Embedded Finance: What it is and What it Means for the Fintech Industry
The fintech industry is always evolving. But one development in particular is generating significant buzz and market-wide revenue predictions to the tune of over $7 trillion in just 10 years. That development is embedded finance, and every fintech enterprise or company needs to know what this is and how it may affect the industry at large sooner rather than later.
What is “Embedded Finance”?
Embedded finance is best understood as integrating a financial service or technology with a traditionally non-financial service, product, or technology. Here are a few simple examples:
- An online store like Amazon or similar offers a “Buy Now, Pay Later” option that converts the cost of a purchase into an automatic loan from the online store itself instead of a third-party lending institution.
- A car dealership includes insurance offerings that are texted to the customer at the moment of purchase or as they try a car.
- Google Maps allows users to find and purchase parking straight through the app interface instead of having to use another app.
Put in practical business terms, embedded finance allows organizations and enterprises to open up new revenue streams and reinvent the services they offer to their customers. This is great not only for those enterprises but also for user convenience – it’s often easier to buy products related to a main purchase from the same source instead of having to interact with three distinct businesses over the course of a day.
The potential implications for the economy at large, and for the fintech industry, are massive. Fintech in general is already growing at a massive rate, ranging from lending sites to stock trading apps. For instance, the pandemic has led to more people utilizing the most popular day trading platforms than ever before. According to the Wall Street Journal, everyone is a day trader now – and rightfully so.
As more of the world uses fintech in their day-to-day lives, the opportunities for embedded finance will only increase.
How Do Companies Leverage Embedded Finance Tech Today?
In most cases, companies are leveraging embedded finance to provide extra products or services that are related to their primary product.
For example, Tesla offers car insurance through its proprietary car sales program, monopolizing most (if not all) of the possible profits from a given customer when they’re looking for an electric car. Even schools are looking into embedded finance – for example, coding schools like Lambda are utilizing “income sharing” agreements which allow students to enroll at a comparatively low risk until they are hired.
But while embedded finance is mostly limited to “packageable” bonus products and services, embedded finance has the capability to grow far beyond these relatively basic applications.
How Will Embedded Finance Change the Fintech Landscape?
Embedded finance is likely to change the fintech industry and the world market overall in multiple ways. While many of these changes can’t be predicted, several of them are easy to see coming even today.
Easier Diversification of Customer Experiences/Offerings
First and foremost, embedded finance will allow companies to provide a more diverse spread of customer offerings and experiences than ever before. This isn’t anything new, as businesses have long known that offering customers more choices or services results in more business and increased profits. A simple example of such includes the benefits offered by card and ACH payments at points of sale.
But it may not be too long before one or more companies start to incorporate all of the building blocks of a unified customer journey into their purchasing funnels or tracks.
It’s not too hard to imagine Amazon growing even larger than it already is. The company already has e-commerce largely controlled, and now they’re expanding into lending opportunities. Is it crazy to think that an Amazon bank might be an option sometime in the future? I would say no, as Amazon already offers a business line of credit to qualifying small businesses.
A theoretical customer of this future uber-Amazon could then buy from Amazon, bank with Amazon, and take out a loan from Amazon.
This, as well, will have several effects on the market overall:
- It will likely increase market competitiveness across the board
- Monopolization may become more of a worry than it is now
- Customer loyalty may grow with certain brands and make it difficult for new brands to emerge
Incumbent Banks and Insurance Companies Aren’t Guaranteed the Top Spot Anymore
Another big way that embedded finance might affect the fintech industry is by forcing incumbent banks and other large enterprises to evolve or die. Customers may very well transition to smaller banking and insurance companies if those companies can offer more value from their services.
Consider a bank that offers not just lending and other typical financial services, but also stock trading services through a proprietary app. In fact, some lending institutions already do this, offering stock trading options or investment programs for high-value customers.
Banks and insurance companies will need to adopt embedded finance or be replaced by more agile competitors.
Big Data Will Become More Important
Big data already runs much more of our lives than many people understand. But it’ll become even more crucial in the future as companies adopt embedded finance solutions.
Consider a car company that analyzes the insurance ratings of a potential customer. They might offer insurance to those who purchase new cars from their lot using big data gathered from data farmers or other sources.
Furthermore, big data could be used to provide personalized products to specific consumers. This may be even more important for Gen Z buyers, who have grown up in a world that has always been inundated with data collection to some extent. Such a consumer base may demand data-fed products tailored or picked for their preferences.
The Role of Artificial Intelligence Will Grow
In all likelihood, AI will become even more necessary as companies scramble to provide the optimal embedded finance services and products to their customer bases. Not only is AI valuable for gathering the right kind of data and sifting through the mountains of ones and zeroes, but it’s also critical for analyzing which embedded finance offerings will be most successful for a given enterprise.
Overall, the Market Will Evolve
Ultimately, embedded finance has the potential to dramatically change the market in almost every way. It opens up the opportunity for many companies to evolve beyond their niche offerings and become multi-market sellers or providers, much like Amazon and other powerhouse companies like Microsoft.
In addition, embedded finance’s evolution and adoption will demand that companies evolve and embark on embedded finance enterprises of their own. A new era of rapid development and competition may be on the horizon for fintech and other industries.