Understanding the Embedded Finance Landscape

by FM Contributors
  • Is there still room for new entrants?
Embedded finance

Banking and payments infrastructure designed for embedded finance might be taking the center stage on the payment landscape sooner than you think.

With massive growth projections, as new providers and distributors emerge and many still ponder on how they can play a part in embedded finance, some are already solidifying their presence whether in terms of technology, partnerships, or expertise.

As such, it became important to understand how the embedded finance landscape is shaping up in terms of participants, key drivers, and potential opportunities.

What Is Embedded Finance?

Embedded finance refers to the placement of financial products in what could be considered a nonfinancial customer experience or platform.

A prime example of this is how nonbanking entities have operated as a channel for the banks by giving us features such as private label credit cards in retail companies or sales financing.

Embedded finance 2.0

While the concept of embedded finance isn’t new in any way, it is certainly undeniable that it has evolved as we’ve entered a new stage in which financial products are seamlessly integrated into digital interfaces.

From digital wallets to accounting software. From shopping carts to loyalty program apps.

The possibilities are nearly endless but the underlying theme is that consumers begin to feel that the acquisition of financial services has become a natural extension of the experiences which they were already having in the first place.

This, in turn, means that embedded finance has been embedded even deeper as it reshaped the ecommerce landscape.

Embedded finance has fundamentally changed ecommerce

Whether in terms of technology or merchant and consumer behavior, embedded finance has fully taken advantage of the opportunities given by new digital avenues.

The innovation brought upon individuals and businesses by open-banking has led to near market-wide adoption of these new technologies.

By being able to enable third-party fintechs to access their users’ banking data and conduct transactions, finance is now present in nonfinancial customer journeys and is experienced pretty much everywhere.

And, as more and more digital natives arise, so does the user and consumer pool expand and so do new businesses open, both of which rely on digital platforms to deliver no-nonsense financial services.

In fact, this dynamic market has made it possible for small businesses that are just starting out to not even consider interacting with a conventional bank anymore.

But, even with many opportunities on the horizon, banks, fintechs, software companies, and payment providers might still be struggling to understand how to participate and how to find their place.

Who are embedded finance’s key participants?

First and foremost, it is important to contextualize and understand that embedded finance has a greater likelihood of emerging in places which foster a high frequency of digital interactions with end consumers.

Prime examples in which this critical mass of users can be found are retailers, online marketplaces, business software companies, and so forth.

This makes it so that there are usually two moving parts behind the embedded finance mechanism: distributors and providers.

These digital platform operators are also known as the distributors of embedded finance, and they rely on providers such as fintechs (who provide them with customizable digital platforms, digital solutions, and financial products) or balance sheet providers (which are either chartered or licensed financial institutions that usually provide compliance and/or risk services, and may bear the risk of credit default).

The balance between these two moving parts along the value chain, namely in terms of risk management, will also correlate to how revenue will accrue.

As such revenue dynamics are dependent on the nature of the embedded finance product itself (lending VS deposits and/or payments)

Last words: What is the future of embedded finance?

Embedded finance isn’t going anywhere as it boasts a higher value proposition for customers and businesses alike.

Given the fast pace in which the financial world moves, the foundation for future leadership isn’t set, meaning that there is room for new entrants.

The supporting key services avenue is still wide open as there are still many legacy financial entities which are simply not ready to externalize their own workflows and/or processes.

Moreover, many embedded finance distributors will be looking at providers to deploy financial products in a regulatory-compliant manner.

There is still a lot left to unpack in terms of embedded finance’s reach, however, the single most important element in a new entrant’s strategy may just be choosing where to compete.

Banking and payments infrastructure designed for embedded finance might be taking the center stage on the payment landscape sooner than you think.

With massive growth projections, as new providers and distributors emerge and many still ponder on how they can play a part in embedded finance, some are already solidifying their presence whether in terms of technology, partnerships, or expertise.

As such, it became important to understand how the embedded finance landscape is shaping up in terms of participants, key drivers, and potential opportunities.

What Is Embedded Finance?

Embedded finance refers to the placement of financial products in what could be considered a nonfinancial customer experience or platform.

A prime example of this is how nonbanking entities have operated as a channel for the banks by giving us features such as private label credit cards in retail companies or sales financing.

Embedded finance 2.0

While the concept of embedded finance isn’t new in any way, it is certainly undeniable that it has evolved as we’ve entered a new stage in which financial products are seamlessly integrated into digital interfaces.

From digital wallets to accounting software. From shopping carts to loyalty program apps.

The possibilities are nearly endless but the underlying theme is that consumers begin to feel that the acquisition of financial services has become a natural extension of the experiences which they were already having in the first place.

This, in turn, means that embedded finance has been embedded even deeper as it reshaped the ecommerce landscape.

Embedded finance has fundamentally changed ecommerce

Whether in terms of technology or merchant and consumer behavior, embedded finance has fully taken advantage of the opportunities given by new digital avenues.

The innovation brought upon individuals and businesses by open-banking has led to near market-wide adoption of these new technologies.

By being able to enable third-party fintechs to access their users’ banking data and conduct transactions, finance is now present in nonfinancial customer journeys and is experienced pretty much everywhere.

And, as more and more digital natives arise, so does the user and consumer pool expand and so do new businesses open, both of which rely on digital platforms to deliver no-nonsense financial services.

In fact, this dynamic market has made it possible for small businesses that are just starting out to not even consider interacting with a conventional bank anymore.

But, even with many opportunities on the horizon, banks, fintechs, software companies, and payment providers might still be struggling to understand how to participate and how to find their place.

Who are embedded finance’s key participants?

First and foremost, it is important to contextualize and understand that embedded finance has a greater likelihood of emerging in places which foster a high frequency of digital interactions with end consumers.

Prime examples in which this critical mass of users can be found are retailers, online marketplaces, business software companies, and so forth.

This makes it so that there are usually two moving parts behind the embedded finance mechanism: distributors and providers.

These digital platform operators are also known as the distributors of embedded finance, and they rely on providers such as fintechs (who provide them with customizable digital platforms, digital solutions, and financial products) or balance sheet providers (which are either chartered or licensed financial institutions that usually provide compliance and/or risk services, and may bear the risk of credit default).

The balance between these two moving parts along the value chain, namely in terms of risk management, will also correlate to how revenue will accrue.

As such revenue dynamics are dependent on the nature of the embedded finance product itself (lending VS deposits and/or payments)

Last words: What is the future of embedded finance?

Embedded finance isn’t going anywhere as it boasts a higher value proposition for customers and businesses alike.

Given the fast pace in which the financial world moves, the foundation for future leadership isn’t set, meaning that there is room for new entrants.

The supporting key services avenue is still wide open as there are still many legacy financial entities which are simply not ready to externalize their own workflows and/or processes.

Moreover, many embedded finance distributors will be looking at providers to deploy financial products in a regulatory-compliant manner.

There is still a lot left to unpack in terms of embedded finance’s reach, however, the single most important element in a new entrant’s strategy may just be choosing where to compete.

About the Author: FM Contributors
FM Contributors
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About the Author: FM Contributors
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  • 1310 Articles
  • 14 Followers

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