The New FinTech Galaxy and Role of Embedded Finance

Inventing new concepts, ideas, technologies and utilizing them to an extent that has not been thought of earlier is the way forward. Embedded Finance is one example of human intelligence which has given a telescopic lens to FinTech to see many opportunities which were not visible earlier. Embedded Finance is a new Galaxy in the FinTech Universe.

What is Embedded Finance?

Embedded Finance entails all banking services provided by non-bank companies. These services can incorporate transaction accounts, wallets, loans, and payments. Through Embedded Finance, companies aim to attract and retain customers, while providing them quicker, hassle-free financial services. 

What is the role of Embedded Finance in FinTech?

FinTech is a comprehensive term that illustrates the integration of various physical and virtual technologies into financial services, for convenience and ease of delivery or service straight to the consumer. In recent years, payment services within the FinTech industry have attracted customers, companies, and investors alike, heralding the transition from traditional online bank transfer systems. It is estimated that in 2018 alone, the top 250 companies providing FinTech services managed to raise over $31.85 billion [1].

A principal problem stemming from the emerging field of FinTech is the relativistic lack of credence in the security and privacy of said companies. A lot of customers do not perceive the significant advantages of FinTech companies compared to banks for storing large amounts of spendable income. Banks, in turn, entail their own set of problems including inconvenience, transaction fees, interests on loans, and a longer transfer time. It is much more feasible for customers to deal directly with their brands of choice, using virtual accounts and wallets embedded in the websites of each company. Being integrated within the platform itself, Embedded Finance offers improved security, as the money trades fewer hands in between. Keeping small amounts of money in multiple embedded wallets is a much more convenient alternative to traditional banking. 

Embedded banking also benefits the companies hosting them. Offering better incentives for using their services goes a long way in building consumer trust and confidence. Because customers have funds within a wallet dedicated only to a certain company, they are more likely to return for more transactions, increasing the customer’s lifetime value [9]. Embedded finance payments can also be tracked by the company itself, and using customer purchasing data other products the customer might be interested in can be recommended to them too.

How Embedded Finance is using Artificial Intelligence, Machine Learning?

Artificial Intelligence has a vital role to play in the development of Embedded Finance and FinTech in general. The advent of smartphones and widespread internet services has exponentially increased the amount of financial data being circulated. In 2018, an article published by the MIT press quoted an estimated 90% of all data on outputs, prices, employment, and market behavior as being generated in the two years prior [4]. To process such vast amounts of information, artificial intelligence and machine learning can pave a much smoother future for FinTech, one which cannot be matched in accuracy and efficiency by humans alone.

A major advantage of embedded finance is its customizability and programmability for optimal performance. However, with a vastly growing number of options available, manual programming is becoming increasingly inefficient and obsolete. A well-developed AI can analyze data points throughout its respective industry, providing the most ideal solutions for customers [5]. AI also can instantly find patterns in consumers’ purchasing behavior, which through the help of ML, can be used to predict future market trends.  

Which companies are already offering Embedded Finance?

The most commonly used Embedded Finance service in our day-to-day lives are those offered by ride-hailing services such as Uber. The in-app wallet allows passengers to pay for their trip without having to count cash or pull out a debit card. Customers can store money for future use, take and repay loans when convenient, and make payments for others if they want to book a ride for someone else. Drivers also benefit from this system. According to Forbes, Uber now sends more than 70% of its driver payouts via Instant Pay [2].

In recent years, tech giants and online marketplaces have also come on board with Embedded Finance. Amazon, for instance, has introduced multiple new financial services [6]. Amazon Pay is an online wallet that allows customers to directly pay for their shopping on the website, saving the hassle of entering bank details and addresses. Customers are also able to review the status and tracking location of all their orders. Amazon Card is another feature under the company’s large embedded finance umbrella, and as the name implies, is a new credit card feature for customers.

How Embedded Finance is redefining FinTech?

As quoted by Andreessen Horowitz general partner Angela Strange, “Every company will be a fintech company” [7]. In brief, this means that transactions between customers and businesses will occur directly from e-wallet to e-bank. There will be no middle-man, like traditional banking systems, in the purchase. Even dedicated FinTech services will no longer be necessary, as their task is already handled by the company’s embedded service. This reflects that FinTech, in its relatively short existence to date, will see a transition towards small-scale purchases in every website we visit rather than the one-for-all service we have only just grown accustomed to.

Will Cryptocurrency a part of Embedded Finance in the Future?

Virtual currencies have a pivotal role in the finance sector over the coming years. According to research by the Management Research and Practice journal, there has been a significant increase in the number of customers and businesses using cryptocurrencies [8]. Currently, around 36% of small businesses in the US accept cryptocurrency as a form of payment, with 59% of them having their purchases of digital currency. Bigger corporations, such as AT&T, Expedia, Newegg, and Microsoft, have also started to accept cryptocurrencies as a form of payment.

The cryptocurrency purchases can be handled by an Embedded Finance system called BTCPay. This service is similar to other embedded finance systems, but it also adds another layer of security whereby each money transfer is encrypted so that it is impossible to trace. The payment changes hands directly from customer to merchant, with no third party involved. This system is also open-source, allowing users to utilize it to suit the specific needs of their company. More than 171 different companies are using BTCPay to accept BitCoin as a form of payment today [8].

How much Investment is expected in Embedded Finance in the next 3-5 years?

The Embedded Finance sector is expected to grow up to five times by 2025, from a current valuation of $22.5 billion to over $250 billion [3]. The reason for this exponential growth can be attributed to the diverse range of businesses embedded finance can be incorporated into, both in the commercial goods and the services sectors.

Conclusion:

As more companies every day seek to expand their customer base and loyalty, Embedded Finance contributes a solution that could assist pave the way for innovations. Artificial intelligence, machine learning, and cryptocurrencies will boost the viability and diversity of Embedded Finance solutions, to help meet the needs of businesses of every size shortly.

References:

1. Anne-Laure Mention (2019) The Future of Fintech, Research-Technology Management, 62:4, 59-63, DOI: 10.1080/08956308.2019.1613123
2. https://www.forbes.com/sites/jordanmckee/2020/12/16/embedded-finance-a-beginners-guide-to-the-growing-intersection-of-tech-and-financial-services/?sh=5ef31b624af1
3. https://fintech.tv/embedded-finance-continues-to-grow/
4. Lagarde, C. (2018). Central banking and fintech: A brave new world. Innovations: Technology, Governance, Globalization, 12(1-2), 4-8.
5. https://www.mindtree.com/blog/future-fintech-embedded-finance-using-ai-and-ml
6. https://www.am.comount.com/blog/embedded-finance
7. https://www.altfi.com/article/7536_the-rise-of-embedded-finance-its-the-end-of-fintech-as-we-know-it
8. Bezovski, Z., Davcev, L., & Mitreva, M. (2021). Current adoption state of cryptocurrencies as an electronic payment method. Management Reseach and Practice, 13(1), 44-50.
9. https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/what-the-embedded-finance-and-banking-as-a-service-trends-mean-for-financial-services#