The Rise of Embedded Finance: Integrating Financial Services into Everyday Business Tools

Embedded finance is a rising trend in the US, streamlining financial interactions and enhancing consumer experience. Picture this: you run a small-scale online business and require funds to stock up additional inventory for the festival rush ahead. Though your sales numbers are good, the hassles of going through a bank loan application process refrain you from acting further. What if your e-commerce platform gives you an offer to avail of cash advances based on your sales history? You can also avail yourself of extra funds with no paperwork with a few clicks. This is a perfect example of embedded finance in action. 

How Does Embedded Finance Work?

FinTech has enabled businesses to access financial tools with the help of technologies like APIs (Application Programming Interface), machine learning, data analytics, and blockchain. In embedded finance, financial services like lending, payments, and investing are seamlessly integrated into non-financial platforms such as e-commerce, retail, healthcare, and more. Integrated financial services offered by businesses (non-financial platforms) make transactions and workflows more efficient and smoother. 

Shopify, a popular e-commerce platform, is one of the prime examples of embedded financial services. ‘Shopify payment’ enables businesses registered on the e-commerce platform to accept payments without any hassles, eliminating the need for third-party payment platforms. ‘Shopify capital’ enables these small businesses to seek additional funding instantly based on their sales history directly within the platform. This model offers businesses convenience and generates additional revenue for the e-commerce company embedding these financial services. 

Growth Trends in Embedded Finance and Role of FinTechs

FinTechs are serving a wider customer base and tapping into non-financial sectors through embedded finance. Some FinTechs offer their white-labelled financial products to businesses, which helps them speed up transactions, reduce reliance on traditional banking systems, and optimize their cash flow. 

According to the Allied Market Research report, the global embedded finance market will be valued at USD 82.70 billion in 2023 and is expected to grow at a CAGR (compounded annual growth rate) of 21.3% to reach the projected value of USD 570.9 billion by 2033. Recent research by Accenture reveals that 26% of the SME banking market could be captured by embedded finance by 2025. 

Here are the important growth trends in embedded finance:

1. Embedded Payments

FinTechs are offering embedded payment solutions to businesses, enabling them to carry out payment transactions directly onto their platform (app or website) without any need for third-party payment processors. Stripe, Fiserv, and Square are some of the leading FinTechs offering embedded payment solutions. 

Embedded payments can be a valuable strategy for business. Overall, it makes transactions seamless and quick. 

• Automated recurring payments and reconciliation via integrations with accounting tools such as QuickBooks
• Helps them come up with new business models like BNPL (Buy Now, Pay Later), enhancing customer experience
• Real-time settlement improves cash flow – e.g. Stripe. 

RTP (Real-Time Payments) is a growing trend in the embedded payment landscape, enabling real-time, instant B2C and B2B transactions. Blockchain-based stablecoin and crypto payments provide a smooth global trade experience by reducing cross-border payment costs. Voice-activated payments like Amazon’s Alexa Pay and AI-powered payment facilities boost customer experience across industries. 

2. Embedded Financing

Integrating lending and credit solutions directly into the business’s platform makes credit more accessible to them. This offering by FinTechs helps enterprises to enhance their workflow in the following ways:

• Instant access to capital based on real-time sales data and AI-driven underwriting eliminates the lengthy approval process.
• Businesses can improve cash flow with advance payments on unpaid invoices.
• Payroll financing helps businesses to ensure their employees are paid on time, even during slow cash flow cycles. 

Amazon lending, Shopify capital, Resolve (which offers BNPL in the B2B marketplace), and Square loans (for payroll funding) are some of the leading FinTechs in the embedded financing space. 

Blockchain or crypto-based lending, decentralized finance, and green financing (for businesses that focus on sustainability) are new embedded financing trends enabling instant lending. Growing trends and innovation in embedded lending can accelerate cash flows, remove barriers, and empower businesses.

3. Embedded Banking

FinTechs are integrating banking services directly into the business platform and transforming the way people manage their finances and conduct banking transactions. Integrated business bank accounts, automated payouts, payroll processing, and virtual debit cards for employees are some of the best ways embedded banking improves business workflow. FinTech companies with API-backed banking-as-a-service (BaaS) models and embedded treasury solutions are enhancing business efficiency. 

Real-time payments, crypto wallets, industry-focused embedded banking solutions and compliance-embedded BaaS are the growing trends in embedded banking. Here are some examples of FinTechs in the embedded banking space that help businesses improve their liquidity and efficiency:

• Brex offers embedded banking solutions to businesses, with integrated corporate accounts to manage finance easily and virtual corporate cards to track expenses easily.
• Mercury and Airbase are perfect examples of FinTechs that offer embedded treasury solutions.
• FinTechs like Stripe and Oscilar offer the best BaaS solutions

Considering its benefits, small and medium-sized businesses are increasingly turning to embedded finance. Accenture’s SME survey shows that more than 47% of SMEs are interested in using embedded banking services.

4. Embedded Investing

Integrating investment services like retirement savings and stock trading directly within the app or website ensures a seamless investment experience for users without going through traditional financial advisors or brokerage firms. Some payroll platforms have embedded wealth-building tools and retirement plans to help employees automate their investments. 

Some of the leading FinTechs that offer embedded investing solutions are:

• Robinhood, Acorns, and PayPal are some platforms that offer embedded alternative asset investing for users.
• Cash app, Coinbase and Stash are some examples of embedded trading solutions

5. Embedded Insurance

FinTechs integrate insurance products directly within business platforms to offer coverage at the point of sale. This helps businesses create new revenue streams,  improve customer experience, and manage risk efficiently. For example, Tesla offers embedded auto insurance coverage based on real-time data at the point of sale. Embedded on-demand insurance for gig workers and freelancers, instant travel cover and embedded cyber insurance, health insurance, and DeFi insurance are rising trends. Cover Genius, Lemonade, Next Insurance, and Pie Insurance are some of the leading Insurtech that provide embedded insurance solutions. 

Despite challenges like regulatory complexities, data privacy, integration complexity and the need for consumer education, the growing trends are shaping the future embedded finance market. 

Conclusion

Embedded finance is a game changer for FinTech and the financial services ecosystem. From embedded financing removing the barrier to accessing funds quickly to real-time banking improving the cash flows to embedded banking simplifying financial operations to crypto-friendly financial solutions reducing the overall cost, embedded finance is the big bet for businesses. FinTechs are democratizing access to financial services and helping businesses to scale and grow with enhanced workflow.