The word “embedded” literally means “to fix something firmly and deeply in something else”, and thus embedded finance ends up translating to fixing or attaching financial offerings to a non-financial offering. A simple example of this would be – pop-up for travel insurance while booking flight tickets.
According to a study, every Indian spent 4.7 hours on their phone per day with a cumulative total of 7.6 billion hours on shopping apps in 2021. However, while people can explicitly identify themselves as consumers of the products they buy, they also implicitly become consumers of latent financial offerings like payments, insurance, financing, etc. These latent financial offerings come under the umbrella of embedded finance.
More and more consumer facing companies have started offering such latent financial products for a multitude of reasons. As a consumer, it thus becomes important to understand the basics of back-end processes which bring you these offerings, what are the advantages and the prominent types of embedded finance, and lastly, what exactly should you keep in mind while opting in for these financial products.
Process of Embedded Finance
Before diving into understanding the back-end process of embedded finance, it is important to know the stakeholders involved. There are primarily three major stakeholders-:
- Consumer: This is the person who is buying the non-financial product and thus, also becomes a potential customer for the embedded financial offering (as explained before). Although in some cases due to the latency involved, one may not be explicitly able to identify themselves as a customer.
- Business: The company which is selling you the non-financial product or service.
- Financial Institution (banks, non-banking financial companies or NBFCs, fintechs, etc): The companies/institutions that are selling/backing the embedded financing products. These companies do not directly sell the financial offerings but indirectly do so – through the businesses.
Types of Embedded Finance
Broadly embedded financial offerings can be divided into three types. Their examples are as follows-:
- Embedded Payments: Online payment options like credit card, debit card, united payments interface (UPI), etc at checkout on any shopping website/app.
- Embedded Insurance: Travel insurance while booking flight tickets or phone breakage insurance while buying a phone.
- Embedded Credit/Lending: Buy now pay later (BNPL) or equated monthly installments (EMI) option at checkout on any shopping website/app.
Advantages of Embedded Finance
Although it may seem like a simple plug and play concept, embedded financial products require extensive deliberation and collaboration on the part of the business and the financial institution to ideate, forecast and finally implement. So what advantage do these companies reap in offering these products to you, and what advantage do customers like you have in opting in for these products?
- Alternate revenue source: Businesses get a share of the revenue earned from customers from the financial products sold on their respective website/app.
- Competitive advantage and customer loyalty: A website offering extra financial products like easy financing, insurance for the product the customer is buying, online payment options, etc. would be much more attractive to customers than a website not offering these options.
- Higher order value: EMI and BNPL (Buy now pay later) options provide the extra cushioning for customers to make high value purchases and buy more products than what they normally would.
For Financial Institutions
- Easy customer acquisition: Collaborating with businesses and embedding their offerings on relevant websites and apps gets banks/NBFCs easy access to a large and relevant customer base at a minimal cost. Through websites/apps, financial services can also be extended to seemingly riskier customers which may not be possible through the normal route.
- Relevant data collection: With the right placement of financial services, financial institutions get access to not only their financial data but also their non-financial data like shopping preferences, frequency of usage of specific services like cab hailing, etc; which can further be utilized to curate specific financial products at a macro level and cross-sell other offerings at a micro level.
- Easy consumer management: With the companies running the websites and apps dealing with customers, the user lifecycle management responsibility gets divided between the financial institutions and the businesses, which eases the burden on the financial institutions to cater to queries, customer service, etc.
- Convenience: As a user you get convenient access to financial services like online payment options or EMI facility at the time of checking out or casual usage of a website/app.
- Apt offerings: The financial offerings that you get access to, are not only conveniently placed but also relevant to the particular website/app that you are using.
- Tailored offerings: Financial services available in the market directly are not very flexible and customer friendly in terms of both offerings and process. However, embedded finance offers tailored financial services at the click of a button to potential consumers. For example – getting a personal loan vs getting a buy-now-pay-later option at checkout.
- Inclusion: Embedded finance allows the underserved users to get access to formalized financial services which they might not in the normal course of activities due to complicated processes and stringent filtering criteria of financial institutions. It also acts as a foot-in-the-door for underserved users for future access to formalized financial services.
- Better experience: As a consumer, getting added offerings in a convenient manner always leads to a better overall shopping experience.
Should Consumers Be Wary of Embedded Finance?
While embedded finance is supposed to make financial services more accessible, convenient and relevant, as a user it is important to keep some basic things in mind while opting for them.
- Terms and conditions: Like any other financial product, it is extremely important to carefully go through the terms and conditions and personally understand what exactly you are signing up for.
- Convenience vs Informed decisions: Although embedded financial services offer a high degree of convenience, they might not always offer the best offering in the market. Hence, it is always a prudent practice to compare all the offerings in the market before opting for any of them. For example – the premium charged for a travel insurance policy may be cheaper if bought directly as compared to a flight ticket booking website.
- Unintentional purchases: As a result of the consumer psyche, convenient and widespread access to financial services sometimes leads to unintentional purchases which could lead to regrets in the future. For example – buying an expensive product just because of an easy-financing option being available at checkout.
Embedded finance is one of the fastest growing sub-sectors in the fintech industry. The potential for its growth is widespread in a country like India with a massive young population on the internet. With time, we can expect more and more innovation and unique offerings in this domain for different types of users and businesses. However, as a user it is important to have the basic financial knowledge of one’s actions may partake in online and the implicit consequences of the same – whether positive or negative.