Embedded Finance can be defined as the integration of financial services into non-financial products, enabling customers to take advantage of value-added offerings in their existing customer journey.
Putting it simply, it’s an interface for customers to access financial services in their app. The rapid development of Embedded Finance is attributed to increased digitisation. Embedded Finance facilitated the emergence of new players and the adoption of traditional finance services by breaking down the barrier for customers.
Yes, there are multiple types of Embedded Finance. Embedded Finance connects financial services within non-financial platforms. Therefore, we can have as many types of Embedded Finance as there are types of financial services. However, we usually categorise them into three different buckets:
Embedded Payments: this refers to the integration of payment capabilities into various digital platforms or applications. It enables seamless and efficient transactions directly within the customer journey.
Embedded Lending: it enables the provision of lending services, such as Buy Now, Pay Later and instalment payments, at the point-of-sale or in an app.
Embedded Insurance: this allows users to subscribe to insurance for a specific service. For example, when ordering a plane ticket, you can directly subscribe to insurance for bad weather conditions in your user journey, just by ticking a box.
With the increased adoption of custodial and non-custodial wallets, these forms of digital wallet transactions are playing a crucial role in promoting financial inclusion by addressing various barriers to entry that traditionally hinder access to financial services. We are currently witnessing a significant expansion in the realm of user payment options, surpassing anything we have previously encountered in the payment industry.
Web3 projects are always looking for a bridge to the mass market, typically through user-friendly on-ramps. Traditional institutions have the opportunity to harness DeFi technology to enhance their backend systems while providing a trusted and user-friendly experience to facilitate the widespread adoption of Web3 technologies.
Embedded Finance brings risk as it involves third parties to provide integration with financial services, exposing user data to breaches in case of cyber-attack on the third party.
Another risk associated with the Web3 industry relies on smart contracts. Smart contracts are pieces of code used in Web3 to trigger actions. If smart contracts are vulnerable, they can be exploited by hackers to manipulate transactions.
However, these risks can be easily mitigated through different actions. All systems should be audited. The third-party provider should be chosen carefully and provide the necessary guarantees. It is also the responsibility of the Embedded Finance services to include privacy-by-design, such as employing cryptography to encrypt all the data shared by users.
Finally, as Embedded Finance grows, the main risk always comes from misuse by users. That’s why transparent communication from the provider, and user education to identify and prevent risks are essential.
In a recent study, it was reported that in the US alone, financial services embedded accounted for USD 2.6 trillion, or almost 5% of total financial transactions in 2021. This shows the growing impact it has on businesses. Embedded Finance is the interface between customers and financial services, leading to increasing adoption by customers.
Regarding DeFi more specifically, it opens up financial services to a global audience, including the unbanked and underbanked populations. With DeFi protocols, anyone with an internet connection can participate in the decentralised payment ecosystem, bypassing traditional barriers to entry and improving financial inclusion.
This interview was first published in The Paypers' Embedded Finance and Banking-as-a-Service Report 2023, which is the latest comprehensive market overview and analysis focusing on the key products and players within the Embedded Finance and BaaS ecosystem.
About Hamish Johnston
Hamish Johnston is a Web3 & Crypto Lead within Worldline Digital Commerce, leading our Crypto and Web 3.0 expansion.
About Thibault Pele
Thibault Pele is a Product Manager at Worldline Financial Services, exploring the potential of Digital Currency to shape the future of finance.
About Worldline
Worldline helps businesses of all shapes and sizes to accelerate their growth journey – quickly, simply, and securely. With advanced payments technology, local expertise, and solutions customised for hundreds of markets and industries, Worldline powers the growth of over one million businesses around the world. Worldline generated EUR 4.4 billion in revenue in 2022.
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