Whenever you place a mobile food order, request a car on a ridesharing app or use a mobile payment service, you are engaging with embedded finance technologies.
Those services are just the beginning of the embedded finance market, which is expected to reach a global value of $7 trillion in the next decade.
Embedded Finance Definition
As consumers continue to want services faster and easier — and companies want to receive payments quicker, too — embedded finance stands to touch nearly any industry by allowing businesses the ability to lend, accept payments or offer insurance without traditional financial institutions.
“Companies that adopt embedded finance technologies are going to have an enormous competitive advantage over others in their market,” said Wayne Chang, co-founder and co-CEO of Digits, an AI-powered financial management platform that connects with businesses’ bank accounts to allow them to analyze their cashflow in real time. “Others in the market who don’t have this technology are actually spending capital employing manual workforces to give them information that might be delayed.”
What Is Embedded Finance?
Embedded finance is the integration of financial services like lending, payment processing or insurance into nonfinancial businesses’ infrastructures without the need to redirect to traditional financial institutions.
For example, instead of going to a bank for a loan, customers can use companies like Klarna to obtain financing when purchasing a product online.
“I think the easiest way to think about embedded finance is how you take nonfinancial or nontraditional financial products, and you infuse financial services through them,” said Sofiat Abdulrazaaq, CEO and co-founder of Goodfynd, a food truck ordering application that uses embedded payments.
Embedded finance speeds up the processing of financial decisions for companies, Chang said. Businesses also learn more about their customer’s spending habits and receive payments quicker than traditional invoicing.
“At a company without embedded finance, you’re basically doing everything very manually,” Chang said. “You’re basically saying, when I want to purchase something, I have to create a purchase order. This has to be given a review. Someone might have to input this in a spreadsheet somewhere. They have to figure out the implications of this on the company, and then a round trip comes back, do I purchase this?”
On the other side, consumers who engage with businesses using embedded finance systems are able to conduct financial transactions quicker and easier — without needing to go to a bank.
“Any good business is going to want to use some type of embedded finance because at the end of the day, it is all about the consumer,” Abdulrazaaq said. “From a customer ease perspective, the value prop is there. It allows you to be disruptive quicker, and it allows you to add financial tools and services to your products to make payments easier, quicker.”
Embedded Finance Examples
Embedded payments are probably the most well-known type of embedded finance offering. Amazon, Uber, DoorDash, Walmart and Instacart all enable embedded payments, letting customers to place an order and pay for it all in one application.
Google Pay, Apple Pay and Venmo are other examples of embedded payment applications where users can store financial information and conduct transactions in one place.
“If you use Venmo to authenticate your bank account, those types of services are embedded finance, and it definitely makes it quicker and simpler for consumers to check out, and it makes it better from a trust perspective,” Abdulrazaaq said.
Small businesses benefit from embedded payments, too. Take a local HVAC company. Rather than a repair person needing to invoice for services days later, they can take payments on site with a payment solutions platform like Xplor Pay, said Matthew Morrow, CRO of Xplor Pay.
“We want to make sure that a business can rely on the payment methods that they’ve collected from customers over time,” Morrow said. “Those transactions reconcile right there in the software, and you’re doing less bookkeeping at the end of the day.”
Goodfynd uses embedded payments, too — users can pay for their food with Google Pay, Apple Pay, PayPal or card.
“The benefit for the customer is you don’t have to re-put in your credit card number. You don’t have to trust a third party that you don’t know with your personal information, but you’re able to check out seamlessly,” Abdulrazaaq said.
Embedded Buy Now, Pay Later Installment Plans
Before the embedded finance technologies came on the scene, layaway was an option where a consumer could go into a store to buy a product and place a deposit to reserve the item. The store would hold onto it until the purchaser was able to pay it off.
Now, companies can offer buy now, pay later services where the consumer can get the product right away but pay for it over time in installments. This embedded installment plan option is presented during mobile checkout. For example, Afterpay offers a buy now, pay later option of four interest-free installment plans.
“Embedded finance changed the game. Think about buying the Peloton. You get it right then, and then you can make these monthly payments through a firm, and that’s offered up to you at checkout,” Abdulrazaaq said.
Another layer of buy now, pay later is embedded lending. Businesses can offer loans through their embedded finance offerings — and customers don’t even need to go to a traditional financial institution.
“I remember back in the day when you had to go to the bank to get a loan for $1,000 right now,” Abdulrazaaq said. “Now you can be in an application, and they’ll give me $2,000 to buy a Peloton right away. I only see that growing as consumers continue to want ease and continue to want to get to the product or to the experience sooner rather than later.”
Klarna is one example of an online financial services provider that offers lending. Their retailer partners will offer a financing option during checkout, and the purchaser fills out a simple application for financing. They receive an instant decision and make monthly payments to Klarna.
Applications that integrate stock market investing like Robinhood, Acorns and Cash App are examples of embedded investment companies. Buying, selling and trading stocks can happen without leaving the app or working with an investment adviser.
With embedded insurance, it’s no longer necessary to meet with an insurance agent to get coverage for an upcoming trip or a new car purchase. Some companies have embedded the insurance application process into the checkout experience. For example, travelers can purchase insurance coverage during the checkout process when booking a flight.
What Is the Future of Embedded Finance?
Fifteen years ago, nearly all financial services for a small business were handled by a local banker, Morrow said. Now, the emergence of embedded finance has cut through much of the red tape, and business owners are looking to wrap payments and financial services into their softwares as seamlessly as possible. The desire for increased access to these services is only going to grow, he said.
“There’s an uptick of adoption here, not because of, ‘Oh, this is really nice’ or ‘this is really great,’ but because of necessity,” Chang said. “The industry is not producing the supply of accountants and financial professionals as fast as the business industry that needs their support, so firms are adopting these tools because it multiplies their workforces efficiency and productivity,” he said. “And the more clients they can serve, the more impact they have.”
“You get speed. You get efficiency. You get cost savings. It would be very, very odd if you’re a company that just started, and you aren’t adopting embedded finance. It’s inevitable.”
In the future, embedded finance solutions will enable companies to have more customers and more revenue with less cost, Chang said.
“You get speed. You get efficiency. You get cost savings. It would be very, very odd if you’re a company that just started, and you aren’t adopting embedded finance. It’s inevitable,” Chang said.