Embedded finance: Connecting the dots

As financial products integrate into user journeys, what are the implications for the various stakeholders?


The internet now plays a far more central role in people’s lives. What started as a space for entertainment, information, and social connection today serves as a platform for accessing essential goods and services, and conducting our work lives - a transition accelerated by the pandemic. As a natural segue, consumers, especially those who are younger and digitally native, expect every part of the offline experience to be replicated and if possible improved upon on the web.

This includes access to the entire range of financial services such as cashless payments, credit lines, loans, and insurance in any digital environment the consumer happens to be in

Enter embedded finance. Non-finance companies, keenly aware of consumer expectations,  have begun to partner with traditional financial companies and fintechs to provide their customers and stakeholders seamless access to financial services on their digital platforms.

The best-known examples are China’s super apps, WeChat and Alipay. Both function as single windows where a user can discover and transact with local businesses as well as big brands, and access a diverse set of services such as ride-hailing, mobile recharging and wealth management.

Big tech firms such as Alphabet and Amazon have entered the fray. Southeast Asia’s Grab and Gojek aspire to grow into super apps for their region. In India, embedded payments introduced to formalise the economy have been widely adopted, and embedded Buy Now Pay Later is gaining in popularity. In Europe, 55% of non-finance businesses say they will offer embedded finance services within the next two years and worldwide, VC investments in embedded finance doubled to USD 4.2 billion compared to the previous year, as of September 2021.

Ecosystem shakeup

So far, traditional finance companies have played a key behind-the-scenes role in delivering embedded finance to end-users. Since they already have the capital, the licenses and the core systems, it makes sense for fintechs and non-finance companies to turn to them.

But unexpected partnerships might mean that users look to familiar, well-known brands for their entire spectrum of financial needs. Walmart has set up a fintech arm that partners with investment fintech Ribbit to leverage their combined competencies to deliver tailored services to customers. In Southeast Asia, a Grab-Singtel-led consortium has procured banking licenses in Singapore and Malaysia.

Given this, are traditional financial organisations doing enough to stay relevant? They need to develop a greater sense of urgency, says Vijay R Mani, Partner, Financial Services Consulting, Deloitte India. “In this sector, you have to catch your customers young. So traditional financial institutions need to move beyond mobile apps and websites and come up with creative offerings.”

Gopi Billa, US FSI Strategy & Transformation Leader at Deloitte Consulting, explains how this is happening. Not all traditional financial institutions believe their way of operating is under threat. Some feel they will continue to hold sway and all they need to do is digitise existing processes.  A second category feels digitisation alone will not help and is leveraging technology for offerings such as banking-as-a-service to stay in the game. The third category, thinking far more disruptively, is setting up separate entities that look and feel very much like technology companies. The fourth category is a subset of the third, where the digital offshoots of traditional financial institutions partner closely with fintechs and non-finance companies not just for distribution but for product development as well. An example is Marcus, Goldman Sachs’ consumer-focused digital arm behind the successful Apple Card, which has recently launched a credit card with General Motors.

Billa predicts the four categories will coexist, just as the brick-and-mortar bank branch has survived to serve certain customer segments, though its demise was talked about years ago.

Data forges new paths

The integration of financial services into non-financial digital platforms will unleash large streams of new data that will open frontiers for all stakeholders. According to Himanish Chaudhuri, Partner at Deloitte India, providers will have to use data intelligently to get the best out of embedded finance. “Otherwise, we are just looking at a channel migration.”

Financial institutions and fintechs will have high-level insights into usage patterns, and an overview of technical details such as loads on the system. Detailed records of online transactions updated in real-time will create credit footprints for unbanked users, boosting financial inclusion. Marketers and sellers will gain fresh user insights that will help them co-create tailored finance products and provide speedy access at the right points in the user journey. For instance, Shopify, a global platform that helps small businesses set up online, uses machine learning to anticipate when merchants need funding and proactively offers it.

With data, the regulatory norms of each country play a crucial role, note Mani and Chaudhuri. Consumers need to be able to choose which of their data to share. The Bank for International Settlements expressed concern last year that the entry of big tech players into embedded finance necessitated a relook at regulations as otherwise, these firms might end up as dominant players based on the large volumes of their existing user data. Central banks and governments everywhere need to put in place policies that tackle these issues and clearly determine how user data can be harnessed.

Embedded finance and inclusion

Given the greater reach and stronger customer connect of non-financial platforms, embedded finance services are more likely to be used by underserved consumers and businesses. As observed earlier,  digital interactions will provide data on the creditworthiness of these users, removing a major obstacle in their path to financial inclusion, especially in emerging markets. 

The simpler onboarding processes and smaller ticket sizes that technology facilitates are also more suited to unbanked users who might be daunted by formal banking.  Thanks to this combination of factors, embedded finance is well placed to increase financial inclusion. Embedded finance products for farmers in India and Nigeria are examples of how technology has begun to impact the lives of the underserved across the world.

But technology can do much more. “A significant feature of embedded finance is customer education, giving them a better understanding of a financial product and making it easier for them to consume that product,” says Mani. This presents an opportunity. For instance, the layperson in India understands products such as mutual funds but needs guidance on approaches to investing. Embedding investment planning and investment transactions in day-to-day customer journeys is an emerging area in India that will address this and boost retail investor participation in capital markets. Which in turn will increase financial security for individuals.