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Embedded Finance as the Future of Payment Technologiesby@b2broker
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Embedded Finance as the Future of Payment Technologies

by B2BrokerMay 25th, 2023
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Embedded finance is transforming the payment industry by providing convenient, cost-effective solutions for business-to-consumer interactions. These include point-of-sale lending, Fintech-as-a-Service (FaaS), and embedded insurance. This type of financing helps customers get customized services at checkout and increases their purchasing power.
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The development of the financial sector, and payment systems in particular, has allowed us to rethink to a large extent the role of information technology, which today, is a solid foundation for the creation and development of many technological solutions to provide convenience, speed, and reliability of interaction between business and its customers.


One of the latest trends in such payment solutions is embedded finance technology.


This article will shed light on the question of what embedded finance technology is and its development path. You will also learn what advantages this technology has and what varieties it exists in.


KEY TAKEAWAYS


  • Embedded finance technology is a set of payment instruments used by non-financial organizations to provide financial services.


  • Some of the most advanced trends in the development of embedded finance today are crypto-lending, the “buy now, pay later” model, and insurance services for various things.


  • Embedded finance technology is one of the variations of the banking as a service (BaaS) model.

What Is Embedded Finance Technology?

Embedded finance is a new generation of financial systems that are a type of BaaS (Banking as a Service) embedded lending or bank processing solutions integrated into non-banking products and services such as BNPL (Buy Now, Pay Later) to provide a quick and convenient way to make mutual payments in B2B and B2C.


For example, a retailer might offer its customers the ability to pay for their purchases with a digital wallet or mobile payment app. Such a technology platform might give financial institutions access to financial tools such as budgeting and investment tracking.


In addition, businesses can also use embedded payments to access financial services such as credit or payment processing.



Embedded financing provides a seamless and convenient experience of interaction between the buyer and the service when paying for goods or services.


As a rule, as part of a company's website, the embedded financing module is integrated into the context of the site or page, and payment takes place in the same window without redirecting to third-party intermediary resources.


Nevertheless, it's a logical addition to the page of an insurance company, online store, or marketplace. The service providers could be banks and fintech companies.


The latter plays a prominent role in developing the embedded finance industry due to their flexibility and ability to adjust to their partners.



The BNPL services, as mentioned above, have recently become more widespread in marketplaces. These solutions allow you to quickly calculate and arrange installments when paying for an order. BNPL services are a rare example of a B2C product in embedded finance.


Meanwhile, B2B developments in BaaS and embedded finance contrast interestingly with BNPL. One of the first prime examples of such developments in the embedded finance market is the collaboration between Uber cab service and the fintech platform BBVA.


The latter has developed a payment module for Uber to quickly accept payments with additional discounts, cashback, and credit options.



FAST FACT


  • Embedded finance technology is an intermediate stage in the development of the fintech industry, in particular payment systems, replacing the classical banking system.

The Evolution of Embedded Finance

About a decade ago, all payment services and platforms, without exception, fit into the category of BaaS 1.0; the essence of which was to provide specialized banking services (for example, issuing banking products as a debit card) and obtain a stable income derived from charging customers for the use of these products.


Today, the industry has changed a lot. Most embedded banking solutions businesses belong to the BaaS 2.0 generation, offering solutions to facilitate online customer payments.


The ability to easily accept online payments is now a must-have for any business, regardless of the field of activity, because without it, competing in the market becomes much harder.


Online payment support also helps BaaS 2.0 solutions generate more revenue by charging customers for access to payment processing in addition to monthly service fees or product subscriptions.



Thanks to advances in information technology, which are now closely intertwined with other innovations such as cryptocurrency solutions, embedded finance systems continue to improve and are beginning to evolve into the BaaS 3.0 category, offering all-in-one payment processing tools in the form of additional embedded financial features (such as credits, accounts, and cards) beyond payments.


Modern technology underpinned by a more flexible financial regulatory environment gave birth to embedded finance in the form that exists today. But the real driver is the growing demand from technologically advanced businesses working to create new, sophisticated implementations for embedded financial services.


There are numerous examples, ranging from online marketplaces that provide working capital solutions for clients and suppliers to accounts payable and accounts receivable automation systems that aim to simplify user workflows.


The technology of embedded finance has come a long way, at the origins of which were the companies that developed services to release branded banking products for individuals and legal entities.


The next stage of such technology's development was White Label solutions, which made it possible to use ready-to-use payment solutions within the business framework for a certain fee.


The next stage involved the development of solutions utilizing PaaS (Payment as a Service) technology to connect a group of international payment systems, where the architecture is represented by a layer or overlay that sits on top of these systems and provides two-way communication between the payment system and PaaS based on standard APIs.



What Are the Advantages of Embedded Finance?

Embedded finance technology, while gradually revolutionizing payment systems, has a wide range of benefits for all parties involved, including companies and customers (end users). Let's look at the benefits of embedded finance technology for each party in sequence.


  • Advantages for Companies


To begin with, let's look at the most important benefits that companies get when they implement embedded finance technology in their payment system.



  1. Additional Source of Revenue


The introduction of embedded finance technology into the company's payment infrastructure allows it to receive additional and stable income due to the collection of a certain percentage of commission from each client transaction, whether with a debit or credit card, which, with a large volume of payment transactions, allows you to receive impressive revenue figures.


Moreover, by cooperating with other payment systems, you can also receive an additional percentage from each transaction made within the referral program.


  1. Increase Product Attractiveness


By using embedded finance solutions within the business, the company's products and services look more attractive in the eyes of customers because they not only bring practical benefits with accelerated and simplified payment transactions but also become the foundation for developing its own embedded services that the company can offer as a unique product of its own.


This, in turn, helps to expand both the customer base and the range of payment solutions offered by the company.


  1. Increase of Converts


Payment services form a crucial link in the framework of payment operations for goods and services. Today, every person uses one or another bank for the opportunity to have a card to pay for purchases.


The use of embedded finances will allow an increase in attendance of a website because this technology guarantees comfortable and quick access to the payment modules on the company's site itself.


Such technology today finds application in many non-financial institutions that begin offering their customers financial services.


  1. Improvement of Competitiveness


Today, in almost every business area, one can observe the fierce competition, which on the one hand, is a hard struggle for software companies for market leadership. Still, on the other hand, it moves technology development forward.


Initially, the surge of interest in this topic was driven by the needs of challenger banks.


Banks required the infrastructure to create banking software and a license. But today, the main growth driver is non-financial organizations, which are building fintech into their product line, and thus have an undeniable competitive advantage.


  • Advantages for Customers


Now, let's move on to the benefits that ordinary users of products from non-financial companies offering embedded finance solutions can benefit from.


  1. Increased Convenience


When interacting with companies using tools that include embedded finance, users get convenient access to financial services such as online payment options (debit or credit) or EMI services when checking out or using the website or application.


This advantage is one of the most significant since it provides a way of directly using the possibilities of Internet banking for working with such products as installment payments, loans, payments for products in installments, embedded insurance, etc.


  1. Individual Offers


Financial services that are directly available on the market often lack customer friendliness in terms of both offerings and processes.


The company's embedded financial solutions offer clients individual financial services and offers that meet different criteria for assessing the solvency of users on the one hand, and, on the other hand, allow them to use all the advantages of the banking ecosystem to obtain the best shopping experience within a particular business.


  1. Inclusiveness


Embedded finance allows low-income users to access formalized financial services that they otherwise wouldn't be able to because of the complex processes and strict filtering criteria used by traditional financial institutions.


This includes different categories of financial instruments which, for one reason or another, may not be available to some individuals or businesses. Often, the process of opening any bank product requires a visit to the bank and many other manipulations.


Built-in financial tools allow access to payment solutions instantly within the product of a company that cooperates with the provider of such solutions.

What Are the Types of Embedded Finance?

Today, the technology of embedded finance, gaining popularity at a rapid pace, has received a new round of development and has found its application in many areas of the financial system, opening up new opportunities for interacting with money. Let's look at the main ones below.



  • Buy Now, Pay Later (BNPL)


BNPL services allow consumers to purchase goods using any bank card and pay in equal installments within a certain period after the purchase. As a rule, in this case, the payment is divided into four equal parts, or the buyer is given a delay of 30 days.


As a type of short-term financing, this model, unlike credit cards, allows consumers to break down the purchase price into interest-free payments. This scheme has taken shape as a business model over the past decade.



BNPL operators usually make money from transactions paid by merchants. In addition, service providers can profit from late payment penalties on consumers. The BNPL model for making small purchases has become popular due to the popularity of e-commerce.


To start using this embedded finance option, the buyer must make a purchase, make an initial payment, and then pay the remaining amount in several interest-free installments.


  • Point-of-Sale Lending


PoS lending is one of the options for an express loan, which can be obtained on the territory of a trade and service center in the process of purchasing goods or receiving services.


You can apply for a loan at any of the physical outlets (shop, hypermarket, sales outlet, etc.), as well as online (online store, marketplace, etc.).



PoS lending services can be used to purchase almost any product. The most popular categories include electronics, home appliances, furniture, jewelry, and more. Financing is carried out at the expense of credit institutions and partners of retail outlets (IFI/bank).


As a rule, financial institutions enter into cooperation agreements with large and medium-sized businesses; for this reason, the service is most popular among retail chains, and small outlets are rare.


  • Fintech-as-a-Service (FaaS)


Fintech-as-a-Service, FaaS, is one of the most popular varieties of embedded finance, providing a variety of financial tools for business.


A fintech provider creates financial products, and companies from non-financial sectors get access to payment solutions without having to develop services themselves.


With the help of financial solutions, the company covers more scenarios and earns more.



Fintech as a service is the next step in integrating financial tools. For example, paying for a taxi in an app is a basic set of functions for accepting payments.


In contrast, a bank account and an e-wallet from a taxi service, which provide the driver with instant access to earned funds and the ability to manage them, are fintech as a service.


Today, this approach is used by Uber, a non-financial company that implements financial scenarios in its field.


  • Embedded Insurance


Embedded insurance is a concept that many insurance companies use to provide their products and comprehensive services as part of other web-based programs and services.


This type of insurance can be offered either as a supplement to other products and services or as its own component of a third-party customer experience.


EI is typically used when a customer buys a product at checkout, such as a TV, and has the option of adding insurance or a warranty during checkout.



As the marketplace evolves, consumers are definitely enthusiastic about the idea of increasing convenience and ease of service through built-in insurance.


This is because the latter allows consumers to get a customized insurance offer that matches their product or service purchases without having to search for suitable insurance options, bringing the whole process together at the point of sale of that product or service.

Conclusion

The payment industry, experiencing global changes as a result of the development of information and financial technologies, is on the verge of adopting solutions built on the model of embedded finance to revolutionize the process of mutual settlement and increase purchasing power.


The future of embedded finance will bring many new opportunities for business-to-customer interactions and help push the boundaries of the usual understanding of how service provision is done.