Embedded finance = embedded financial services
At its core, embedded finance describes various financial services that are integrated directly into their offers and processes by non-banks and companies that do not operate in the financial industry. This integration means a real embedding of such services in the range of offers of a company, often integrated into the processes between selection, ordering, purchase and payment. Mt Embedded Finance does not mean a mere link to a financial service provider, at best it is a cooperation.
Embedded finance is often referred to as embedded banking. Both terms are correct – in understanding embedded finance goes much further than pure banking offers and includes, for example, insurance or other financial offers.
In order not to remain abstract, here are some exemplary areas of application for embedded finance.
Examples of embedded finance
The loan to buy furniture is available directly from the furniture dealer
If a furniture store offers the loan to finance the new facility directly on its website in the vicinity of the furnishing objects, this is embedded finance. In other words, an embedded financial service that rounds off the process between selection, order, purchase and final payment processing.
It is possible that a purchase comes about through this additional service in the first place, because this integrated financial service increases the financial scope of furniture buyers.
Insurance for the new car is taken out directly from the car dealer
A car dealer is not an insurer. If he still sells the advantageous insurance at the same time as buying and paying for the car, that’s a form of embedded finance. The service is embedded when the car buyers can book and take out the insurance online directly via the car dealer’s website.
Amazon, Uber or Apple and their financial services
If big techs offer their customers accounts, credit cards, loans, partial payment options or even smart and integrated forms of payment processing, then they are also talking about embedded finance or embedded banking. Amazon, Uber, Apple and other Big Techs are neither banks nor financial service providers – and yet they offer financial services, seamlessly integrated into their core offerings or combined with their basic services.
Embedded finance stands for the fact that non-banks, non-insurers and companies that are not positioned as financial service providers integrate financial services into their offerings and processes as part of their core services. These can be all types of financial services: loans, installment payments, insurance, services related to cryptocurrencies, all types of payment processing and more.
The bank behind embedded finance
Most of the time, a bank or a financial service provider with a banking license is behind these financial services integrated on external platforms. As a rule, however, the bank is not directly visible; it acts as a service provider for the respective customer, takes care of the technology and the necessary processes in the background and also ensures that all regulatory requirements are met.
In principle, any traditional bank could take on this role that consistently thinks ahead with the concept of open finance, is also able to do so in terms of technology and therefore offers third parties BaaS (Banking as a Service) services. Often, however, specialized providers act as banks in the background. Service providers with a banking license who do not want to be a classic bank themselves, but offer directly usable banking and financial services in the B2B area of FinTechs, sometimes also traditional banks and companies from completely different industries. The business model of these specialized providers consists exclusively of providing various customer groups with the required finance modules and processes via platforms and APIs. To a certain extent on demand, as individual modules or in selectable combinations and ready for integration into the systems of the respective customer. As white label or modular banking as a service solutions.
Embedded finance is already a reality, but it will take up a lot more space and will play a major role in financial services in the future.
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