Embedded finance is a new trend in the fintech industry where financial services are integrated into non-financial products and services. This allows companies to offer their customers a variety of financial services without having to become financial institutions themselves. Embedded finance has the potential to revolutionise the way businesses and consumers access financial services.
While there is some overlap between the concepts of embedded finance and banking-as-a-service, there are also some important differences. Click here to read more about this.
Embedded finance is making financial services more accessible to a wider range of people by leveraging cutting-edge technologies that enable the integration of these services into everyday products and services.
Embedded finance also has the potential to increase competition in the financial services industry.
By allowing non-financial companies to enter the market and offer financial services, it can lead to increased innovation and lower costs for consumers.
Embedded finance also has the potential to drive the growth of digital payments.
*According to the National Payments Corporation of India (NPCI) data, the number of UPI (Unified Payments Interface) transactions alone reached 7829 million in December 2022, with a total transaction value of INR 12,82,055 crores, indicating strong growth in digital transactions in India.
*Also, the Indian government's push to promote digital transactions through initiatives such as the Digital India campaign, and the continued growth of fintech and digital banking services in the country, is likely to drive further growth in digital transactions in India in the coming years.
As more companies integrate digital payments into their products and services, it will become more convenient for consumers to use digital payments, which can lead to increased adoption. This can also help to reduce the reliance on cash, which can have a positive impact on the economy.
One of the most common use cases of embedded finance is partnerships between fintech companies and non-financial companies. Consumer companies that have a deep understanding of consumer behaviour often provide commerce or other solutions that are central to their business. However, these companies may not have the expertise to handle financial services and the associated risks and regulations. To overcome this challenge, many companies are turning to partnerships with Fintech companies that have a better understanding of the financial services landscape. By partnering with these companies, consumer companies can offer financial services to their customers without having to worry about regulatory compliance. By partnering with fintech companies, consumer companies can offer their customers a wide range of financial services - such as digital payments, credit, and insurance - without having to become financial institutions themselves.
Another use case of embedded finance in India is the integration of digital payments into eCommerce and ride-hailing platforms. This allows customers to make digital payments directly through the platform, making the process more contextual and streamlined.
Embedded finance can also be used to provide financial services through mobile apps. This allows customers to access financial services such as digital payments, credit, and insurance directly through their mobile devices.
One of the challenges of embedded finance is compliance with regulatory requirements. As non-financial companies enter the financial services market, they will need to comply with the same regulations as traditional financial institutions. This can be a significant challenge, particularly for small and medium-sized enterprises (SMEs) that may not have the resources to navigate the regulatory landscape.
Despite these challenges, embedded finance also presents significant opportunities for growth and innovation. Allowing non-financial companies to overlay the financial service on top of their offerings, which can drive innovation and lower costs for customers.
Embedded finance can also have a positive impact on financial inclusion. Microfinance companies are using embedded finance to reach underserved populations, such as rural communities and low-income households, and to provide them with access to financial services such as credit and savings products. Companies are using embedded finance to streamline their supply chain finance processes, by offering financing solutions to their suppliers and distributors to help them manage their cash flows, which thereby, improves access to finance for small businesses and entrepreneurs. Governments are using embedded finance to improve access to financial services for their citizens. For example, India has launched several programs aimed at increasing financial inclusion, such as the Pradhan Mantri Jan-Dhan Yojana, which provides bank accounts, insurance, and credit services to millions of previously unbanked citizens. As financial services become more accessible through non-financial companies, it can help to bring more people into the formal financial system. This can have a positive impact on the economy, as more people will have access to the financial services they need to grow their businesses and improve their livelihoods.
Embedded finance is revolutionising the fintech industry in India. With the increasing use of digital payments and the need for financing options, embedded finance is providing a seamless and personalised experience for consumers. The popularity of lending and BNPL services, along with the integration of these financial services within everyday applications, is making it easier for people to manage their finances. The embedded finance approach not only improves the user experience but also provides new revenue streams for businesses and creates new job opportunities. This transformation of the fintech industry is expected to continue to grow and bring significant benefits to both consumers and businesses. However, non-financial companies must effectively address compliance and regulatory challenges in order to realise the full impact on the economy and society. Fundfina, with its expertise and experience, aims to assist these companies in overcoming the challenges and establishing themselves as leaders in embedded finance.