Embedded finance is a new trend in the fintech industry where financial services are integrated into non-financial products and services. This allows companies to offer their customers a variety of financial services without having to become financial institutions themselves. Embedded finance has the potential to revolutionise the way businesses and consumers access financial services.

Is Embedded Finance Same as Banking-as-a-Service (BaaS)?

While there is some overlap between the concepts of embedded finance and banking-as-a-service, there are also some important differences. Click here to read more about this.

Benefits of Embedded Finance

Increased accessibility to financial services

Embedded finance is making financial services more accessible to a wider range of people by leveraging cutting-edge technologies that enable the integration of these services into everyday products and services.

• Digital wallets: Digital wallets, like Paytm and Google Pay, have become increasingly popular and are being used as a convenient way to make payments, transfer money, and access other financial services.

• E-commerce: E-commerce platforms are increasingly offering financial services to their customers, such as the ability to take out loans or make investments. E-commerce giants like Flipkart and Amazon have launched their digital wallets - Flipkart Money and Amazon Pay respectively, to enable their customers to make payments, transfer money, and access other financial services like loans and investment options through their apps. 

• Financial services within social media apps: Social media apps, like Facebook and Telegram, are now offering financial services to their users, making it easier for people to access these services without leaving the app. While Facebook has launched “Facebook Pay” - a payment platform to make payments, transfer funds, and other financial services - Telegram has launched its own cryptocurrency, “the Gram”, and is exploring the use of blockchain technology to offer financial services.to its users.

• B2B Commerce: Of late a lot of B2B marketplaces and s/w service providers have been overlaying financial services on top of their core offerings to augment revenue streams and provide additional services to their clients. Payments and Credit instruments have been adopted as important instruments in this field.  

Increased competition in the financial industry

Embedded finance also has the potential to increase competition in the financial services industry.

• New entrants: Embedded finance enables companies outside of the traditional financial services industry to offer financial services, creating new competition for traditional financial institutions.

• Innovation: Companies, like Fundfina, offering embedded finance services can offer innovative financial products and services, which can drive innovation and lead to better outcomes for consumers. With its cutting-edge technology and deep expertise in the financial services industry, Fundfina empowers its clients to offer a wide range of financial products and services within their existing products and platforms. By doing so, they can expand their business offerings, increase customer engagement and loyalty, and deliver more value to their customers.

• Lower barriers to entry: Embedded finance reduces the barriers to entry for new players in the financial services industry, making it easier for them to compete with established players.

• Greater customer reach: By making financial services more accessible and widely available, embedded finance can expand the market.

• Increased choice: Embedded finance can give consumers more choices in terms of the products and services they use, leading to increased competition among providers.

By allowing non-financial companies to enter the market and offer financial services, it can lead to increased innovation and lower costs for consumers.

Driving the growth of digital payments

Embedded finance also has the potential to drive the growth of digital payments.

*According to the National Payments Corporation of India (NPCI) data, the number of UPI (Unified Payments Interface) transactions alone reached 7829 million in December 2022, with a total transaction value of INR 12,82,055 crores, indicating strong growth in digital transactions in India.

*Also, the Indian government's push to promote digital transactions through initiatives such as the Digital India campaign, and the continued growth of fintech and digital banking services in the country, is likely to drive further growth in digital transactions in India in the coming years.

As more companies integrate digital payments into their products and services, it will become more convenient for consumers to use digital payments, which can lead to increased adoption. This can also help to reduce the reliance on cash, which can have a positive impact on the economy.

Use Cases 

Partnership

One of the most common use cases of embedded finance is partnerships between fintech companies and non-financial companies. Consumer companies that have a deep understanding of consumer behaviour often provide commerce or other solutions that are central to their business. However, these companies may not have the expertise to handle financial services and the associated risks and regulations. To overcome this challenge, many companies are turning to partnerships with Fintech companies that have a better understanding of the financial services landscape. By partnering with these companies, consumer companies can offer financial services to their customers without having to worry about regulatory compliance. By partnering with fintech companies, consumer companies can offer their customers a wide range of financial services - such as digital payments, credit, and insurance - without having to become financial institutions themselves.

Digital payments integration

Another use case of embedded finance in India is the integration of digital payments into eCommerce and ride-hailing platforms. This allows customers to make digital payments directly through the platform, making the process more contextual and streamlined.

Providing financial services through mobile apps

Embedded finance can also be used to provide financial services through mobile apps. This allows customers to access financial services such as digital payments, credit, and insurance directly through their mobile devices.

Challenges and Opportunities

Compliance and regulatory challenges

One of the challenges of embedded finance is compliance with regulatory requirements. As non-financial companies enter the financial services market, they will need to comply with the same regulations as traditional financial institutions. This can be a significant challenge, particularly for small and medium-sized enterprises (SMEs) that may not have the resources to navigate the regulatory landscape.

Opportunities for growth and innovation

Despite these challenges, embedded finance also presents significant opportunities for growth and innovation. Allowing non-financial companies to overlay the financial service on top of their offerings, which can drive innovation and lower costs for customers. 

Impact on financial inclusion

Embedded finance can also have a positive impact on financial inclusion. Microfinance companies are using embedded finance to reach underserved populations, such as rural communities and low-income households, and to provide them with access to financial services such as credit and savings products. Companies are using embedded finance to streamline their supply chain finance processes, by offering financing solutions to their suppliers and distributors to help them manage their cash flows, which thereby, improves access to finance for small businesses and entrepreneurs. Governments are using embedded finance to improve access to financial services for their citizens. For example, India has launched several programs aimed at increasing financial inclusion, such as the Pradhan Mantri Jan-Dhan Yojana, which provides bank accounts, insurance, and credit services to millions of previously unbanked citizens. As financial services become more accessible through non-financial companies, it can help to bring more people into the formal financial system. This can have a positive impact on the economy, as more people will have access to the financial services they need to grow their businesses and improve their livelihoods.

Conclusion

Embedded finance is revolutionising the fintech industry in India. With the increasing use of digital payments and the need for financing options, embedded finance is providing a seamless and personalised experience for consumers. The popularity of lending and BNPL services, along with the integration of these financial services within everyday applications, is making it easier for people to manage their finances. The embedded finance approach not only improves the user experience but also provides new revenue streams for businesses and creates new job opportunities. This transformation of the fintech industry is expected to continue to grow and bring significant benefits to both consumers and businesses. However, non-financial companies must effectively address compliance and regulatory challenges in order to realise the full impact on the economy and society. Fundfina, with its expertise and experience, aims to assist these companies in overcoming the challenges and establishing themselves as leaders in embedded finance.