In a traditional setting, payment is separate from transactions. At the end of a taxi ride, a customer has to dig into their wallet and pull out the cash or credit card needed to settle up with the driver. Embedded finance merges payments and transactions.
It creates a seamless experience for the customer by blending what were once separate financial processes with another service. At the end of a ride using a service like Uber or Lyft, a customer exits the vehicle and finishes up the transaction on the app.
Their payment information is stored in the app, allowing them to pay and tip seamlessly.
The growth of embedded finance is reshaping the banking, business, and fintech landscape. It’s allowing for the integration of previously unrelated industries, producing new opportunities for revenue growth, and providing the customer with a better experience
overall. The disruption caused by embedded finance presents opportunities for the future, and at the same time, it presents several challenges.
Embedded Finance Opportunities
Since embedded finance removes the intermediate party from financial services and transactions, it’s an area that’s full of opportunity. Thanks to embedded finance, any type of company in any industry can offer its customers financial services, including
payments, insurance, loans, and investments.
Embedded Finance Industries
Most industries can benefit from introducing embedded finance. Let’s take a closer look at how embedding financial services can directly benefit a variety of industries:
- Real estate: Anyone who has ever purchased a home or another type of property knows the process is lengthy and complex, especially if they are borrowing money to make the purchase. Embedded lending can cut down on the number of documents a buyer needs to
sign during the purchase process. Embedded finance also creates opportunities in the home insurance industry, allowing for more accurate and affordable insurance quotes.
- Ride-sharing and transportation: Companies such as Lyft and Uber have already shown that it’s possible to create a seamless payment experience for customers. They are also taking steps to do the same for auto insurance by offering drivers insurance that
only kicks in when the driver is actively driving for the company.
- Dining and restaurants: Restaurants can benefit from embedded finance to streamline the process of having customers pay for their orders. The use of embedded finance can minimize the risk of a customer “dining and dashing,” ensure the restaurant staff receives
tips for their work, and confirm tips are properly reported for tax purposes.
- Media and performance: It’s no longer the case that a few studios control the content that gets created and consumed by the public. Individual creators have found ways to share their content online through YouTube, social media, and personal blogs. Embedded
finance can make it easy for content creators and performers to get paid for the work they produce, either directly from the customers who consume the content or from advertisers and sponsors.
- Retail: In a 21st-century take on the layaway concept, many retailers have begun to offer embedded lending options at checkout. Customers can choose to pay for their purchases in full upfront as usual, or they can decide to split up payments over time,
using an embedded lender.
Embedded Finance Growth Drivers
A number of factors are driving the growth of embedded finance including design thinking — or a focus on solving the problems a customer
might encounter — as well as a focus on creating a better user experience overall. Competition between companies is also a driving force behind embedded finance.
If ride-share company A begins to offer drivers insurance coverage, ride-share company B will likely have to do the same to avoid losing market share. Once one retailer offers customers a way to seamlessly pay over time at checkout, other stores in the niche
have to do the same to keep people shopping with them.
Why Embedded Finance Can Succeed
Embedded finance is likely to succeed because it offers customers convenience and meets their needs. It’s also likely to succeed because it offers the companies that provide it something in return. A retailer that offers customers the ability to pay in installments
can take advantage of increased customer loyalty, as well as additional revenue produced by interest payments on installment loans. Companies that integrate payment processing into their services and apps can avoid the fees charged by traditional payment processing
companies, ensuring that more of their revenue stays with the business.
Embedded Finance Problems
The path to the future isn’t always smooth. While there are great opportunities in store for companies that embrace embedded finance, there are also some risks involved. For example, Uber has made great use of embedded insurance and payment processing, but
it stumbled with the introduction of its digital wallet, Uber Money. Uber Money was meant to give drivers a quick and easy way to access their payments from the ride-sharing company. It also introduced a credit card that offered cash back rewards.
Several months later, the company announced it was shifting focus away from the digital wallet, choosing instead to focus on core business functions.
Although Uber’s shift in focus is a setback for embedded finance, it doesn’t necessarily signal that others will fail in the same way or suggest that other companies wouldn’t be open to trying something similar. The company’s launch of a digital wallet was
in part affected by worldwide circumstances. The executives at Uber couldn’t have predicted that a global pandemic would take place several months later, causing them to reevaluate and shift directions.
Embedded Finance Trends and the Future
Despite some setbacks and some trial and error, the future looks bright for embedded finance. It meets consumers where they are, allowing them ease and convenience when it comes to financial transactions and services. It also allows businesses to distinguish
themselves from the competition.
Embedded finance integrates well with and might even replace the concept of banking as a service (BaaS). BaaS allows a traditional financial services company to offer products and services on behalf of another company. It streamlines payment processing and
loans, but still requires the use of a traditional bank or lender. Embedded finance goes one step further, eliminating the third party and allowing the companies that use it to see the maximum benefit and profit.