Embedded Finance: The Next Big FinTech Trend?

Embedded finance is a new fintech technology trend rapidly gaining popularity in 2023. It refers to integrating financial products and services into non-financial platforms, making it easier for consumers to access financial services.

Examples of embedded finance include using mobile payment services, getting loans for online purchases, and sales financing for appliances and vehicles.

Embedded finance is advantageous for e-commerce businesses as it speeds up transactions and boosts customer loyalty. Industries that adopt this trend will have a competitive advantage over others in the fintech market.

Third-party fintech companies have also gained access to customers' financial data. They can carry out transactions on their behalf, encouraged by open-banking innovation and mandates in the European Union and the US.

The embedded finance market is expected to exceed $7 trillion in the next 10 years, making it worth double the combined value of the world's top 30 banks.

Fintech companies offering embedded finance products are gaining significant ground and seeing huge gains in rounds of venture capital investments as the market grows.

Embedded finance is expected to bring about new revenue streams, rearranged interactions between consumers and financial service companies, a new type of competition, and a new era of partnerships.

Banks, fintech, and financial institutions will strive to take advantage of this expanding potential, with local banks serving their customers more efficiently and effectively, increasing their share of wallets and reducing costs.

Implementation Process

Identify the target platform: The first step in implementing embedded finance is identifying the non-financial platform where the financial product or service will be integrated. This could be an e-commerce platform, a mobile app, a customer loyalty program, or any other platform where users engage in non-financial activities.

Choose the financial product or service: The integrated financial product or service must be chosen. This could include payment processing, loans, insurance, investments, or any other financial product or service.

Choose a partner: Depending on the specific product or service, a financial partner may need to be chosen. This could be a bank, a payment processor, an insurance provider, or a financial institution.

Integrate the financial product or service: Once the target platform, financial product or service, and partner have been chosen, the integration process can begin. This involves connecting the non-financial platform with the financial partner's APIs or other integration methods.

Testing and Launching: After the integration process, the product or service must be tested to ensure it works correctly. Once the testing is complete, the embedded finance product or service can be launched to the target audience.

Monitoring and Maintenance: The product or service must be monitored and maintained to ensure it works properly and meets users' needs.

Limitations of embedded systems

Security and Privacy Concerns: Since embedded finance involves sharing financial data across different platforms and systems, it is crucial to protect the data from cyber-attacks and other security threats. There is also a risk of privacy breaches when customer data is shared across different platforms.

Regulatory Compliance: Embedded finance operates in a highly regulated industry, and companies must comply with various financial regulations and standards. Failure to comply with these regulations can result in penalties and other legal consequences.

Integration Challenges: Embedded finance requires integration with various platforms and systems, which can be challenging and time-consuming. Companies may need to invest in new technology and infrastructure to support embedded finance, which can be costly.

Limited Customer Awareness: Many customers may not be aware of embedded finance or may not trust non-financial companies to handle their financial data. This lack of awareness and trust can limit the adoption of embedded finance.

Lack of Standardization: Embedded finance is a relatively new technology, and there is a lack of standardization across different platforms and systems. This can create interoperability issues and limit the scalability of embedded finance.

Integrating Crypto into Embedded Finance

Create a Secure and User-Friendly Interface: To integrate crypto into embedded finance, a secure and user-friendly interface is crucial to enable customers to buy, sell, and hold cryptocurrencies within the platform. This can be done by partnering with a reputable crypto exchange or developing an in-house solution that meets regulatory compliance and provides a seamless customer experience.

Leverage Blockchain Technology: Blockchain technology can ensure secure and transparent transactions, reducing the risk of fraud and improving the speed and efficiency of transactions. The use of smart contracts can also enable the automated execution of financial agreements, further streamlining the process.

Ensure Regulatory Compliance: Compliance with regulatory requirements is crucial when integrating crypto into embedded finance. This includes complying with anti-money laundering (AML) and know-your-customer (KYC) regulations to prevent fraud and financial crimes.

Educate Customers: Educating customers about the benefits and risks of cryptocurrencies is crucial to ensure successful adoption and usage. Customers need to understand the volatility of cryptocurrencies and the importance of managing their digital wallets securely.

Will Embedded Finance disrupt FinTech?

Embedded Finance has the potential to disrupt FinTech by creating a new way of delivering financial services to customers that is more efficient, accessible, and convenient.

It could democratize financial services by making them more accessible to a wider range of consumers who may have been excluded from traditional financial services.

This new trend is expected to be a major force in the financial industry, creating new revenue streams, rearranging interactions, and creating new types of competition and partnerships.

Conclusion

These embedded finance solutions will benefit banks and fintech firms while promoting healthy competition in the financial and other industries.

Businesses, FinTechs, and financial institutions will, without doubt, strive to take advantage of this expanding potential, and who benefits the most will depend on execution, timing, and market awareness.

Local Banks will be able to serve their customers more efficiently and effectively, increasing their share of wallets and reducing costs.