Embedded finance refers to the seamless integration of financial services adopted by non-financial companies. This merger between non-financial entities and embedded finance services has revolutionised the way we interact with money and businesses alike.
The recent growth in embedded financing services has disrupted the role of traditional banking institutions. Previously, many of our financial interactions, such as loans or payments, were only made possible through the use of banks.
Nowadays, non-finance companies can provide financial services to their customers by connecting fintech and banks to their platforms through APIs.
No matter what industry you find yourself in, you can incorporate banking products onto your platform, without the need to comply with strict regulations and licenses.
For example, retailers can now embed financial lending services onto their platform and give their customers the option to split online purchases into monthly instalments, also known as buy now, pay later.
Banking as a Service
Banking as a Service, also known as BaaS, refers to a model in which licensed banks can provide non-financial companies with an embedded integration of banking services.
More specifically, BaaS is the end-to-end model that allows third parties and digital banks to connect, via APIs, and create white label banking services or innovative banking products.
Non-financial companies can improve their user experience and benefit immensely by offering their customers banking services.
Previously, financial services, such as lending or payments, used to be exclusive to traditional financial institutions. These services require a banking licence, which in turn requires a lot of capital and strict regulations.
Going through all this paperwork isn’t in the best interest of non-financial companies; they aren’t interested in becoming a bank, they are focused on providing customers with their own alternative services.
This is where Banking as a Service comes in, with BaaS, any business can provide their customers with a seamless user experience that integrates financial features into their platform.
Non-financial companies aren’t subjected to any of the regulatory duties of financial institutions, yet they still enjoy the benefits provided by an enhanced user experience.
Who is embedded finance for?
Embedded finance is for everyone – for companies of all sizes and sectors.
It gives non-financial brands the chance to offer tech-savvy customers new and exciting opportunities. These embedded finance services offer simplified transactions, new lines of revenue, and the ability to deepen existing customer relations.
However, embedded finance doesn’t just bridge the gap between businesses and consumers, it helps bridge the gap on a B2B basis too. Many fintech companies dedicate themselves to facilitating payments and loans between buyers and suppliers.
Embedded finance doesn’t limit itself to payments, it includes insurance, lending, and even investment. It’s provided SMEs, the growth engines of our economy, with an opportunity to access alternative forms of financing.
The growth of the fintech and embedded finance industry is paralleled by the growing benefits it brings to both businesses and customers alike.
Embedded invoice finance
Commercial customers aren’t the only ones reaping the benefits from embedded financing, so are buyers and suppliers.
Invoice financing services help businesses plug sizable cash flow gaps in balance sheets by advancing any outstanding invoices.
Going through a more traditional financing route, such as a bank loan or overdraft, could take weeks or even months for the cash to materialise.
Previously, you would go to the bank, take out a loan, and use this money from outstanding invoices to cover expenses or pay contractors.
Invoice financing cuts out the awkward middleman. It provides tailored financing that meets the personalised needs of your business.
Embedded invoice financing is a seamless and integrated way to get advances on the cash that you are already owed.
This type of embedded finance offers companies a way to increase their operational efficiency, which in turn increases turnover and provides an opportunity for growth.
Embedded finance is the terminology used to describe the adoption of financial services into non-financial business processes, whereas embedded fintech can be used to describe the adoption of fintech services (like money management or data breach and identity protection) into the business processes of financial institutions.
In order to keep up with the abundance of fintech companies emerging, banks need to offer their customers digital and integrated experiences.
An overwhelming majority of Millennials and Gen Zers rely on their mobile banking apps to access their checking accounts. Banks need to facilitate their customers with a digital platform that is worthwhile, competitive, and modern.
Rather than conceptualising, testing, and then launching these services, financial institutions utilise the services of embedded fintech. In many ways, the finance market has evolved from pure competition to diversified collaboration.