What is Embedded Finance? (& Why It Matters)

Embedded finance has recently gone from being a ‘hot topic’ to an essential part of the global financial ecosystem. 

It has game-changing and far-reaching implications for most industries. 

Recent research estimates that the value of the embedded finance market, which was at $43 billion in 2021, will grow to $138 billion in 2026. 

Just like the word ‘fintech‘, it means different things to different industries and companies. 

So, let’s take a closer look at embedded finance and its transformative impact. 

What is embedded finance? 

Embedded finance is the embedding (seamless integration) of financial services into the business processes of non-financial service companies. 

These financial services include payment processing, lending, invoice finance, insurance and even investing. 

They are embedded via APIs (application programming interfaces) – programming code that enables different softwares to connect and integrate. 

You might already be aware of the term ‘embedded payments‘. This refers to the simplification of transactions that take place within apps or other online channels.  

Uber is often cited as an example of embedded payments in a consumer scenario. Unlike a traditional taxi journey, no cash or card transaction needs to be instigated by the customer at the end of the journey. We share more examples later. 

Embedded finance is the application of this same principle across a broader range of financial services such as pensions or loans, not just the payments element.  

Banking as a Service (BaaS) 

When discussing embedded finance, you’ll often hear the term Banking as a Service (BaaS) mentioned. 

It is the name of an outsourcing model used in embedded payments, whereby banking services are white-labelled for use by non-banking companies. 

There are several barriers to companies directly offering banking services to their customers, particularly: 

• Regulatory and risk compliance requirements 

• Building the necessary technology 

BaaS providers enable companies to offer valuable services to their customers without their customers knowing that a third party is involved. 

It is similar to open banking. But the difference is that, the latter is when non-banking businesses provide services which only rely on using banks’ data (as opposed to their services). 

Examples of embedded finance 

There are many different types of embedded finance. It is a highly varied field with innovation baked into its DNA. 

The examples below give just a sample of the variety of embedded financial products available in the consumer market.

1. Klarna & buy now, pay later (BNPL) 

Klarna is a Swedish fintech company that primarily specialises in providing payment processing services for e-commerce stores. It is also well-known for its consumer buy now, pay later (BNPL) service. 

BNPL is essentially a form of money lending which divides payments up into instalments. It makes purchases more attainable for consumers rather than paying in one lump sum using a traditional card-based method. 

2. Lyft & ridesharing 

US-based Lyft has the second biggest share of the ridesharing market in the US, after Uber. 

Ridesharing (or ride-hailing) is a service that connects drivers with passengers via an app or website. 

Prices are fixed (based on live local conditions) beforehand and payments are processed and recorded by the app itself. This dispels uncertainty about costs and reliance on cash, making the journey even easier than hailing a traditional cab. The passenger simply exits the cab at the end of the journey without the inconvenience and delay of finding cash or making a card payment.  

3. Tesla & embedded insurance (EI) 

Tesla isn’t only an innovator in electric car design and technology. Since becoming a licensed insurer, the company also offers embedded insurance (EI) in a growing number of US states. 

This is very convenient for its customers who would otherwise have to pay relatively high rates from traditional insurance providers. They can simply purchase insurance at the point of sale. 

Tesla’s EI provides the same cover as other insurers. What makes it unique is that its rates are calculated using live data from the vehicle owner. 

The benefits of embedded finance 

There are multiple benefits of embedded finance both in context of B2B and consumer scenarios. These will vary according to the precise method but the benefits listed below generally apply across all iterations of B2B and consumer embedded payments.  

1. Increased revenue 

The primary benefit of embedded finance is that is makes customer spending easier and therefore promotes increased sales and revenue growth.  

2. Increased convenience 

Embedded payments make transactions effortless and time-saving. 

This is most evident from a customer experience point of view. Nowadays, even the simple task of having to repeatedly re-enter bank account details is seen as an inconvenience that can cause a purchase to be abandoned. 

The B2B customer experience has recently begun to see a similar level of attention as as the consumer experience. Providing frictionless B2B process is an opportunity for businesses not only to grow revenue but to differentiate themselves in the market.  

For businesses without a BaaS provider, the time, effort, and risk of developing and maintaining a native version of the same service would be too much of a barrier. Qualifying for regulatory certification alone would be both excessively expensive and time-consuming. 

3. Increased customer sign-up and loyalty 

The prestige and trust that comes with offering innovative financial services is hugely beneficial from a repetitional and brand standpoint. 

Also, loyalty is hugely important to companies offering both B2B and consumer services. Embedded payments and especially embedded payments can make a difference here. For example, offering a line of credit that can spent easily online is likely to keep B2B customer coming back.  

By neglecting to adopt an embedded finance or embedded payments strategy, companies risk losing business to more forward-thinking competitors. 

4. Improved analytics 

Embedded finance enables improved data collection and analytics. 

The nature of the technology involved means real-time updates and detailed reporting are often available. 

The right system will also simplify the consumer feedback process. This can help companies understand their customers’ pain points better, implement more impactful marketing and inform their future development. 

Traditional financial institutions vs alternative lenders 

Despite their name, BaaS services aren’t necessarily provided by banks. In fact, many are provided by fintechs and other non-bank companies. 

Banking is a very old business model and many current banks still have deep roots in the past. Some have made steps towards digital reinvention – influenced in part, no doubt, by the challenge posed by fintechs.  

However, legacy banks still primarily make money through traditional loans and are underpinned by outmoded technology. This means that their operations are often slow and customer experience is poor. 

Fintechs are designed around modern technology and cutting-edge specialist tools. This allows them to connect with other data sources, process information more quickly and offer a much better user experience to customers.  

Using new technology also means fintechs don’t have to maintain large and complex IT systems so they can usually be relied on for more competitive pricing than incumbent providers of financial services.

Embedded finance for B2B 

Whilst there are many examples of embedded finance for the consumer market, as mentioned above, it is also increasingly an essential part of business-to-business (B2B) propositions.  

These are growing in popularity as businesses acknowledge that the expectations of B2B buyers are rising quickly based on their experiences as consumers. 

B2B financing itself is a fast-growing and innovative field. The kinds of solutions most frequently used in B2B and their scale obviously differ from B2C. 

For example, invoice financing is a popular way for businesses to efficiently leverage their existing accounts to improve cashflow. 

At TreviPay, we specialise in providing effective embedded B2B financing solutions, from different types of invoice financing to payment and Net 30 terms. 

Conclusion 

The embedded finance market is growing rapidly. Customers and businesses alike expect financial services to be available and frictionless at the point of sale. 

Embedded finance providers can be banks or alternative providers, such as fintechs. They use APIs to integrate business platforms with BaaS (Banking as a Service) software. 

There is a wide – and growing – variety of embedded finance options available from payments processing to investing and much in between. The innovation involved in creating and bringing new these solutions to scale is impressive, to say the least. 

The precise type of embedded finance commonly used and its scale varies depending on the type of industry and whether they work in the B2C or B2B world. In the B2B world, for example, invoice financing is a particularly popular and effective service. 

By providing embedded payments to customers, companies can increase their revenue, customer sign-up rate, customer loyalty and gain powerful analytics insights.  

It is a trend that is likely to increase as companies elevate the user experience and convenience of their B2B payments to match that expected with consumer payments.