The latest buzzword in Fintech is Embedded Finance. Experts vouch that the global embedded finance market will reach $7 trillion by 2030. In reality, though the concept of embedded finance is not so new, it is just that nowadays, you see more implementations of it in financial services.
You may have already experienced embedded finance while booking an Uber or ordering food through the Deliveroo app. In simple terms, embedded finance is when a financial service like payments is embedded into a non-financial brand to provide a customized customer experience.
Companies these days are changing their business models to accommodate embedded finance and letting the investors pile in. Fintech banks, Big tech, and many other non-financial brands all want a share of this new emerging and profitable concept.
A Movement Comes Of Age
Finance always used to be simple; businesses and consumers turned to banks for every financial need. However, this also meant that payments, lending, and other jobs were too made through the bank, thus adding to the friction.
This was followed by the fintech revolution that saw the rise of start-ups that wanted to offer better financial services than the established banks. There was a rise in the number of fintech apps that were optimized for specific functions. In fact, nowadays, there is an app targeting every type of financial service as the unbundling of banking moves at a steady pace.
The next phase of this change is the re-bundling of finance, but that is not into banks or any other dedicated financial entity. Till recently, doing this was almost impossible. Finance had not digitalized so much that it could successfully integrate with the non-financial companies present.
However, over the last decade, developers work to standardize the APIs that have been accelerated by the Open Banking movement. This is a very crucial aspect as open APIs have a common language that allows businesses working on different software systems to eventually talk to each other.
For example, think of a waiter in a foreign restaurant who will translate the menu and help you get your kind of food by telling the chef how you want it. The waiter, in this case, is the API translating your order into food that the chef can cook for you and deliver to your table,
Shifting Customer Expectations
Some customer expectations are also causing this shift. Whether it is music streaming, cloud-based operations, or e-commerce, consumers these days are used to move from one app to another without any hurdles and need ecosystems that are aligned to each other. With the pandemic spread all over, these behavior shifts have increased further.
Businesses want their payment processes to be sophisticated and seamless. This they want not just for convenience, but they understand the operational efficiencies and money savings they can achieve by integrating the financial services into their workflows.
Apart from that, there is a shift in the mindset, and people want a financial service at their fingertips and know where and how to use it. This means finance is going more and more into the background though its value is still on the rise.
Innovation Ventures Into Uncharted Territory
Though the movement of fintech evolution is towards an embedded world, how this shows in different markets and sectors is still to be seen.
Geographically, embedded finance is developing in different ways:
- In Europe, the innovation will be developed by the challenger banks and FinTech’s, which are now at a stage where they can partner with other parties like mortgages or cheap gas and electricity. Open Banking and PDS2 further complement this.
- In the US, Big Tech will keep making changes in the e-money services while partnering with big retail banks to comply with state-wise regulations. As an example, Apple has partnered with Marcus by Goldman Sachs and launched its own card.
- On the other hand, in Asia, some of the countries have the best development in embedded markets. Super apps like WeChat, Grab, and Alipay play a vital role in people’s lives. They have, by now, changed the banking system to allow the customers to order taxis and do much more through their messaging apps.
Though the frontier of innovation is still unconquered, it will not be a free for all market. FinTechs cannot just try and do things on their own but will have to work with non-financial brands.
FinTechs would also try to partner with other banks to add financial aspects that they are not specialized in to gain more value. This next wave of innovation should be more competitive but also collaborative as FinTechs will compete in certain areas and work together in others.
These associations and alliances will form without the public knowing anything about this. But that is what embedded finance is all about. People are not concerned about what is happening; they only want a connected and open financial system.