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Embedded Finance Explained: Integrating Fintech into everything.

Gone are the days when financial services were reserved specifically for banks or other types of traditional financial institutions. With the COVID pandemic accelerating fintech innovations, several notable trends have gained momentum over the past three years. 

One of them is Embedded Finance. Bain Capital estimates that this market will grow to over $2.6 trillion revenue by 2026; for context, in 2021, it was valued at just $0.7 trillion.


What is Embedded Finance? 


Embedded Finance refers to the integration of financial services within non-financial platforms or applications. In simple terms, it's when financial services such as lending, insurance, and payments are seamlessly woven into other services, turning virtually any software or platform into a financial touchpoint.

Consider how we once had to visit banks or dedicated platforms to obtain loans before one could make a purchase. Embedded finance blurs these boundaries, allowing users to instantly access the most fundamental types of financial services as they shop online, order food, or hail a taxi. 

This seamless integration is what's driving the popularity of embedded finance.Why jump between apps or platforms when one can do it all?

Examples of Embedded Finance 

To better understand how this concept works, let's delve into the most common types of embedded finance.

Buy Now Pay Later (BNPL) 

BNPL is an installment payment model that has gained popularity in the digital shopping era, providing shoppers with the option to make low-interest or interest-free payments over time instead of paying the entire amount upfront.

Some of the popular e-commerce marketplaces that feature BNPL as part of their embedded finance product suite include Amazon and Shopify. However, it is worth noting that these online stores do not provide the financial service themselves. Instead, they partner with BNPL service providers, including the likes of Klarna, Afterpay, PayPal Credit, and Affirm.

Although still a nascent market, a recent report by Solarisbank revealed that 42% of the people surveyed in Germany have at one point used Klarna over the past year, one of the leading BNPL service providers in Germany.

Integrated Insurance 

Non-financial businesses are embracing embedded insurance to alleviate some of the challenges shoppers encounter when seeking insurance at an individual level. The most common example is today's digital products, which often come with a warranty option.

Tech giants Microsoft and Amazon are also capitalizing on this trend. The former has partnered with Slice and AXA to offer insurance policies for Microsoft tool users. Meanwhile, Amazon introduced its embedded insurance product in 2021 through a partnership with Next, granting Amazon Prime members access to a variety of insurance policies, including workers' compensation and general liability.

It is also interesting to observe that some companies, like Tesla, are going full in on integrated insurance. The popular electric car maker launched its own insurance product, offering more competitive rates than traditional automotive insurance companies.

Fintech-as-a-service 

Fintech, the intersection of finance and technology, encompasses a wide range of services, including payments, investing, lending, and robo-advisors. Non-financial companies are integrating these services to enhance the shopping or transaction experience.

The integration of payments, for instance, has been made possible through open APIs such as Square’s APIs, Stripe Connect, PayPal Checkout, and soon, Peanuds will be joining the mix. Ideally, non-financial companies can integrate these APIs into their payment systems to make the checkout process more seamless.

In addition to payments, the integration of Fintech services has ushered in a new era of banking known as open banking. In this model, traditional banks have opened their APIs to fintech service providers who then leverage the financial data to offer banking services to non-financial institutions through a less conventional approach, making banking more accessible.

What are the Benefits of Embedded Finance? 

As highlighted in the above examples, embedded finance presents a transformative shift in the way consumers and businesses interact with financial services. Here are some key benefits of embedded finance: 

 

  1. Seamless User Experience: Embedded finance integrates financial services directly within everyday platforms and apps. This allows users to conduct financial transactions without having to switch between multiple platforms, offering a smoother and more intuitive interaction.
  2. New Revenue Opportunities: By embedding financial services, non-financial platforms can tap into additional monetization channels. For instance, Tesla envisions its insurance product could become a significant source of revenue, accounting for almost 30% in future.
  3. Enhanced Accessibility: By offering financial services on platforms that consumers already use daily, embedded finance can extend the reach of these services to a larger audience, including those who might have been underserved by traditional financial institutions.
  4. Increased User Engagement: With the convenience of integrated financial solutions, users are likely to spend more time on the platform and engage more frequently, thus increasing retention rates and reducing churn.
  5. Innovation and Diversification: As businesses incorporate financial functionalities, they can develop innovative products, services, and business models. This not only diversifies their offerings but also enhances their value proposition, making them more competitive in their respective markets.

Peanuds - Making Finance More Accessible 

Peanuds understands that in today's fast-paced world, users demand services that are both comprehensive and integrated. Whether it's making a payment, managing finances on the go, or using debit cards that offer convenient access to funds, Peanuds provides an all-in-one solution, eliminating the need to juggle multiple apps or platforms.