Why is Embedded Finance Accelerating so quickly?
Embedded finance refers to the inclusion of financial services in non-financial institutions. The additional services provide a one-stop shop to cater to all customer needs and help companies retain their customers and expand revenue streams. Financial services including payments, lending, insurance, or investing, are increasingly being embedded into native applications as an additional service to improve the customer experience.
Embedded Finance has become more accessible and sought-after because it comes from technologically advanced financial service providers. Other driving forces for embedded finance are:
- Customer Demands: Customers are seeking integrated experiences that are simple, holistic, embedded, and direct. They are flocking to ecosystems of providers offering a plethora of services in a single platform.
- Rise of Open Innovation: Regulatory approval and government support of open banking is driving banks to consider expansion with APIs or new Banking-as-a-Service (BaaS) and Fintech-as-a-Service (FaaS) business models to recoup costs and leverage fintech developments.
- Search for New Revenue Models: Considering the forecast decline in projected revenue and profitability of banks, financial institutions are actively exploring alternative sources of revenue and product growth.
What is Embedded Finance?
Embedded finance revolutionizes the landscape by seamlessly integrating financial services into a business’s core products and services, facilitated through API connectivity. This innovative approach empowers both financial and non-financial entities to extend offerings such as payments, banking, lending, and insurance without the need for regulatory compliance as financial institutions or the development of intricate financial infrastructure.
Traditional financing models that address capital requirements, funding, and other financial decisions have seen challenges in recent years for a number of reasons:
- Innovation Lag: While customers have access to numerous innovative and frictionless financing options, business providers need time and resources to keep pace with the developments in fintech. This creates a disconnect between the mechanics of current business finance solution providers, the resource requirements for them to transform, and customer expectancies.
- Fragmented Markets: Fragmented markets make it difficult for businesses to navigate the complexity of the finance solutions available and to switch between favourable options when needed. However, open banking and open finance solutions provide more transparency and give customers more flexibility and choice.
- SME Lending: Because of the lack of symmetric data available to gauge the creditworthiness of SMEs, there are less SME credit opportunities available in the market.
- Lack of Invoice Financing: Invoice or short-term financing is difficult to offer. However, if done efficiently, it is very much in demand and the cost of financing is an investment that will yield returns.
- Adoption of Fintech: Firms that have less appetite for technology are losing their customer base. It is not only depriving businesses of their revenue potential, but also making their functioning expensive and inefficient.
- Trustworthiness: Globally, trust in fintech is seen to be coming on par with trusted and long-playing financial services providers.
Market dynamics and customer expectations are evolving rapidly. Increasing demand for holistic, frictionless, and streamlined experiences is challenging the financial services ecosystem. Embedded finance taps into the pain points of legacy services and provides a single point of access for a diverse range of financial and non-financial services. This is an opportunity that banks, financial institutions and other firms are increasingly capitalising upon, further accelerating the adoption of fintech. It gives businesses access to easy finance, faster decision-making, and tech-driven solutions to improve processes. Such attributes help unlock the vast underlying potential of businesses and offer superior user experience to customers.
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