a highly dependable and forward-thinking technology partner with extensive knowledge and experience in the field of integrations. We are prepared to create efficient and customized solutions that will provide our clients with a competitive edge, modernize their digital infrastructure, and generate new streams of revenue.

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