Embedded finance is everywhere, so what is it exactly?
Everyone uses financial services in every aspect of their daily lives. Be it buying a cup of coffee at a drive-thru in the morning, paying for a taxi ride, or having to shell out a hefty sum for a new car or house. Finance is everywhere and the money flowing through it is the lifeblood of the modern world.
However, few stop to think of just how the financial world revolves and how financial services have become so integrated into areas they are not native to. Banks are considered to be the main gatekeepers and forwarders of financial services and the funds they are delegated to manage. Payment gateways are also considered as financial services, be it PayPal, MasterCard, Visa, or any other such company. But the fact of the matter is that PayPal is not a financial company, but rather a service offering financial transaction processing.
The trend of including financial processing into various product offerings as a by-service is a common practice that has been gaining considerable momentum in the last few years. The trend has been called Embedded Finance and the advent of blockchain and decentralized financial services has only empowered its ascent.
What Is Embedded Finance?
Embedded finance is the practice of translating financial services through a non-financial platform. In essence, it is the inclusion of payment processing, or other financial services, into applications and venues that are not financial at heart. Companies use embedded finance in positioning their products and services among users and potential clients by attracting them via the convenience of having embedded payment processing, allowing them to bypass the need for transferring payment through dedicated financial services providers like banks.
The practice of embedded finance allows businesses to leverage the three core constituents of financial services with better value offerings.
The first is the transfer of value in space, which means that companies having embedded finance solutions gain value by becoming more convenient for their clients. By providing an all-in-one experience that involves the entire client journey from product selection to payment, companies are positioning themselves as wholesome enterprises that are attractive as shopping venues.
The second is the transfer of value in time, which means that companies with embedded finance project their value into the time sector, saving time for their clients by allowing them to conduct financial operations on the spot without having to resort to third parties. In addition, companies with embedded finance retain value over time by continuously providing convenience to their users.
The third is risk management, which means that clients can have a degree of confidence in the embedded finance system and can trust it to forward the transaction.
All embedded finance solutions move along the trajectory of a financial value chain, starting from Distribution-As-A-Service, which involves the distribution of financial service through existing platforms. The next stage is that of offering Connectivity-As-A-Service, which involves the establishment of a connection between non-financial and fintech companies, essentially ensuring a streamlined link for payment processing. The third and final stage is the inclusion of Infrastructure-As-A-Service, which places emphasis on native integration of financial services into existing platforms, essentially creating a seamless transition from product or service selection to payment.
Examples of Embedded Finance Application
Among the most notable and best-known embedded finance examples are Google Pay, Apple Pay, PayPal, and other forwarders of financial services, which are, essentially, payment gateways provided within platforms initially designed for entirely different purposes.
Google Pay was added as part of a general ecosystem of Google products and services to provide users with a convenient means of paying for them. The same applies to Apple Pay, which is more of an offshoot of the overall Apple system that had to be developed to keep the company in trend with the growing integration of embedded finance solutions by its competitors. PayPal was initially designed not for payments, but for monetary transfers, but has since evolved into a major payment solutions provider that even accepts cryptocurrencies.
Other examples of embedded finance include rideshare insurance, which is insurance for companies offering rides, like Uber. The given function involves payment for a service that has nothing to do with finance, since rides are an automotive service, but one that requires payment solutions to be embedded.
Another example is integrated banking services, which allow platforms to have single-account logins for performing banking operations through a unified interface. This is an extremely popular solution for companies that have routine cooperation with banks, but have included their own financial applications as part of their overall system for the convenience of their users.
QR code purchases are a common form of embedded finance, also one of the most straightforward, hassle-free and convenient. QR codes have nothing to do with banking, but the information that can be embedded in them to make payment for a product or service near-instant makes them an indispensable and convenient instrument for embedded finance solutions.
BNPL programs – Buy Now Pay Later – are also embedded finance, since they allow clients to shop for products and then pay for them interest-free in installments. Such programs allow clients to have approval of purchase on the spot, while having to pay for the product later, thus making them affordable and attractive.
Benefits of Embedded Finance
The benefits of embedded finance are numerous, the main of which is the reduction of friction in the process of conducting a transaction. By streamlining the process and saving time for clients, embedded finance makes banks themselves nearly obsolete as go-to solutions for direct payment processing.
The lack of obstacles in the chain of purchase encourages clients, both buyers and sellers, to adopt embedded finance solutions and thus bypass the need for intermediaries, ultimately reducing commissions.
However, the three main advantages of embedded finance are the following:
1- Cheaper, broader and more efficient distribution of products and services to clients;
2- Leveraging of existing resources and platforms for streamlining fintech operations;
3- Better use of data and technology for advancing businesses.
Blockchain And Embedded Finance
Blockchain technologies have immense potential for embedded finance solutions, considering the inherent virtues of transaction processing speeds, low commissions, transparency and immutability. Combined, these fintech solutions provide the perfect infrastructure for the adoption of embedded finance and its integration not only into decentralized platforms, but also into the traditional economy.
The blockchain allows embedded finance applications to be seamlessly employed in any number of decentralized services ranging from gaming Dapps and staking pools to metaverses, where businesses can create their own digital outlets of representative offices and sell both digital and tangible products. The prospects of utilizing blockchain technologies for forwarding payments are immense, and are also a natural consequence of the development of the Decentralized Finance sector.
At heart, virtually every decentralized application on the blockchain is an embedded finance solution, since it connects the world of digital currencies with fiat gateways and allows users to pay for products and services. Anything from crypto exchanges and betting Dapps contains embedded finance and businesses around the world are starting to leverage DeFi solutions to tap into the growing audience of digital currency users.
PayPal is a shining example of the merger of DeFi and embedded finance in the traditional economy with its acceptance of Bitcoin as a means of payment.
Embedded finance is everywhere, even if we do not notice it or know of its existence. Businesses depend on embedded finance in the modern digitized economy. The growing adoption of blockchain-based services is only accelerating the integration of embedded finance, given the inherent advantages the technology provides both users and businesses in streamlining financial operations.