How Embedded Finance is Changing the Financial Operations Market?

Transformation of the Global Financial System: Embedded Finance Brings New Opportunities.

Evolution of the Global Financial Market
The role of banks in society has changed throughout history. In the past, clients did not need much from the bank except to have a safe place to store their money. Such collaboration was accompanied by considerable bureaucracy and a lot of paperwork. However, as time passed, the financial market changed, bringing new financial institutions to the market and changing people's expectations and visions of financial services.

Today, in 2023, many banks appear to be too conservative and old-fashioned to respond to the needs of the market. The financial services industry is fast-moving away from traditional brick-and-mortar branches towards digital embedded finance to enhance customer services and gain new customers, with APIs powering this shift. As a result of these processes, according to statistics, more than 4,000 bank branches have closed in the United Kingdom in the last six years. Additionally, according to Forbes, brick-and-mortar bank branches could become extinct in the United States by 2034.

In the current market conditions, fintech companies have emerged as progressive revolutionaries, transforming the financial industry by providing clients with quick, remote, and hassle-free financial operations. From opening a bank account to money transfers, credit, and investment management, all services can now be easily accessed with just a few clicks. This approach is well-suited to customers, especially considering that more than one-third of American adults under the age of 50 claimed in 2018 that they do not make any cash purchases in a typical week, according to the Pew Research Center. In other words, digitalization is rapidly transforming the financial sector, driven by changing expectations and habits, and fierce competition. Although the shift from traditional brick-and-mortar finance has been a gradual process, the COVID-19 pandemic has accelerated this transformation as businesses of all types rush to adapt to remote shopping, work, and financial transactions.

Embedded Finance Companies: New Players of the Financial System
Embedded finance companies are those businesses of the non-financial sector that integrate financial services directly into their products and services. They provide a huge range of possibilities for businesses, allowing them to improve their offering in new ways. The appearance of embedded finance was very natural and logical since the latter makes the market more democratic. With embedded finance, clients can get access to financial services whenever they need them and in a convenient way. The vendors of financial products, in turn, gain access to new clients at a reduced cost, transforming the nature of the financial system. The following figure demonstrates the expected forecast for the market of embedded finance by 2030.

Why Is Embedded Finance Growing?

1. It helps to add value and offer better targeting. Embedded financial services give the possibility to companies to see the habits of the customers and provide them with more targeted solutions. For instance, e-commerce giants (like Amazon, Apple, etc.) with access to vast amounts of user data can create unique financial products that would perfectly fit the needs of their customers.

2.  It solves problems. Having wide applicability, embedded finance can help to solve a wide range of different problems. For instance, initially, Uber started to use embedded finance attempting to have consistent and on-time payments for customers. Similarly, other companies are using embedded finance to solve their own problems.  

3. It helps to redesign the price chain of the business, to build a new value chain, and to find new sources of revenue, while scaling back the costs.

4. It often fits the needs and expectations of the people better than traditional conservative banks. Human behaviour and expectations of financial services have changed. It is predicted that the demand for digital and online services would only grow in the forthcoming years and this trend would only intensify. The banks have also entered the competition in the domain of embedded finance.  In this sphere, they can use new channels of distribution for their services and products.

What are the Most Popular Embedded Finance Companies?

In the last decade, there was a large increase in the number of fintech companies providing embedded services, therefore the competition on the market now is very intense. The most prominent players on the market are Amazon, Samsung, Google, Uber, Tesla. However, it is also necessary to mention:

Visa is one of the largest payment systems in the world and one of the undisputed leaders in the financial market. According to statistics, Visa covers about 200 countries and territories, allowing the use of domestic and international payments for more than 160 currencies. In addition, Visa has more than 3 billion cards and 2 billion bank accounts.

MasterCard – huge American multinational corporation that serves consumers, small and medium businesses, government and public sector, large enterprises, credit unions and banks. Functioning in more than 210 countries, the company is contributing to the inclusive global digital economy.

Tuum – the modular banking platform that combines business know-how with advanced technology, and allows the launching of highly configurable financial products and services within weeks.

Finastra – the company offers applications that drive financial institutions, and marketplaces, accelerating the development of the industry. Besides, it serves as an open innovation platform that provides banks and fintech the possibility to connect and collaborate.

Stripe – the large Irish American financial services and software company that offers payment processing software and application programming interfaces for e-commerce websites and mobile applications.  Millions of companies of all sizes – from startups to Fortune 500s utilize Stripe’s APIs and software to send payouts, accept payments, and manage their businesses online.

Paysafe – a multinational company that provides secure and simple payment solutions to businesses of all sizes around the world.

AfterPay, Affirm, and Klarma – buy now, pay later solutions (weekly or monthly payments over a certain period of time with no interest).

The Common Use Cases of Embedded Finance
There are many different possibilities to embed finance into your business. The most common use cases are the following:

1. Fintech as a service. It might include a wide range of different services, from customer acquisition to invoicing, as well as other in-between tools of financial technology as a service.
2. Trading and investments. The tools of embedded finance in investment applications provide the clients the possibility to connect with their brick-and-mortar bank to invest, taking into account the spending habits and current financial situation of the people.
3. Integrated insurance services. When buying a new service or product, the clients might wish to buy insurance, to get a guarantee that their money is not wasted, if something unexpected happens.
4. Buy now, pay later (BNPL) services. Such an approach helps to create a new line for contemporary shoppers.  Having the access to a wider range of products that can be paid for over a certain period of time, encourages people to behave differently and to make other shopping decisions on the market (regardless of the domain this service is applied).
5. Point-of-service lending. The new version of the buy now, pay later service is mainly used for large/significant purchases. Still, this service often requires data regarding creditworthiness to ensure responsible lending.  

Overall, the new players in the financial market will not displace banks in the short-and medium perspective, however, they will occupy a valuable part of the market, contributing to greater competition.