Voice of the Industry

How embedded finance is stirring a revolution in financial services

Thursday 18 January 2024 10:26 CET | Editor: Irina Ionescu | Voice of the industry

Akash Sinha, CEO and Co-founder at Cashfree Payments, discusses the numerous use cases of embedded payments for both businesses and end-users, as well as what customers should expect in 2024.

In our fast-paced world, embedded finance is seamlessly weaving itself into our daily routines. Embedded finance brings financial services directly into other non-financial platforms, ensuring a seamless user experience. It is subtly reshaping the landscape of how we manage financial transactions. 

From paying for a ride-hailing app or instantly availing a Buy Now, Pay Later (BNPL) option during an online purchase, embedded finance is quietly ushering in a new era of simplified, unified payment experiences for customers worldwide.

As diverse use cases emerge spanning from streamlined online shopping payments to intricately tailored insurance and lending solutions, as well as instant payment and credit options, the integration of savings, credit, insurance, and investment tools into non-financial apps or websites is on the rise. 

The embedded finance market is expanding more than ever. According to a report, the market size for global EmFi across the entire value chain will rise substantially to touch USD 606 billion by 2025, of which, Asia-Pacific countries would account for USD 305 billion or a whopping 50% of that value.

Embracing embedded finance seamlessly

Today, consumers increasingly spend more time on non-financial applications on their devices rather than on their banking apps. This change in behaviour has pushed businesses and financial institutions to move a step ahead of Open Banking. 

While Open Banking focuses on innovating the banking sector and data sharing for third-party innovations, embedded finance takes a consumer-centred approach, extending beyond traditional banking. It brings financial services right where customers are now. 

Additionally, embedded finance's hallmark is seamless integration of financial services into daily activities. It relies on the application of programming interfaces (APIs), easily linking businesses and financial institutions. This integration ensures a unified and intuitive customer experience, sparing users from the hassle of toggling between multiple apps or websites. By embedding financial services into existing platforms, users effortlessly access and utilise banking products as a whole, reducing friction and maximising convenience.

Embedded finance and its propositions

For businesses. By integrating embedded finance, businesses can look forward to a better Average Revenue Per User (ARPU) and improved customer retention, preventing shifts to competitors. By providing more comprehensive services, companies can generate additional revenue through transaction fees, interest on loans, or partnerships with financial institutions. Furthermore, embedded finance utilises data analytics for valuable insights into consumer behaviour. Leveraging this, businesses can improve offerings and value-added services for further monetisation. 

Moreover, embedded finance comes as a boon to MSMEs and SMEs. Given the rise of such businesses in the Asia-Pacific region, it is interesting that embedded finance will unlock USD 242 billion in revenue opportunity by 2025 across small businesses (SMBs) and consumer segments in the region. Thanks to simplified and wholesome financial services accessible and available on platforms provided by SaaS solutions or fintech players, MSMEs and SMEs can focus on their own sustainability, with the power of embedded finance. 

However, such opportunities also come with their risks. It is imperative to have a 360-degree security outlook including a perspective on interoperability, data-sharing, shared liability, cyber-attacks, customer data protection, etc. Apart from market volatility, businesses and fintech providers must look into constantly upgrading APIs and tech stacks to protect data and ensure the authenticity of transactions. A recent example from India would be card tokenization for embedded payments, which was recently introduced with the scope of securing actual customer card details by replacing it with a unique token, while a customer completes a purchase on a non-financial application such as a shopping portal. 

For customers. Embedded finance significantly enhances the overall customer experience. By offering financial services within familiar and frequently used platforms, customers benefit from a more user-friendly interface and a reduction in transactional complexities. For instance, a study conducted by Juniper Research has found that the total number of digital wallet users will exceed 5.2 billion globally in 2026 - a clear indication of customers wanting convenience. Embedded finance options are not only time-saving but also provide personalised and tailored financial solutions, thus presenting multiple choices for customers. 

From ecommerce platforms (Amazon Pay, Shopify Payments) and ride-sharing apps (Uber, Lyft) to social media (WeChat, Facebook Pay), embedded finance is making things smoother for customers. For instance, Booking.com and Airbnb are linking secure payment gateways, ensuring transaction safety, and offering customers a smooth journey from browsing to booking and payment. 

Another example would be how within India, a significant 60% of customers express interest in 'embedded financing,' enabling ecommerce customers to seamlessly convert their purchases into EMIs. Hence, embedded finance isn't just making financial transactions easier but it is becoming an integral part of our digital experiences. 

India is the home to one of the fastest-growing markets for digital device adoption, as well as a large population of tech-savvy GenZ and millennials. They have high expectations when it comes to online user experiences. As the Indian embedded finance industry is predicted to scale substantially, it will ensure a smooth sail for customers as well as service providers in the coming years. 

For financial inclusion. In addition to customer expectations, embedded finance plays a pivotal role in democratising financial services. According to the Global Fintech 2023 by BCG, an estimated 1.5 billion adults globally are still unbanked, with an additional 2.8 billion adults underbanked. Embedded finance can help eliminate the barriers and challenges presented by traditional banking. It expands the access and benefits of banking, payments, investment, credit, and more, to underserved communities, especially in emerging economies.

2024 trends and future potential 

The potential of embedded finance is vast and continues to expand. A further boom in B2B embedded finance with varied services like invoicing, verification, lending, etc., is expected along with major participation from SMEs. The advent of Artificial Intelligence and Machine Learning is expected to elevate embedded finance with better decision-making capabilities through data insights, and risk assessment. Customers can expect more options apart from BNPL, EMI, digital wallets, and lending options, which keeps them hooked to service providers. We also look forward to an API-first approach from banks and financial institutions to create a strategic ecosystem that offers more flexibility and a seamless experience. 

In conclusion, embedded finance represents a fundamental shift in the way financial services are accessed and utilised. As the boundaries between finance and other industries continue to blur, embedded finance stands at the forefront, reshaping the way we manage and interact with our finances in the modern digital age.

About Akash Sinha

Akash Sinha co-founded Cashfree Payments, a leading payment and API banking solutions firm, in 2015, with his friend Reeju Datta, to solve the challenges faced by businesses in bulk payments and disbursals. Before launching Cashfree Payments, Akash worked with leading brands such as Amazon and BankBazaar where he built products as a Software Engineer. In early 2021, Akash was featured in the highly respected Forbes India 30 under 30 list.

About Cashfree Payments

Cashfree Payments is a leading payment and API banking solutions company. It provides full-stack payment solutions, enabling businesses in India to collect payments and make payouts via all available methods with simple integration. Cashfree Payments' offerings include an advanced and easy way to integrate payment gateways, a split payment solution for marketplaces, bank account verification API, Lending disbursals solution and Auto Collect -- a virtual account solution to match inbound payments to customers. Founded by IIIT Hyderabad alumnus Akash Sinha and IIT Kharagpur graduate Reeju Datta, www.cashfree.com is among the leading payment service providers in India processing transactions worth USD 80 Billion annually. 

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Keywords: embedded finance, Open Banking Ecosystem, Open Banking payments, ecommerce, Gen Z, financial data, financial services, tokenization, data protection, API, fintech, cybercrime, SMEs, SaaS, BNPL
Categories: Banking & Fintech
Companies: Cashfree Payments
Countries: World
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