17.05.2022 Finance Luxembourg Tech

Embedded finance or the finance (r)evolution?

According to OpenPays, 96% of businesses will launch an embedded finance offering by 2026. It is estimated to be worth $7.2 trillion by 2030[1], “making it worth double the combined value of the world’s top 30 banks today.[2]” So Embedded Finance: a revolution? Or the natural evolution of the financial system?

Embedded Finance is described as “the integration of any financial services or tools within the products or services of a non-financial organisation.”

According to Fintech Future, the ideal process for businesses looking to enter into “Embedded Finance” is to “assess existing processes and tools and determine which can be readily enhanced through an embedded solution. Then, research and get in touch with a relevant partner able to provide a modern, frictionless solution.[3]

Embedded Finance seems to be the new way to ​​modernise B2B commerce. Indeed, Embedded Finance started with Embedded Banking, expanding to a new area of possibilities offering to match precisely what the customers need.

This article will deep dive into practical examples of Embedded Finance across the sector of payments, lending, and insurance to understand what is at stake within the financial system.

Embedded Payments

There are so many examples of Embedded Payment solutions in operation today that it seems fair to say that it is no longer a revolution, but the new normal. Digital wallets that enable contactless mobile transactions and instant online purchases are now the way to go. It is what we call the “Uberisation” of society. Payment technology is now integrated into so many app infrastructures and e-commerce websites that customers forget how they would process payments before. Today, to get a ride, you don’t need cash; you pay via Uber. Today, you can watch a movie on your TV by paying directly via your streaming platform. You can buy your next pair of sneakers by activating your fingertips on Apple Pay…A report from IDC predicts that 74% of digital consumer payments globally will be conducted via platforms owned by non-financial institutions by 2030[4].

Embedded Lending

Embedded Lending is when credit or financing products are integrated into a non-financial services company, such as a retailer or marketplace. Embedded Lending is not new, but it has become more well-known under the acronym BNLP, “Buy Now, Pay Later”. BNLP is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. One of the most successful players in this space is Klarna. Nevertheless, for the past months, BNLP models have faced hard criticism, saying that it impacts consumer debt accumulation without any regulation or consumer data protection. This is then no surprise to see David Sandstrom, Chief Marketing Office at Klarna, recently trying to change Klarna’s narrative, ditching the BNPL association to “show the company’s bigger ambitions to be a global retail bank and one-stop-shop for e-commerce.[5]” If the BNLP model jeopardises embedded lending, it can create greater opportunity in emerging markets, offering a new infrastructure that can channel massive amounts of capital to businesses and individuals who have previously been excluded. For instance, by integrating data between Taobao, T-Mall and Alibaba, “Alipay originated facilities for its clients while banks funded the loans. Alipay checked all elements required to lend at scale with a well-designed and structured solution.[6]

Embedded Insurance

The adage goes: “insurance is not bought; it is sold”. Nevertheless, it becomes easier if insurance is purchased at the right moment. Indeed, Embedded Insurance is emerging as a new and seamless way to distribute insurance services. It holds a trillion-dollar opportunity with the potential to create new revenue streams, lower distribution costs, gain access to new customer data, perform real-time risk assessments and calculate more accurate pricing. For the customers, it promises to get more affordable and relevant insurance when needed. Alex Lazarow, a Senior Contributor for Forbes, presented the case of ZhongAn phone insurance which is embedded in the phone. Before the customer picks up his dropped phone with a cracked screen, “the embedded policy will have been triggered by internal sensors, and a new phone will be on its way. No messy claims or repair estimates needed.[7]

As we have seen through Embedded Payments, Embedded Lending and Embedded Insurance, Embedded Finance is the natural evolution of the financial system. But to make it successful, financial services providers need to view and conceptualise their financial product through the technical lens and the use of an API. Traditional banks and insurers are not equipped to build API from scratch, and that is why the future of embedded finance lies in the hands of innovative Fintechs.

[1] Openpayd

[2] FintechFutures

[3] FintechFutures

[4] The Paypers

[5] The Drum

[6] 11:FS

[7] Forbes