While the DeFi ecosystem has been growing exponentially in the last few years, there’s a parallel revolution happening in fiat financial services: Embedded finance.
No matter where you look, the possibility of non-banks offering bank-like services holds great promise across the Fintech world.
The potential is immense, as more and more non-banking companies decide to integrate financial services into their business.
They, in turn, provide customers with products and solutions such as debit cards, digital wallets, money transfers, and payments, to name a few.
The embedded finance market is expected to net €750 billion for European brands by 2026.
Analysts say it is expected to see spectacular growth in terms of global revenue in the next four years.
This will be driven by an increasing availability of APIs from financial services vendors and a change in human behavior following the COVID-19 pandemic.
At the same time, while 2021 was celebrated as the year “crypto finally went mainstream”, we’re still seeing that one of the biggest challenges that the crypto ecosystem faces is reaching much wider audiences around the world and bringing them onboard.
Some may say that the reason is the lack of a simpler user experience that allows them to easily move their money around between traditional financial services and crypto markets.
As a famous writer would say, everything that rises must converge.
With adoption on the rise for both embedded finance and the world of digital assets, what happens when the abyss currently separating the crypto world and the fiat world is finally bridged?
In-app payments are the simplest method to explain embedded finance, whether a customer is using the taxi app "Lyft" or ordering takeout through a food app.
Embedded finance is when a financial service is integrated into a non-financial application. It offers users speedy and easy payments as well as a fantastic customer experience.
The applications of embedded finance are many, and the major role of embedded finance is to provide smooth customer payments.
However, applications for embedded finance's is expanding beyond payments, with more non-financial sectors joining the financial ecosystem to deliver better digital banking services to customers.
All financial tasks, such as investments, borrowing and lending, insurances, credit card applications, and so much more, can be accomplished digitally through the use of embedded finance.
Here are five ways that decentralized finance will be impacted by the extensive adoption of a banking disruptor like embedded finance:
This is a big one and quite possibly the most important, as embedded finance will make it extremely easy for users of a cryptocurrency exchange to onboard and fund their accounts from an “old world” fiat bank account.
For example, when using a decentralized exchange (DEX) users will be able to trade tokens quickly via an in-built fiat on-ramp.
This is a faster and easier alternative than having to buy BTC, ETH or SOL on a centralized exchange (CEX) and transferring it over to the DEX for trading.
This is a specific problem that is very relevant for operations teams. Based on a recent PwC report, 30% of their finance teams’ time is spent on reconciling and fixing incoming incorrect payments.
Embedded finance can improve efficiency by handling all companies' payments through one medium. This reduces the need for finance departments to reconcile accounts, going from department to department and collecting invoices.
Instead, all of the payments will be processed and ordered through the payment app used on the platform.
As embedded finance is increasingly used to improve back-office efficiency, companies will be able to focus on more important tasks rather than menial, time-consuming chores.
The majority of exchanges are operating globally, but their crypto transactions are likely to be in USD.
When a user requests to deposit or withdraw funds in a different currency, the exchange must convert USD into the requested currency (or vice versa) as part of the payment.
Some crypto companies are taking this further, offering FX as a service to their clients. SwissBorg’s partnership with embedded finance provider OpenPayd is just one example of how crypto businesses are now offering FX services.
Many crypto exchanges will also have internal FX exposure. If they have offices in multiple jurisdictions, they will have operational expenses in multiple currencies that their finance team will have to manage - unless they are making all payments in crypto of course.
Why shouldn’t a crypto company be able to offer virtual accounts to their clients that they can use to start making payments to third parties?
Suddenly you can get a cup of coffee at your local Starbucks and pay with your fiat balance from that business.
As more companies start to offer the ability to buy things with crypto, it also makes sense to wrap fiat payments into that product offering as well.
They say that trust is built in drops and lost in buckets. While a digital ledger offers the promise of a trustless financial system, companies building DeFi services will still have to carefully consider how they build trust with clients who are new to buying or investing in cryptocurrencies.
A Banking-as-a-Service provider, who can handle the heavy-lifting of regulatory compliance and offer a smooth client onboarding, has a vital role to play in building trust with new customers as they join the crypto ecosystem.
The process of integrating financial services with traditional non-financial products or services is already shaping the future of decentralized finance.
As the adoption of Web 3.0 accelerates, it’s only a matter of time until the gap between crypto and fiat is closed for good.
Traditional banking institutions' roles have been altered by the recent emergence of embedded financing services.
Many of our financial transactions, such as loans and payments, were previously only feasible with the help of banks.
Non-financial organisations can now give financial services to their clients by using APIs to connect fintech and banks to their platforms.
You may integrate banking products into your platform regardless of your sector, and you won't have to worry about tight rules or licencing.