Decoding what is embedded finance and its application for business

Apr 05, 2024

The pandemic was a crucial time for the development of newer, adaptable technology — inadvertently creating an avenue for different financial technology to become accessible to multiple consumers.

One remarkable example of this is the evolution of embedded finance. Before getting into the crux of what is embedded finance, let’s take a quick second to understand its background.

We make superfast payments within and across the country without stepping out. Merchants and eCommerce sites have more convenient payment options.

Banking and financial services have become more accessible to both consumers and businesses. The reason is this — embedded finance.

This is what has made every payment possible, without leaving the application — from ordering food to paying for a cab.

What is embedded finance?

Integrating financial services into non-financial applications is the basis of embedded finance. This is to improve the customer experience while accessing financial services through digital platforms and applications. 

One good use case to understand this is a Buy Now Pay Later scheme. Rather than choosing from one of the available payment options, customers can choose BNPL while making a purchase.

In traditional means, they will have to go to the bank, apply for a credit card, and then make the payment. But here, they can subscribe to a financial program during the checkout process and pay upfront. 

It’s predicted that embedded finance will have a great future in India and will see massive growth in a few years. By 2029, the expected revenue of embedded finance players will reach $21,127.5M.

What are some examples of embedded finance?

Embedded payments

Picture an online checkout process. Once you are ready to key in your payment information, you will be redirected to the banking page. Embedded finance offers a seamless payment experience.

Shifting from one application to another with a card in your hand shouldn’t be the ideal solution. With embedded payments, you shop and pay from the same place without navigation.

Businesses benefit from this too. Instead of relying on third-party payments, they can become payment facilitators. 

Embedded lending

Embedded lending is to attract buyers who leave carts due to insufficient funds. You let them scroll through financial products and lenders rather than redirect them to banks.

You cut intermediaries and bank visits by making loans available in marketplaces. There is no lengthy paperwork or approval timings. BNPL is a live example of successfully embedded lending.

They are available with leading eCommerce and online merchants facilitating instant payments. 

Embedded credit

Businesses need more secure and easily accessible products than consumers. Embedded credit is to help them get access to funding. Some examples are BNPL for businesses, credits, and invoice financing.

You can buy from your vendors and tap into financial products available for financing. No need to reach out to financial institutions and wait for their approval. 

Embedded insurance

Customers can buy insurance options within a commercial platform too. When buying products that qualify for insurance coverage, customers can get both. The insurance will be available as an add-on.

Some examples include air tickets, electronics, equipment, spare parts, etc. Customers prefer doing research before choosing insurance covers. Later, they approach the provider, make payments, and finish the paperwork.

This can be skipped altogether with embedded insurance, which offers prime coverage options and competitive premium rates.

Embedded investment

India is witnessing a boost in a financially aware population who are keen on diversified portfolios. Something that helps this crowd manage their investments and money in one place is the advent of embedded investment.

Its goal is to have a one-stop shop that allows everything from trading to share marketing. Customers can create a single account, load their money, and access multiple financial instruments stacked together.

Additionally, they have assistance from AI too. Some examples include Cash App, TATA Moneyfy, etc.

How exactly does embedded finance work?

A lot of use cases are presented above. But how do applications host these options and let them co-work? How does embedded finance work when you make payments, use UPI or QR scanners, or allow cashless payments?

Businesses can connect and plug in any financial product, from payments to investments, with their platform.

It is an additional revenue stream for businesses as they can partner with financial institutions and earn a marginal share of transactions.

As the business already has its customer base and attracts a steady flow of new visitors, a new world of opportunities opens up for both. 

Though businesses provide in-app purchases, they don’t have to do the grunt work for payment infrastructure, safety, licensing, encryption, or others.

Your payment partner, who has got the know-how and all the above infrastructure, will ensure successful and compliant payment. 

Using API (Application Payment Interface), you can embed your business platform with financial instruments. APIs talk the language of computers and act as the bridge between two different architectures.

Every financial institution has its API layers that are integrative and interoperable. The portability of APIs can be done in two ways.

Businesses can either buy APIs on their own, connect them to financial products, and offer them like their own product.

Or they can build a stack of API layers on their own, make customizations, and connect with the desired solutions. That’s what happens behind the scenes of quick taps from one app to another.

What are the key benefits of embedded finance?

1. Digitally established platforms

Businesses with digital platforms come under this category. They are the most benefited among all. They have metrics like customer retention, satisfaction, lifetime value, and average order value.

It all revolves around one action — whether the customer purchases or not. Presenting them with multiple payment options can be a big decision-changer. It also reduces cart abandonment cases.

Businesses spend a lot to win back these customers. With less effort, they can make noticeable improvements in the above metrics.

2. Financial institutions

Speaking to customers directly and gaining their trust is a task for financial institutions. Indian customers are quite skeptical about trying new financial products unless a trustworthy entity recommends them.

With embedded finance, they can access a large pool of customers by collaborating with growing businesses. They can use this opportunity to attract potential buyers and borrowers, both on and off the business platforms.

By doing this, they can increase their profit margins and offer a bespoke range of products to suit the platform.

3. End-users

Buyers no longer have to make purchasing decisions based on funds availability. They can access a bunch of financial products at more affordable prices.

One product can’t be tailored-fit for all. Customers can choose options that fit their needs. They can get things done in a click and avoid payment decline or gateway issues. 

What are the trends driving the future of embedded financial services?

What makes the future strong for cutting-edge technologies like embedded finance?

What should businesses and banking institutions capitalize on to identify the right opportunities and not get misled? Some trends have the potential to make embedded finance the future.

1. New consumer behaviors and revenue streams

Customers' mindset has shifted from offline to one-click online purchases. It’s convenient because they can book hotels, buy clothes, or pay bills from wherever they are.

They are spoiled for choice already, as many small businesses have their digital entities. This is applicable to both B2B and B2C industries.

To provide customers with uninterrupted financial services, businesses need help from fintech commodities. With too many players in the field, outdated businesses get kicked out too soon.

But this space is mended by embedded finance solutions. Financial organizations look for additional revenue sources to make more profit in a competitive space. By joining hands with lucrative businesses, they accomplish this.

2. Rise of financial APIs

Banking domains have always remained strict about sharing data with other platforms. Previously, this didn’t let other applications work closely with them. Yet, in the technological era, everything is possible.

Businesses can safely tap into the banking ecosystem and receive only the authorized data in a secure format. That’s what API stands for. The rise of financial APIs has been highly observed in recent years. 

A new concept of open banking is on the rise. Custom-built financial products came into existence in all aspects of finance.

Through third parties, businesses can establish a connection between the financial domain and their consumers. This smooth and seamless connection elevates the user experience. 

These financial APIs make embedded financing possible, keeping security and reliability intact. There will be a breakthrough in the fintech industry with more promising products surfacing in.

This will unlock new opportunities for businesses and intermediary institutions.

3. Embedded payments

A lengthy checkout process can put off the high of buying real quickly. Embedded payments are changing that by aiding express checkouts.

Customers can click on ‘buy now,’ choose the payment option they like, and pay right there. It saves time for them and brings revenue to the business.

Recently, there has been a huge increase in small businesses going online. They have hiked their sales past 100% with accessible embedded payment features.

It also works in ways where financial partners can come up with offers exclusive to customers of one business. 

4. Fintech-as-a-service

Banking and financial services aren’t limited to banks anymore. There are more and more innovative fintech products replacing traditional financial practices.

Advanced technology like cloud computing, artificial intelligence, and machine learning are making a revolution by increasing the capabilities of financial instruments.

A good example is AI-powered investment applications. Fintech apps also exist in other branches of finance, like budgeting, credit, payments, and others. 

These apps are easy to build, plugin, and integrate with other core applications. Traditional banks are also catching up by digitizing banking functions to stay on par with rivals.

The rise of fintech services is highly favorable for embedded finance players to enter. Fintech providers can make their services more accessible through embedded finance.

It’s a huge market opportunity for both to extend each other’s capabilities.

How is Volopay helping businesses stay ahead of their finances?

Evidently, India’s financial sector is progressing by leaps and bounds. It’s great for businesses as they can provide a seamless buying experience to customers.

But it’s the same businesses that still rely on distressing accounting practices. You can hit target revenues, but tracking expenses, paying timely bills, and budgets will be unachievable.

It’s a misconception among small businesses that accounting and finance automation is expensive. It’s not. Volopay’s proof for that. 

Volopay is an expense management and payment application. It can replace your complicated, time-consuming, and messy accounting processes with automated workflows

Invoice processing typically takes a week to 15 days. Volopay can automate that end-to-end. Your accountants will find it simpler to schedule payments and automate approvals. 

You can leverage corporate cards, an incredible BaaS product, and use them for PoS and online payments. Virtual cards for employee payments and subscription management is also available.

Monitoring payments constantly is not an option in spreadsheets and manual accounting. Volopay provides an up-to-the-minute view of your transactions, reducing follow-ups.

No one has time to waste on manual data transfer. You can sync your payment data automatically with ERP apps through integrations. 

You don’t have to spend too much to make successful international payments. Make quick cross-border payments at the best conversion fees. Or get your multi-currency wallets to load money in the currencies you want. 

Keep track of your accounting data from where you can draw actionable insights for the next budgeting sessions. And that’s how smart businesses grow their profit margins and net income.

Stay on top of latest business payments technology with Volopay