Embedded finance is a term used to describe the integration of financial services into non-financial platforms or applications, such as social media platforms, mobile apps and e-commerce websites. This integration enables consumers access financial products and services without having to check out of the platform they are using.
For example, a consumer could purchase a product on an e-commerce website and then be presented with the option to finance the purchase through a loan or installment plan, all without having to leave the website. Similarly, a social media platform could offer the ability to send and receive money or invest in stocks directly from within the app.
Embedded finance is becoming increasingly popular as more businesses recognize the potential to improve customer engagement and loyalty by offering seamless financial services.
Offering embedded finance used to demand significant time, resources, and technological effort until a few years ago. However, this has changed due to the rise of fintech companies and application programming interfaces (APIs)that allow for easy integration of financial services into other platforms.
The APIs act as gateways between customer, company, and bank, and means the customer enjoys a, streamlined shopping experience, with banking transactions available if they need them. By leveraging APIs, non-financial companies can partner with financial institutions to offer a wide range of financial services, such as payments, lending, insurance, and investments.
It has been recognised that embedded finance has the potential to disrupt traditional financial services by creating new business models and revenue streams for non-financial companies. It also allows financial institutions to reach new customers and expand their market share.
Is Embedded finance disrupting banking?
Some notable companies have been utilising embedded finance, over the years and they include:
1. Jumia: The e-commerce platform integrated a range of financial services, including mobile money, into its platform, making it easier for customers to make payments and access financial services.
2. PayPal: This online payment system has expanded to offer a range of financial services, including loans, credit, and debit cards. It has also partnered with other companies to offer integrated payment solutions within their platforms.
3. Square: This payments company has expanded its offerings to include a range of financial services, including loans, deposits, and investing. It also offers a point-of-sale system that integrates with other platforms, allowing businesses to manage payments and finances in one place.
4. Stripe: This online payment platform offers an API that enables businesses accept payments and manage their finances within their own apps or websites. It also offers a range of other financial services, including invoicing and subscriptions.
The recent partnership between Apple and Goldman Sachs shows the growth of embedded finance and its further disruption of traditional financial institutions.
Although the partnership had been in the works for a while, details of the partnership fully emerged when it was announced in April 2023 that Apple Card users could grow their Daily Cash rewards with a savings account from Goldman Sachs, offering annual percent yield (APY) of 4.15 percent, a rate that stands at over 17% of the US national average of 0.24%.
With no minimum opening deposit, balance requirements or transaction fees, Apple users can easily set up and manage their account directly from their virtual wallet, and Apple Cash is instantly deposited into that savings account. Within the five days following the launch of the high yield savings account, there were over $1bn in deposits showing how widely this has been embraced.
The ease posed by this model is in sharp contrast from the state of things just a few years ago where customers would be required to walk into a bank, open a bank account, download an app or visit an online store, search for a product and then use a debit card to conclude a transaction.
You also have to look at the fact that the iPhone, Apple’s main source of revenue, accounting for over 50% of total global sales, has over 1 billion users which places it in a unique position and allows Goldman Sachs tap into that customer base. Other embedded finance providers like Square and Paypal are not exactly competing for that space or audience but the fintechs and banks who are may be concerned with the rise of this business model.
Furthermore, millennials and Gen Z are leading the charge when it comes to influencing market decisions in certain segments. Millennials are presently the largest consumer segment, and Gen Z is estimated to have $360 billion in disposable income. This demographic tends to enjoy the ease that comes from embedded finance products and services.
Due to the preference for contactless and digital payments among this younger generation, B2B businesses are now providing more embedded financial solutions. These generations have either entered or have already been in the workforce, and as a result, they are now having an impact on corporate strategy and payment practises.
The future of banking?
The launch of Apple’s new savings account shows that tech companies are investing heavily in financial services. Despite increased competition in the financial services sector, cooperation between banks and tech companies can be successful.
With all these developments, there are several reasons why embedded finance is gaining traction and considered the future:
1. Convenience: Embedded finance brings financial services directly to the consumers’ preferred platforms, making it more convenient for them to access and use financial products and services. Customers can perform transactions, make payments, and manage their finances without leaving the platform they are already using.
2. Improved User Experience: By integrating financial services into existing platforms, embedded finance enhances the user experience by eliminating the need for users to navigate multiple applications or websites. It provides a seamless and integrated experience, simplifying financial tasks and reducing friction.
3. Increased Accessibility: Embedded finance has the potential to increase financial inclusion by reaching underserved populations. Non-financial platforms, such as e-commerce or ride-sharing apps, often have a larger user base and broader reach than traditional financial institutions. By offering financial services within these platforms, more people can access and benefit from essential financial services.
4. Partnership Opportunities: Embedded finance opens up partnership opportunities between traditional financial institutions and non-financial companies. Financial institutions can leverage the customer base and digital infrastructure of non-financial platforms, while the platforms can enhance their offerings by integrating financial services. This collaboration can lead to innovative and personalized financial solutions.
5. Data-driven Insights: Embedded finance allows platforms to gather valuable user data related to financial behavior and preferences. This data can be used to provide personalized recommendations and targeted financial products, enhancing the overall customer experience.
However, it is worth noting that the implementation of embedded finance comes with regulatory and security challenges that need to be addressed. Privacy, data protection, compliance, and cybersecurity are critical considerations to ensure the trust and security of users’ financial information.
Overall, while embedded finance has great potential, its successful future relies on collaboration among financial institutions, technology companies, regulators, and consumers to navigate the evolving landscape and address associated challenges effectively.
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