What is embedded finance?
Embedded finance is the integration of financial products or services such as payments, lending, insurance, or banking into non-financial companies' platforms or applications. This enables non-financial companies to seamlessly offer financial products to their customers.
Some examples of companies with embedded finance offerings include:
Uber, which offers in-app payment and financial services for both customers and drivers.
Shopify, which provides business owners with integrated banking solutions.
Tesla, which offers insurance to Tesla owners.
Embedded finance isn’t just used to connect the customers of non-financial businesses to financial services; it’s also used within fintech and financial businesses. For example, an accounting platform might offer third-party banking services through an embedded finance product.
The evolution of embedded finance in the digital economy
Embedded financial services have been around, in some form or another, for decades. Some examples that predate the digital era are private-label credit cards for retailers and airlines, sales financing at retailers, and dealer financing for cars. Partnerships such as these have long connected banks to end customers through a business intermediary.
More recently, the rise of mobile technology and digitalisation of commerce has made it much easier for consumers and businesses to shop, schedule employee working hours, manage inventory, or do other tasks online. This has dramatically expanded opportunities for businesses to embed financial products within their existing services. And it’s beneficial for customers, as using financial services at these moments within the same app or interface can help them complete tasks more conveniently.
Key players in the embedded finance ecosystem
Some of the players within the embedded finance ecosystem include fintechs, banks, embedded lenders, merchants, and B2B platforms that offer embedded financial products.
Fintechs
Within embedded finance, fintechs can be either a solution provider, offering embedded finance products such as payments or lending, or a distributor, such as an accounting solution that offers embedded banking or payments from a bank or other fintech.
Traditional banks
Traditional banks often provide the financial infrastructure that fintechs and non-financial platforms rely on to offer financial services, such as accounts, loans, or other products. This allows banks to access new customer segments and extend their presence beyond their own apps or interfaces.
Embedded lenders
Embedded lenders offer lending services that integrate directly into non-financial platforms, allowing consumers and businesses to access financing without leaving their chosen app or website.
By leveraging data and customer engagement from the host platform, embedded lending streamlines the borrowing process, making credit more accessible at the point of need. This model is widely used in e-commerce, ride sharing, and SaaS, where businesses can offer loans or credit options instantly.
Buy Now, Pay Later (BNPL) services, which enable shoppers to split payments into instalments during checkout, are probably the most common examples of embedded lending today.
B2B platforms
Many B2B platforms offer embedded financial products. For example, BigCommerce enables merchants to embed financing directly within their e-commerce sites, while Shopify offers merchants a range of credit products, payments, and accounting services.
Examples of embedded finance products and services
Embedded payments and digital wallets
Embedded payments are payment capabilities integrated directly into software solutions. Paying for dinner through an app, subscribing to a streaming service, or buying something via social media are all examples of embedded payments.
This enables software companies to tap into payments as a new revenue source while also improving the buying experience. Digital wallets such as PayPal rank among the most prevalent examples of embedded payments. The seamless nature of the experience means it becomes an embedded part of the checkout experience.
Embedded payments are closely related to integrated payments, but there is a key difference. Embedded payments are those in which the end customer does not need to leave the app or platform to make a purchase. With integrated payments, the customer is often redirected to a third-party page or portal to pay.
Buy Now, Pay Later (BNPL)
BNPL is appealing to younger shoppers in particular, thanks to its accessibility, flexibility, and convenience. It makes larger purchases more affordable for those with less financial capacity by enabling them to split the original cost into smaller payments.
Most BNPL programs offer short-term loans with fixed payments spread over a few weeks or months, with a small down payment required (not unlike a personal loan). The shopper or customer chooses the BNPL option at the checkout, or potentially through a credit card, if the credit card offers this option. BNPL services generally don’t charge interest, making them more affordable than other types of financing — provided the shopper pays on time to avoid late fees.
In a typical BNPL transaction, the lender or BNPL provider pays the merchant the entire cost upfront and takes on the responsibility of granting credit and collecting payments from the borrower. Banks can contract directly with merchants to offer BNPL loans or go through a third-party BNPL provider that serves as an intermediary between merchants and lenders.
Embedded insurance and investment products
Embedded insurance refers to businesses (such as online travel agents or rental marketplaces) that integrate insurance solutions directly into their goods or services. Ride-sharing services, for example, may include insurance coverage for drivers and passengers as part of the booking process or as a membership perk. This connection simplifies the insurance purchasing process for customers.
Embedded investment refers to financial platforms integrating investment products or financial instruments, such as for customers to purchase stocks, bonds or cryptocurrency directly within an app or platform. Offering embedded investment products helps keep customers engaged and provides new monetisation possibilities.
Key benefits of embedded finance
Several groups benefit directly and indirectly from embedded finance, including businesses, banks and financial institutions, and customers or end users.
Benefits for businesses
Businesses that offer embedded finance products to customers benefit from:
Expanded product features or offers, such as a branded payment card or investing functionality.
New revenue streams, as business generally have a margin on top of the embedded finance provider’s solution.
Frequently, access to new customer data, such as visibility into customers’ transactions.
A decreased regulatory burden, since this is typically the responsibility of the embedded finance provider.
Benefits for banks and financial institutions
Financial institutions stand to reap many benefits from embedded finance. Some of these include:
The ability to reach new customers.
Not needing to invest in the customer experience, as this is handled by the business distributing the financial product.
Access to new customer data, which can be used to improve their products.
Benefits for customers or end users
Customers benefit from embedded finance through greater choice and convenience, as they can access embedded finance options directly within the apps or online marketplaces they already use. Frequently, customers also benefit from a better user experience, as most embedded finance solutions are built to be seamless.
Potential downsides of the shift toward embedded finance
Embedded finance comes with several potential risks, including integration complexities, data privacy concerns, security vulnerabilities, and the increasing complexity of the financial value chain.
Furthermore, while the embedded finance provider is responsible from a regulatory perspective, the business that uses it still handles customer relationships. This can result in practices such as onboarding high-risk customers, which can have negative legal, financial, and reputational consequences for all stakeholders.
Embedded finance FAQs
What’s the difference between embedded finance and Banking-as-a-Service (BaaS)?
BaaS is a regulated activity provided by banks. It refers to a bank providing products, such as current accounts and credit cards, to non-bank businesses. BaaS is an enabler for embedded finance.
What regulatory requirements apply to companies offering embedded financial services?
Generally speaking, the regulatory burden falls on the embedded finance provider, as it does not make commercial sense for a non-financial services business to invest in compliance and regulatory security requirements. With that said, if you’re a business looking to offer an embedded financial product, it's a good idea to research how your potential partners are regulated (or consult your legal team).
How do embedded finance solutions typically generate revenue for platform providers?
There are several ways platform providers can generate revenue from embedded financial products. These include transaction fees, deposit fees and subscription tiers — all cases in which the revenue would come from the customers. Additional revenue might come from banking partners in the form of revenue sharing and commissions.
