Will shape the online business in the days to come:
Buying a train ticket or paying a utility bill or even doing a stock trade online today is just a normal activity and one does not ponder over the underlying technology that facilitates these instant payments. Such transactions are enabled by embedded financial services, which simply put is the integration of financial services into non-financial services or products. Embedded finance platforms use APIs to bypass the technical infrastructure to provide plug-and-play functionality. One of the very common offerings through embedded finance platforms is the travel insurance that is offered to an airline traveller while booking a ticket. These platforms are today commonly used by a consumer, who is buying a non-financial product and is offered a financial product as an add-on, a business organization, which is offering a non-financial product and a financial institution, which is offering the financial add-on.
Embedded finance as a whole has grown exponentially that today there are service offerings like embedded payments, embedded credit, embedded insurance and embedded investments. Embedded payments mean payment functionalities are embedded within a software platform. Embedded credit is offering financial services through non-financial products or services. Embedded insurance is where insurance products are offered when a person is buying a non-financial product or service. Embedded investments provide a single platform to manage investments – in MFs, or stocks, or insurance plans. In the embedded finance ecosystem there are 3 stakeholders – financial institutions, digital platforms and embedded finance infrastructure companies.
THE 3 INTER-LINKED OFFERINGS
Any discussion on embedded finance should also look at open banking and open finance as these 3 are inter-linked. Open banking is about sharing of banking data that would otherwise be solely with a bank with other financial providers and trusted third parties. When this data is available outside the financial institution, one has the option to access other financial services while still being with the original bank. The secure exchange of data is all made possible by APIs.
Open finance is the next step of open banking. While open banking enables account information and payment initiation services, open finance will encompass more financial products and services, not just banking. It allows authorized third-party service providers to access a wider range of customer data from various accounts, including savings, pensions, investment, insurance, mortgage and more. This data could be used to create and offer personalized financial products and services.
It is defined as ‘a data sharing model where customers can agree to share the data from any transaction that involves the exchange of money’.
Embedded finance is described as a convenience that integrates loans, insurance, debit cards and investment instruments with almost any non-financial product. It is crucial for e-commerce, where the profit and loyalty of the consumer depend on the transaction speed. An example would be availing an option while buying a commodity of ‘on credit’ or ‘in EMIs’, which is instant instead of going to a bank for a loan that has the rigmarole of application, assessment and approval.
Embedded finance is something above open banking and open finance. It is in fact the function of integrating banking capabilities into non-financial services using technology.
McKinsey in a study had said the revenues of embedded finance had reached $20 billion in the US in 2021 and are expected to double in size within the next 3 to 5 years.
What makes the next generation of embedded finance unique is the integration of financial products into digital interfaces that users interact with daily. Such a system would involve customer loyalty apps, digital wallets, accounting software, shopping-cart platforms etc. For consumers and businesses using these interfaces, acquiring financial services becomes a natural extension of a non-financial experience like shopping online.
In the US, there is high demand for deposit, payment, issuing and lending products in the embedded finance realm. In addition to these traditional financial products, several other use cases are coming up. Prepaid cards are now available for employees as part of earned-wage access programs; merchants have the option to use their deposit accounts for instant-payments settlement; and just-in-time funded debit cards, especially for gig economy workers, are becoming popular.
UNIQUE TRUCKERS’ PLATFORM
In India, a valid example of the use of embedded finance is a service offered to truckers using an online platform, called BlackBuck. The firm describes its activity on its website: “We bring the offline operations of trucking online, be it matching a shipper with a trucker or reshaping the infrastructure around trucking to facilitate payments, insurance and financial services. We at BlackBuck are committed to making it easier for millions of truckers to book a load and move at capacity, and enable shippers of all sizes to have access to the right truck, at the right time for the right price – all at a click of a button.’
BlackBuck services 22% of all truckers in the country. It is a trucking marketplace having digitized fleet operations for truckers (providing predominantly payments solutions around tolls and fuel) and operating a marketplace matching trucks with relevant loads. The platform has close to 700,000 truckers and over 1.2 million trucks on its platform, with over 15 million monthly transactions.
FROM E-COM TO RIDESHARING
Embedded finance is the underlying technology for e-commerce stores offering digital wallets to enable instant contactless payments. Similarly, online ridesharing companies and their financial services use embedded finance, where customers are able to make payments even before reaching their destinations, through an instant payment method.
Embedded finance makes use of AI and ML in a varied manner. Lenders can simplify credit decisions and assess credit worthiness through data analysis. B2B businesses can introduce AI-driven processes for loan authorizations. AI can also enable suppliers to offer curated offerings and help them with sales conversations.
Embedded finance has simplified a customer’s buying process; it creates an interface that makes transactions seamless. The end users are rewarded with better accessibility and convenience.
A GROWTH STORY IN INDIA
Recent studies have put the growth of embedded finance industry in India at 46% annually to reach $4801.8 million by end 2022. It is also expected to grow steadily, recording a CAGR of 30.4% during 2022-2029. Revenues will touch $21,127.5 million by 2029.
There has been a substantial demand for embedded insurance services in the travel industry in India. Airlines are already using embedded finance to offer travel insurance and now operators like Ola and railway booking platform IRCTC too are into embedded insurance.
Embedded finance has given banks an opportunity to create new distribution channels and increase customer base without substantial investments. It has reached a stage where customers can avail a wide range of financial services online without having to interact with a bank. At any online store, a customer has the option to pay through a range of options like UPI, wallets, net banking and EMI and Pay Later options.
What is unique with embedded finance is that brings in benefits for all the stakeholders in the ecosystem – digital platforms, financial service providers, and embedded finance platform operators.
In 2021, India had 180-190 million online shoppers, which is predicted to increase to 400-450 million by 2027. With the rise in digital users, platforms and institutions have scaled up their businesses too. As credit and online payments become the norm in online shopping, embedded finance will act as the glue that brings platforms and institutions together.
While providing the infrastructure to disburse financial services, embedded finance also offers businesses the intelligence to personalize offerings to customers. So, customers get personalized offerings, businesses improve customer experience and financial services gain the data and information to make strategic decisions.
It is question to be answered whether the embedded finance ecosystem is gearing up for such a growth that it can power the digital economy of today to make a quantum jump.