What is Embedded Finance?

Our thinking on embedded finance

Posted on 30th June 2021

Embedded Finance is the use of Banking-as-a-Service and API-driven banking and payments services to integrate financial services within other environments and ecosystems.

What is Embedded Finance - OpenPayd

It has been touted as the future of finance, radically changing how both individuals and businesses experience and interact with financial services. And yet, for all its transformative power, the majority of businesses are still unsure what it exactly is. In this article, we give you the full story.

Our definition of embedded finance

Embedded Finance is the integration of financial services directly into a business’s product ecosystem, via API. This enables businesses to offer services like payments, banking, lending and insurance without becoming regulated as financial entities or building any financial infrastructure themselves. 

How APIs are unlocking financial services

APIs are a technical interface which allow two systems to talk to each other. In terms of embedded finance, they are used to connect your business to a full suite of financial services. 

What this means is that you no longer have to spend years building out financial infrastructure, before then attempting to meet the required regulatory demands. Instead, you ‘plug in’ to an embedded finance provider and select the financial services you need. This is Banking-as-a-Service, allowing you to build new services on a modular basis, depending on what your business needs at any given time. 

Of course, different providers will offer different capabilities, but there are many financial services which can be introduced to non-financial businesses. From embedded payments and embedded banking to embedded lending and embedded insurance, there are a myriad of ways in which businesses can now access the features that once could only be offered by traditional financial institutions. 

How to make embedded finance work for you

We know what you’re thinking, finish the article so I can go and do this! While there may be immediate enthusiasm to get started with embedded finance, it won’t hurt to look at the success of other businesses that have integrated financial services.

That’s why we wrote a whitepaper on the topic which can be found here. We wanted to understand how companies are picking embedded finance providers, the importance of testing in a sandbox environment before you onboard and how to get the most out of different services. 

What embedded finance offers is a bundle of financial services, tech and licences from a single provider. 

At the base, you are covered from a regulatory standpoint, with the financial licences of your provider allowing you to operate in new jurisdictions. 

Then, you have access to new payment rails, enabling you to accept payments from more places and increase the speed at which they take place - there are now over 58 real-time payment rails across the globe.

Built on top of these payment rails and licences are a suite of financial services, what we refer to when we talk about “Banking-as-a-Service”. It’s this functionality that can enhance your offering with new product features that your customers want and need.

Finally, the part that really goes the extra mile, you embed all of this into your own product ecosystem. Your branding, your flows, your design at every touchpoint, with the underlying infrastructure accessed via API

The various categories of embedded finance

When we talk about embedded finance, we’re usually lumping together four main underlying categories: embedded payments, embedded banking, embedded lending and embedded insurance. 

Embedded payments: This enables a business to keep payments fully within their own ecosystem. This prevents the need for external payment screens and steps to payment flows that you have no control over. Whether topping up accounts on a platform, sending money abroad, withdrawing funds to a bank account or whatever else, everything occurs within your product ecosystem.

Embedded banking: Banking is no longer the reserve of established financial institutions. If your customers would benefit from banking functionality, such as having their own accounts in which money can be stored, transferred or even invested, these can be created more or less instantly.

Embedded lending: Many businesses and individuals require lending as part of the purchasing journey, but will never be offered that functionality at the time. Like insurance, lending is typically done separately from a purchase. But if they could access funds from a brand they trust and enjoy engaging with, at the point of need, that is a much more attractive proposition. Embedded lending allows businesses to offer lending services and reap the rewards of an additional revenue stream, without taking on the credit risk. 

Embedded insurance: Insurance is something people want for many items - electronics, jewellery, clothing - but we often end up wishing we had bothered doing it once it’s too late. By embedding insurance, businesses can offer customers the chance to insure their goods at the point of purchase, with no external flows slowing things down. 

Embedded finance solving pain points of financial firms 

While embedded finance undoubtedly opens exciting new avenues for non-financial companies, it’s also being expertly utilised by more established players as well. 

Embedded finance is not just about adding new features, but improving what businesses already have. Below are two real-world examples of what this looks like. 

Caxton: Caxton is a fintech giant that processes over $1bn a year in remittance payments. For them, embedded finance wasn’t about adding more for their customers, but improving their own back office. 

By assigning each of their customers with a virtual IBAN, all payments could be reconciled automatically, eliminating human error and saving their Ops team hours of painstaking work. They were able to spend more time focusing on growth with a persistent pain point alleviated. 

Bitfinex: Anybody who has ever got into the world of crypto will be able to tell you about Bitfinex. The world’s fifth largest crypto exchange, Bitfinex handles fiat payments in the billions from all over the world. 

But in some areas, this was slow - and the crypto world hates slow. European customers were waiting days for bank transfers to clear, a level of customer experience Bitfinex were not happy with. So, they partnered with OpenPayd and we were able to offer them new payment rails - particularly SEPA Instant. This made all their European fiat payments occur in real-time and drastically enhanced their offering.

Embedded finance’s exciting future

Make no mistake, embedded finance is no fad. It is estimated to be worth approximately $7.2tr by 2030, with over 92% of businesses planning to roll it out within the next five years. More and more businesses are becoming aware of how embedded finance can reshape their business, simultaneously cutting costs and boosting revenue. 

This shouldn’t be thought of as solely a top-down development. According to research, 70% of businesses have stated that increasing customer demand for financial services is driving a faster rollout of embedded finance. 

A simple API integration can enable businesses to give their customers the integrated financial services they’re looking for, and many businesses are already seeing the benefits. Embedded finance is no longer a matter of ‘if’, but  ‘when’. 

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