Three Ways Embedded Finance is Changing the Financial Services Industry
Embedded finance represents several financial services once only offered exclusively by financial institutions, primarily banks. The financial landscape, however, is changing, and non-financial institutions, such as e-commerce platforms or FinTech companies, are now offering finance opportunities. The tool driving this financial revolution is technology. For embedded finance to succeed, it’s vital to have cooperation between three entities: 1) A non-financial digital platform drawing customers (this could be an e-commerce platform like Amazon), 2) A financial institution willing to provide the funding and the regulatory compliance, and 3) A FinTech company that provides end-to-end software technology to connect the digital platform with the bank.
Cooperation and integration are the first changes embedded finance is bringing to the financial service industry. Prior to embedded finance, banks and financial institutions were mainly isolated companies, exclusively allowed to offer financial products. However, embedded finance is changing that, integrating multiple players into the financial services industry such as digital e-commerce platforms, food delivery applications and hotel booking websites. This integration can also boost small banks or insurance companies since it allows them to expand by collaborating with FinTech companies without opening new locations, which can be ludicrously expensive. The business as a service industry (BaaS), which centers on the technology banks use to deliver financial services and solutions offered through embedded finance, has been growing for the last two years and is expected to continue growing in the future.
The second change relates to financial services consumers. Embedded finance can reach more people who, until now, were unable to receive financial products due to distance from the bank branches, financial conditions, or hiring conditions at work. It constitutes a significant number of people in the U.S., where 35% of adults are either unbanked or underbanked, and most could be reached by embedded finance.
However, it is not limited to the United States, as there are several Latin American and Asian countries with a high percentage of unbanked people, as seen below.
Accessing an embedded finance product is much simpler, as you only require an Internet connection and a connected device. Nearly 90% of Americans have Internet access, providing a wealth of people now excluded from accessing financial services new opportunities through embedded finance.
The third change relates to customer experience and relationships between people and financial institutions. A survey by Forbes Advisor proves most Americans prefer digital tools for banking instead of in-person visits to their local branch. This is because people want to avoid wasting time making financial transactions.
By using embedded finance, generally, you will barely notice making financial transactions or using financial services. A study by Morning Consult shows that while only 11% of American adults are familiar with embedded finance, 32% use Uber, meaning they are using embedded payments without even realizing.
If we extrapolate that with all the apps and websites using embedded payment, embedded lending (like Amazon with merchants), or embedded insurance (like Tesla that automatically insures cars when buying online), we already have millions of consumers using financial services without noticing - the ultimate customer experience.
These are, in my opinion, the three main changes embedded finance is bringing to the financial services industry. They have such a substantial impact that embedded finance is set to grow exponentially over the following years, as highlighted in the chart below.
Next time you pay for something through an app, get insured automatically when buying a car, or opt for buy now and pay later in a digital store with just one click, remember you are using one of the most revolutionary technologies that will change the way financial services are offered forever.
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