We’re sure you’ll understand embedded finance by the end of this article.
Embedded finance. Embedded. Finance. Embedded finance, embedded finance, embedded finance, embedded finance, embedded finance. Embedded finance.
In terms of what’s online, you see it everywhere in the fintech space (honestly, Google it if you don’t believe us). But how much does the person on the street understand? Well, the person on the Money 2020 floor, at least. We asked Senior Customer Success Manager Jo to do some on-the-ground research and her findings were…enlightening.
Some good answers there, but it’s clear some people could use a little help when it comes to understanding embedded finance. We thought we’d try something different, so below you’ll find embedded finance explained in a variety ways: one sentence, analogy, a few examples, maybe even a haiku - there’s something for everyone. For those that want it, we’ve thrown in some extra detail as well.
So, what on earth is embedded finance?!
Embedded finance is the umbrella term describing when a business integrates financial services directly into their ecosystem, without becoming regulated or building the financial infrastructure themselves.
A bit more? Ok. Embedded finance is where a business will build financial services for their customers that are integrated into their existing product ecosystem. To do this, they will usually partner with a financial infrastructure provider, integrating them via an API.
This allows them to offer any type of financial service (payments, foreign exchange, accounts, insurance etc) without going through the process of becoming regulated as a financial institution and building out these services themselves. It is plug and play - enabling them to keep everything within their own ecosystem and on brand, designing financial flows in a way that works for their customer base.
Let’s step away from finance for a second. Imagine you’re a bakery - ‘Betty’s Bakery’. Business is booming, but you want to start serving high-quality coffee to go with your baked goods. The problem is you don’t know anything about coffee - where to source the beans, which machines you need, and so on.
So you partner with a local barista, who is an expert on the subject. They bring all the equipment, order the beans from their suppliers, make the coffee for the customers; they handle the coffee side of the things completely. But it’s still your business. The coffee is being sold in your store and the coffee cups all say Betty’s Bakery on them.
Embedding financial services is just like embedding a barista in Betty’s Bakery. You’re using a third-party provider to integrate something new into your own offering, with your customers none-the-wiser that partnership has taken place.
That last one was perhaps a little rogue. Try this. Think of all the apps currently available that rely on geo-mapping technology. Delivery services, ride-sharing services, running and fitness trackers. Are all of these businesses travelling around the world making their own maps? Nope. The majority are built using Google Maps.
However, when you’re waiting for your tacos and desperately looking where your Deliveroo driver is, are you looking at Google Maps? No. Everything is designed to look like Deliveroo; it’s fully integrated into their app and remains on brand - as it does for your delivery driver.
Embedded finance works the exact same way; it’s the underlying technology and infrastructure used by a business, which that company uses while retaining the ability to design the customer-facing part however they want.
Uber: Have you noticed when you use Uber you don’t have to continuously enter your details when making trips, or authorise anything with your bank? Nor are you displayed a different payment screen when the transaction is taking place.
Uber has embedded payments infrastructure to allow it to store card details and authorise payments (with the customer’s permission) via their finger print, passcode or facial recognition. There are no pop-ups, and there’s no need to enter information more than once.
Shopify: Shopify allows small businesses to accept payments, and not long ago they realised that a large portion of their customers were using their personal accounts for business transactions. This made things complicated when it came to budgeting and taxation.
They decided to embed banking services and launch Shopify Balance, a full bank account which allows users to manage their cash flow, pay bills and track expenses. While not licensed as a bank, Shopify Balance clients can use their account in the same way as any other bank account they may have.
Without stress and challenges
For your company
So there you have it. We hope at least one of these explainers sticks in the brain, because Jo will be out and about soon to test unsuspecting conference-goers.
Welcome to the first day of the rest of your (embedded finance) life.
Knowing how embedded finance projects are initiated, and why, can help you build better products and services
Expectations have changed. Strong UX is no longer an added bonus, it decides whether someone uses your product or not.