FinTechEmbracing Embedded Finance: Transforming Consumer Interactions and Business Dynamics

INTRODUCTION

The evolution  of mobile payment platforms and the advent of UPI have revolutionized business practices in india, simplifying money transfers hassle-free. Fintech companies use technology to establish direct connections between borrowers and investors through peer to peer (hereinafter referred to as “P2P”) platforms and digital lending services.

Meanwhile, Insurtech startups use digital tools to make buying insurance easier, improve products, and improve the customer experience. These innovations are instrumental in  making financial services more accessible and useful for citizens. Overall, digitalization in fintech is reshaping India’s financial landscape, improving efficiency, and empowering consumers and businesses. Embedded finance involves fluidly incorporating financial services and products into non-financial platforms, like e-commerce websites, mobile apps, or other digital landscapes.

Technological advancements, such as Application Programming Interfaces (hereinafter referred to as “APIs”) and cloud computing, have contributed to the rapid growth of embedded finance. Various industries, including e-commerce, ridesharing, healthcare, and social media platforms, are assimilating embedded finance to offer a more comprehensive customer experience. In the year 2020, there were 24.7 million open banking users globally, and this figure is poised to reach 132.2 million by the end of this year.

Embedded finance represents shift from traditional banking and fintech models, potentially expanding the scope and reach of financial services. This innovation can  help reduce the number of unbanked or otherwise underserved individual by the financial sector. By integration of financial services into non-financial platforms, applications, or services, companies can offer financial products such as payments, lending, insurance, and investment services directly within their existing digital environments, without the need to redirect users to traditional banking interfaces.

The concept of  embedded finance has gained prominence, initially as a term in the mid- to late 2010s and then through changes in fintech and retailing apps. Key factors contributing to its rise include increased competition from innovative players, evolving customer expectations, the unbundling of traditional banking functions for many, the prominence of APIs and software as a service (hereinafter referred to as “SaaS”) model, and the pursuit of new market opportunities. By enabling non-financial companies to seamlessly integrate financial services directly into their platforms and connect with fintech and banks through APIs, proponents of embedded finance say it is a significant departure from both the conventional fintech model and traditional banking practices.

FEATURES OF EMBEDDED FINANCE

1. Seamless Integration: Financial services are embedded within the customer journey of non-financial platforms, providing a more cohesive and streamlined experience. For example, a ride-sharing app might offer insurance, or a retail website might provide “Buy Now, Pay Later” options directly at checkout.

2. Banking as a Service (hereinafter referred to as “BaaS”): BaaS platforms enable non-financial companies to offer financial services by leveraging the infrastructure and licenses of partner banks. This allows businesses to embed banking capabilities such as payments, loans, and accounts into their platform.

3. Technological Enablers: APIs are crucial for enabling the seamless integration of financial services into other platforms. APIs allow different software systems to communicate and share data, making embedded finance possible​.

4. Regulatory Considerations: Companies offering embedded financial services must navigate complex regulatory environments to ensure compliance with financial regulations. This includes adhering to standards for data privacy, anti-money laundering, and customer protection​.

THE PROMISES AND PITFALLS OF EMBEDDED FINANCE

Revolutionizing Promises of Embedded Finance

1. Streamlined Customer Acquisition: Business collaborations and embedding their offerings on relevant websites and apps give NBFCs easy access to a large and appropriate customer base at a minimal cost. Financial services can also be extended to seemingly riskier customers through websites or apps, which may not be possible through the usual route.

2. Relevant Collection of Data: Financial institutions gain access to not only their customers’ financial data but also other data like shopping preferences, frequency of usage of specific services like cab-hailing, etc., This data can be leveraged at a macro level to tailor specific financial products and services. At a micro level, it facilitates targeted cross-selling of additional offerings based on individual customer behavior and needs. This integration of diverse data sets enhances the ability of financial institutions to provide personalized and relevant financial solutions to their customers.

3. Easier Management of Consumers: With the companies running the websites and apps dealing with customers, the user lifecycle management responsibility gets divided between the financial institutions and the businesses, which eases the burden on the financial institutions to cater to queries, customer service, etc.

Potential Pitfalls

1. Bank Dependency: The company that embeds financial services, not being banking in nature, will always depend on one that provides services BaaS.

2. Regulations: Current regulation and licenses are not easy to obtain as there are very strict compliance requirements. BaaS providers need licenses to offer the service so that other companies can operate. As we have mentioned before, licenses can be of different types. It will be the responsibility of the suppliers to choose where they want to enter.

3. Constant Adaptation: The finance sector is a very volatile and changing sector. Nothing is stable or very durable. Therefore, adaptation to change must be constant.

AMLEGALS REMERKS

Embedded finance could be a significant shift in the financial services landscape, seamlessly integrating financial products and services into nonfinancial environments. This integration allows companies traditionally outside the finance sector to offer banking, lending, insurance, and investment services directly through their platforms. Enabled by the use of APIs from specialized providers, embedded finance not only broadens product portfolios and enhances customer convenience but also opens new revenue streams for businesses.

The trend marks a departure from traditional banking and fintech models, integrating financial services into everyday consumer and business interactions. As a modern financial phenomenon, embedded finance is driven by the digitalization of commerce, advances in technological integration, and shifts in consumer behavior. Ecommerce, ride-hailing apps, and freelance marketplaces, for example, are embedding wallet, payment, and wealth management tools into their platforms.

The rise of APIs and SaaS models has made these integrations feasible and caters to consumers comfortable with nontraditional financial service providers. The implications for the future of banking and fintech are profound, highlighting potentially a major transformation in the delivery and experience of financial services.

Embedded finance is transforming the financial services industry by seamlessly integrating financial products into non-financial platforms, applications, and ecosystems. This integration enhances user experience, improves convenience and accessibility, and opens up new revenue streams for businesses. In summary, embedded finance is a game-changer in the financial sector, delivering significant advantages to consumers and businesses alike. By embedding financial services into everyday platforms, it enhances user satisfaction, builds customer loyalty, and creates opportunities for increased revenue, all while promoting broader financial inclusion.

– Team AMLEGALS assisted by Mr. Kushagra Bhagwat (Intern)