The integration of a financial product into a non-financial client experience, journey, or platform is known as embedded finance.
Nonbanks have been providing financial services through private-label credit cards at retail chains, supermarkets, and airlines for decades. Sales financing at appliance merchants and vehicle loans at dealerships are two more typical types of embedded finance. These types of arrangements serve as a gateway for the banks behind them to contact end clients.
The integration of financial goods into digital interfaces with which customers engage daily is what makes the next generation of embedded finance so powerful. Customer loyalty programs, digital wallets, accountancy software, and shopping cart platforms are just a few examples.
Obtaining financial services becomes a natural extension of a nonfinancial experience, such as shopping online, scheduling personnel to work shifts, or managing inventories, for consumers and organizations who use these interfaces. This more deeply integrated kind of embedded finance has risen dramatically in recent years in the United States.
Fundamental shifts in business, merchant and customer behavior, and technology have facilitated the growth of embedded finance. The digitalization of commerce and company management has vastly increased the chances of integrating money into non-financial client interactions.
As much as 33% of global card spending—50% in the US—is now done online, with a major share of small and medium businesses in the US relying on digital solutions to manage their operations.
How does Data become an Important component?
Data is necessary in this context because it gives an edge to those companies to offer better and faster financial services without having to ask people.
Data needs to be used to become an edge for better customer service. Embedded finance’s benefit starts with bringing the customer back to your acquisition and increasing the customer’s stickiness.
Many software product development firms and banks are like data companies. When the platform and data are merged, you gain powerful insights that can take care of user experience up a level.
It is primarily a dating analogy. You need to spend the right amount of time to understand if it’s the right fit for now and in the long term. Once you have identified there is a problem to be solved related to bringing in some embedded financial solutions, then you have to go through an evaluation process to figure out who will be the right partner.
How to set up an Embedded finance partnership?
There has been so much investment in the last few years, with various players available. Embedded finance can be done through vendors that have middleware and banking partners.
When selecting a partner, technology is necessary, but more crucial is what kind of flexibility they have on their models and how easy it is to integrate into the API journey and make flexible changes.
The bar needs to be set from that risk model and process. Does the partner have a similar approach to governance and how bad debt of the customer can be handled?
It becomes necessary to get the right capability for the customer because one of the other things to create is transparency. The financial crisis is completely different today and the need to get credit changes in the timeline, so there can be adaptability in the embedded finance journey.
Benefits of Embedded Finance
- Improving User Experience and Convenience
You should have a good idea of how convenient embedded finance is by now. Previously, you had to hop between various applications to perform different tasks, such as applying for loans or making payments. Nowadays, you may simply access many financial services from a single site.
All of this is possible because of embedded money. This strategy considerably improves client satisfaction and leads to a better user experience by making financial processes quick and simple.
- Improved Access to Financial Services
Another advantage is that financial services become more accessible and inclusive with embedded financing. People who may not have previously used standalone banking applications can now access a variety of services.
As previously said, this is made feasible through the integration of financial tools with third-party platforms such as marketplaces, delivery applications, and booking systems.
- Offers that are personalized and targeted
Businesses may utilize integrated finance platforms to tailor financial product recommendations to individual consumer needs and aspirations. By studying user behavior, transaction history, and preferences, in particular.
A retail platform with incorporated financial capabilities, for example, may evaluate purchase history, browsing behaviors, and demographic data to make customized credit card suggestions.
- Revenue Growth Prospects
Companies can make money through commissions, fees, or revenue-sharing relationships with financial institutions by implementing embedded finance and facilitating financial activities.
Furthermore, firms may work with such organizations to stimulate innovation and extend their service offerings. This strategic strategy expands chances to contact the target audience and helps the firm flourish.
What are some of the biggest challenges?
Because of the benefits it suggests, embedded finance may look appealing to adopt. It can, however, be challenging. If you wish to stick with this method, keep the following points in mind. After all, forewarned is forearmed. Here are the most common obstacles you may face along the route.
- Risk Assessment
To successfully avoid possible difficulties, embedded financial systems require sophisticated risk management processes. To overcome concerns, platforms might include various tools such as credit scoring algorithms or risk assessment models.
These tools may assess a person’s creditworthiness based on a variety of characteristics such as credit history, income, debt-to-income ratio, and so on. They can also examine a variety of factors to determine the chance of default, fraud, or other possible dangers.
- Compliance and Regulation
Financial transactions and sensitive data are dealt with in embedded finance. As a result, it must adhere to several industry rules and data protection legislation. Meeting the appropriate legal and regulatory standards to operate in the financial services business, on the other hand, might be difficult.
One of the requirements that financial platforms must follow is anti-money laundering. Its goal is to aid in the prevention of money laundering, terrorist funding, and other crimes.
Know Your Customer is another requirement for institutions that provide financial services such as lending or investing. KYC helps clients authenticate their identities and analyze their risk profiles. It collects required client information and monitors consumer behaviors continuously.
- Integration of APIs
If you want to offer financial services on your platform, you must have API integration. It enables third-party organizations to use pertinent data to build new solutions that go beyond what a bank can offer on its own.
Through links with investment firms, budgeting applications, or personal money management tools, an API-first strategy allows for a greater range of services. Businesses that use it may create a scalable infrastructure that allows for effective data flow and interaction across multiple systems and applications.
Fintech and non-financial players working together
Collaboration among fintechs and non-financial entities is becoming more common in embedded finance. One of its primary objectives is to develop new and customer-centric solutions.
Overall, this strategy benefits both financial and non-financial participants. This relationship helps non-financial enterprises to get access to a bigger client base, improve the customer experience, and differentiate themselves in the market by leveraging fintech app development knowledge.