What Is Embedded Finance? How It’s Changing Fintech In 2024

In recent years, embedded finance has driven the revolution of financial technology, or fintech. Embedded finance, which seamlessly integrates financial services into non-financial platforms and experiences, is revolutionizing banks and financial services.

The global embedded finance market was worth $66.8 billion in 2022. It’s expected to grow very quickly and hit $622.9 billion by 2032. From 2023 to 2032, this growth is expected to keep going at a rate of 25.4% per year. This article goes into detail about embedded finance, including its history and impact on fintech.

• What Does Embedded Finance Mean?
• Evolution Of Embedded Finance
• Key Components Of Embedded Finance
• Examples Of Embedded Finance
• Impact Of Embedded Finance On Fintech In 2024
• Benefits Of Embedded Finance
• Challenges And Opportunities In Embedded Finance

What Does Embedded Finance Mean?

Embedded finance is when financial services are built into sites and experiences that aren’t related to money. Embedded finance doesn’t just rely on banks and other standard financial institutions. It uses technology to build financial features directly into other goods and services. This integration makes it possible for businesses to offer banking services without any problems. This improves the customer experience and makes operations more efficient.

Evolution Of Embedded Finance

• Traditionally, financial services were offered through physical banks.
• Digitalization and smartphone proliferation led to increased convenience, accessibility, and personalized experiences.
• Embedded finance integrates financial services into digital platforms.
• Gained traction in e-commerce, integrating payment processing and financing.
• Expansion to include transportation, healthcare, and real estate industries.

Key Components Of Embedded Finance

There are a few main parts to embedded finance that make it possible for financial services to be easily added to non-financial platforms.

APIs (Application Programming Interfaces)

APIs are the building blocks of embedded finance because they make it easy for different systems to share data and functions. Businesses don’t have to build financial services from the start when they use APIs to add them to their platforms.

Partnerships And Collaborations

For embedded finance projects to work, fintech companies, traditional financial institutions, and non-financial businesses must work together. Businesses can use each other’s strengths and skills to make the customer experience better and create value for both parties through partnerships.

Regulatory Compliance

Just like traditional financial services, embedded finance solutions need to follow the rules set by regulators to protect customers and keep data safe. Businesses that want to add financial services to their platforms need to make sure they follow the rules. If they don’t, they could face legal and social problems.

Security And Privacy Of Data

When banking services are combined, it’s your job to keep private and sensitive customer data safe. To keep cyber threats and unauthorized access at bay, you need strong security measures like encryption and authentication methods. 

Examples Of Embedded Finance

The way we handle our money is changing because of embedded finance, which is when financial services are built into everyday actions. Here are some examples of embedded finance that are simple to understand:

Embedded Banking

Users of different platforms can do their financial jobs more easily with embedded banking. For example, the big ride-sharing company Lyft gives its drivers a bank account and debit card with their company’s name on them. With this setup, drivers can get their money right away after finishing a ride, instead of having to wait for regular payments. In the same way, Shopify Balance makes it easy for store owners to handle their money by giving them a debit card that lets them make faster payments and get special rewards.

Embedded payments 

It makes the checkout process easier for customers by removing obstacles and making things more convenient. Let’s look at Starbucks. Customers can safely store their payment information in the Starbucks app and quickly buy things with just one tap. SmartPay Rewards is a mobile app for gas stations that lets users pay with their bank accounts and get discounts and rewards. This saves businesses money on transaction fees.

Branded Payment Cards

Businesses that want to handle their expenses more efficiently can use branded payment cards, such as those offered by fintech companies Ramp and Divvy. These platforms let businesses give their workers branded credit cards, which makes keeping track of expenses easier and gives businesses more control over their spending. In the same way, Lyft’s branded debit card works with its built-in banking services to make it easy for drivers to access their wages.

Embedded Fintech

Embedded fintech solutions add new financial services right into standard banking platforms. This makes customers more interested in the services and increases the number of services available. In their banking app, a bank might, for instance, give customers tools to help them handle subscriptions or invest in cryptocurrencies. As customer needs change, banks can quickly adapt and offer a wider range of services without having to make separate apps or services. 

Embedded Investing

Through tools that people already use, embedded investing lets people make investments. For example, PayPal and Venmo users can buy cryptocurrency right from their accounts, so they don’t need to have separate trading accounts. Adding investment choices to everyday financial platforms makes investing easier for users and more accessible.

Impact Of Embedded Finance On Fintech In 2024

Digital platforms are revolutionizing the distribution of financial services by providing customers with more personalized and accessible options than ever before. Here are some of the ways that digital platforms are changing the financial services industry:

Banks Working Together With Tech Firms

Financial companies are increasingly using digital platforms to access their massive client data. This data helps banks understand their consumers, create financial products that meet their demands, and attract repeat customers. Through these agreements, banks can get new customers more quickly and provide more personalized financial solutions.

Financial Products Based On Data

Data enables banks to tailor their services to each customer, enabling the creation of new financial goods. When banks have access to new data sources, like platform data, they can improve the underwriting process and come up with new financial goods that meet the needs of each customer.

The Rise Of Vertical SaaS

Software as a Service (SaaS) companies can now add financial services to their main goods thanks to embedded finance infrastructure. This means that customers in vertical markets can get all of their needs met by a single provider, which makes things easier and faster.

Better Economics For Each Unit

Digital platforms help banks get new customers for less money and get them to buy from them again and again, which increases their total profits. With this optimization, banks can offer financial goods at prices that are competitive while still making money.

Better Experience For Customers

The rise of embedded finance companies and the addition of more financial services by well-known brands have improved the customer experience. Customers can now get a lot of financial services from well-known names, which makes them easier to get and gives them more options.

Buy Now Pay Later (BNPL) Is On The Rise

BNPL services are becoming more famous, and they are expected to bring in a lot of money for the embedded finance market. People use BNPL services because they are easy and make payments go smoothly. This makes them an important part of consumer finance.

New Ways To Make Money And Rearranged Relationships

Embedded finance has changed the way that financial service companies and customers work together. Financial companies have to get used to sharing users with businesses that aren’t financial. This will lead to more competition and new ways to make money. Brands and financial players will need to work together more if they want to offer embedded finance solutions without having to hire a lot of experts.

Benefits Of Embedded Finance

There are many benefits for everyone involved with embedded finance, which encourages mutually beneficial relationships and leads to overall growth:

Digital Platforms

1. Increases in CLTV and Key Metrics: Higher Average Order Value (AOV), better customer engagement, and higher Customer Lifetime Value (CLTV) all lead to more money coming in for digital platforms.
2. Opening Up New Sources of Revenue: Platforms can make extra money through revenue-sharing methods without taking on any financial risk.
3. Better activation of customers: providing banking services makes it easier for more merchants to join, which lowers the cost of getting new merchants and encourages them to do so.
4. Competitive Edge: Adding financial services to products makes them better, makes platforms bigger, and sets them apart from rivals.
5. Data Insights: Financial services integration gives platforms rich client data to analyze behavior and preferences.

Financial Organizations

1. Access to Different Customer Pools: Financial institutions can reach a huge number of different types of borrowers by using the marketing features of platforms. Working with B2B e-commerce platforms enables you reach thousands of small businesses eager to save money.
2. Improved profitability: Better underwriting processes and better loan lifetime management help financial institutions make more money and lower costs for customers.

Users

1. More Access to Low-Cost Financial Services: People can use a lot of different flexible, easy, and low-cost financial services, and they can get licenses on better terms.
2. Customized Offerings: Users get financial solutions that are made just for them based on their wants and preferences.
3. Better Experience for Customers: Offering financial services in the setting of the platform makes it easier and more satisfying for users.

Stakeholders may collaborate and use their capabilities with embedded finance. They boost ecosystem innovation and growth faster than individual efforts. 

Challenges And Opportunities In Embedded Finance

Regulatory Complexity

• Challenge: Different regulatory standards in different places can make it harder for embedded finance services to grow around the world.
• Opportunity: Companies can use legal knowledge to get around tricky situations and make sure they follow the rules, which gives them an edge in a variety of markets.

Cybersecurity Risks

• Challenge: Adding financial services to platforms that aren’t financial adds new cybersecurity risks, such as scams and data breaches.
• Opportunity: Putting money into strong security measures and constant monitoring is a chance to earn customers’ trust and set yourself apart from rivals by putting data protection first.

Customer Trust And Transparency

• Challenge: Building trust and openness is important for embedded finance projects, but people are worried about data safety and security.
• Opportunity: Being open about how they receive, use, and share customer data can help build trust with customers, which can lead to stronger relationships and brand loyalty.

Competitive Pressure

• Challenge: The fintech business is becoming more competitive, so companies need to find ways to stand out through innovation, customer experience, and strategic partnerships.
• Opportunity: Fintech companies can use competition to spur new ideas, come up with unique solutions, and form strategic partnerships to improve their market position and the value they offer customers.

Market Fragmentation

• Challenge: The growing number of embedded financial solutions could split the market, making it harder for users to find what they need and slowing down the market’s efficiency.
• Opportunity: Working on combining and connecting systems can make the user experience smoother by reducing fragmentation and increasing market efficiency. This will make embedded finance services easier to access and use. 

Conclusion

Embedded finance has changed the fintech industry by making it easy to add financial services to platforms that aren’t financial. For customers, it makes things easier to get to, gives them more options, and encourages innovation across all fields. Even though there are problems, like complicated rules and online threats, it is very important to put security first.

To establish new fintech solutions, businesses need a dependable technology partner. Embedded finance continues to help businesses. Appic Software is one of the best fintech app development company. They build secure, reliable embedded finance software for organizations and customers’ changing demands.

Contact us today to get cutting-edge fintech solutions that drive growth, efficiency, and customer happiness. This will help you stay ahead in the fintech world and unlock the full potential of embedded finance.