How embedded finance is streamlining banking and payments for consumers and enabling brands to launch new products with ease.

About a decade ago, challenger banks and neobanks signalled the start of the fintech revolution. Traditional banks stood up and took notice of the industry upending potential of fintech apps with their seamless in-app experiences, thorough customer journey mapping, and competitive rates. Indeed, today there is an app for almost every financial service including insurance, investments, mortgages, pensions, and digital assets. Now, embedded finance is forming the next step of the financial revolution.

So how is embedded finance enabling non-finance brands to offer banking services to their customers—and how exactly is it streamlining banking services?

What is embedded finance?

In-app payments are probably the most recognisable form of embedded finance—whether it’s paying for your taxi via the Lyft app or buying a takeaway through Just Eat. Put simply, embedded finance involves integrating a financial service such as payments into a non-financial app or service. On the user side, the main benefit is that it creates a seamless and customised user experience (more on company benefits below).

There are many use cases for embedded finance, mainly surrounding payments such as the two listed above. But the movement is starting to go beyond convenient e-commerce options as more and more non-finanical industries are seeing ecosystems spring up where customers can conduct virtually all their financial transactions including investments, borrowing and lending, insurance, and more outside traditional banking channels.

Embedded finance integrates fintech into non-finance companies

Embedded finance has been slow to take off. Over the last few years, developers have standardised APIs. Open APIs are critical for embedded finance as they enable the software systems of different businesses to effectively communicate. Furthermore, open banking has gained momentum recently as it gradually moves towards something closer to open finance.

Since embedded finance uses APIs and banking-as-a-service to integrate financial services into brands, any company can now effectively offer financial products and services to its customers. This allows businesses in several industries to integrate a finance layer into their offerings, for example through an insurance add-on for a product (such as with Tesla’s insurance package) or applying for a loan at the point of sale (such as with Klarna’s higher ticket item financing). This is highly attractive for brands as they can create new revenue streams with relative ease and without developing wholly new products or services.

Benefits for both brands and customers

The benefits of embedded finance for brands extend beyond potential new revenue streams. Until a few years ago, launching a financial product meant lengthy development times and compliance hurdles that needed clearing. But, thanks to embedded finance, the parent fintech company now handles the development, integration, and even the compliance aspect so a brand can “rent” a financial product and create a finance layer in their product offerings.

On the customer side, we are now enjoying the convenience of streamlined and seamless payments for products within our favourite smartphone apps. What makes embedded finance so attractive for consumers is that the financial part of purchases and transactions can now take place via the same, recognisable interface as the sale. This is a significant improvement to the user experience than redirecting customers to third-party web services to complete transactions. 

As Bill Gates noted in 1994: “Banking is necessary, but banks are not.” Now, his point is finally being played out on a global scale. Specialised fintechs continue to develop new and innovative services for brands to meet the needs of their customers and make various aspects of finance readily accessible to more users.