In the near future, both consumers and businesses will be spoilt for choice as some of the financial services that until now have been the exclusive preserve of banks and other traditional financial institutions are liberated. The buzzword is “embedded finance”, and alongside its equally famous cousin, open banking, the next phase of the fintech disruption is moving beyond simply enabling payments to transform how people and businesses access credit, insurance, and a run of other financial services. Here’s why.
Embedded finance is really an umbrella term that covers a lot, some of which you may already be familiar with. It is about “integrating financial services such as payments, lending, and insurance usually offered by banks or other financial institutions into non-financial platforms,” Stella Elele, a product manager at Flutterwave explains. “So it’s about customer-facing platforms like an Uber for example, or a Wakanow, being able to meet a customer’s diverse needs in the right form at the right time by embedding financial services into their channels for customers,” she says.
By adding financial services to their core product offerings, Elele says companies can enable their customers to access financial services as part of a user journey their customers are already familiar with. For example, a customer shopping for travel tickets to Dubai on the popular online travel agency, Wakanow, may need travel insurance, or she may not be able to pay for the trip at once. Wakanow can embed a credit programme that allows the customer to lock down their desired travel deal by extending credit to the customer at the point of purchase.
The Wakanow example may be dramatic, but the truth is that embedded finance is actually more common than people think. If you have ever made in-app payments when taking an Uber or while buying food through Jumia Food, then you have already interacted with embedded finance in practice.
But this simple use case for embedded finance is being left behind. Embedding finance is now expanding beyond merely creating more convenient checkout experiences to bringing services like insurance, lending, and investments within reach of the consumer and businesses in some of the most non-financial products. A good example of this solution bundling is the buy-now-pay-later concept which is popular with ecommerce businesses.
The appeal of embedding financial services everywhere
Now that we’ve cleared up what embedded finance is, we can tackle why it is so appealing.
One obvious reason is that bundling disparate services which would previously take the customer time and maybe even money to access simplifies the purchase experience. Consumer expectations have shifted. They want to be served. Bringing credit, insurance, and payments into one user flow is a great way to meet these expectations. Says Lizanne Correa-DSouza, Flutterwave’s VP of products, “People are not going to be walking into a bank anymore to be able to ask for loans… They are used to being able to take all of their life decisions on the phone and what that is doing is driving auxiliary services like financial services to come to them in the form of embedded finance.” Because people are more digitally focused and stay connected through mobile platforms, service providers are having to bring even more services closer to them.
In addition to this, the fintech movement has come of age. Simply put, processing payments, while still important, is only one piece of the financial service pie. And incumbent players in the wider financial services industry are still playing catchup with both the technology and shifting demands of consumers. The rise of disruptive neobanks and challenger banks illustrates this gap. If people do not want to wait in line in a bank hall for hours to access short-term credit for their small business or to purchase an item that can improve the quality of their life, why lose money trying to make them? “That lack of access is now being met by several players in the fintech industry who are trying to close the gaps in helping consumers get access to the financial services that they would normally not have been able to do through a large corporate banking institution,” observes Correa-DSouza.
In addition to this, some have predicted that the embedded finance market globally will be worth $7 trillion by 2030. If this projection has even a half chance of becoming true, it is a no-brainer for fintech brands and challenger or legacy banks to form the partnerships that allow embedded financial services to flourish.
Given the above reasons, it is now clear why everywhere you look, it appears that every other tech company seems to be bundling financial services onto their core product offering.
The challenge of making financial services available everywhere
Regardless of the piling on embedded financial products by tech companies, great and small, there are still significant challenges for businesses drawn to it. Correa-DSouza, explains that non-bank entities like Flutterwave do not have the deep experience and historical overview of consumers that banks do. “So we need to obtain that data on what customer trends are, what credit scoring trends are, and drivers and factors of that from other data sources,” she explains.
Paytech companies like Flutterwave need to understand the economic models around traditional financial services and how to fit this into a broader strategy. In addition, by taking on banks in their space, companies that enable embedded financial services now have to deal with the same regulatory environment that undergirds traditional banking.
“As a non-bank company trying to offer embedded financial services, the number one thing that you’ve got to get really clear and be very firm about is what the regulatory requirements are and how you are going to comply with that,“ remarks Correa-DSouza. “The regulations within every country are different. You need to know them inside out, and you need to understand why they exist.”
Flutterwave is building upon its success as a payment processor for small and medium-size merchants to build its embedded finance offering alongside its lending partners. “Through our partnerships with other financial institutions, we are able to offer a wider range of services than one would normally get from an individual financial institution. So the benefit of being a platform gives [our users] access to multiple offers on the lending, investment side or the saving side,” Correa-DSouza says, “We essentially act as a referral network, and [our users] are able to then get access. In the future, we look to help improve the credit scoring and decisioning of our lending partners through data and information that we may have and share with the consent of the small business.”
The bottom line is that embedding financial products (not just payments) in mobile applications that people use is already altering how people find and use these services—and the pandemic accelerated that. “A bank in my pocket is something that’s going to be here to stay,” Correa-DSouza says, “and I don’t think that consumers will ever go back to the old way of doing things now that they have been able to experience a digital mobile-first experience that they see value in, in terms of time savings simplicity and access.”
This level of access (and the potential reward) is the promise of embedding lending, insurance, and wealth management—to mention a few—everywhere for both consumers and small businesses.