The Evolution of Investment Platforms: How Embedded Finance is Empowering Investors

Over the past decade, digital innovations have changed the way consumers use investment platforms. A major driving factor in this regard is embedded finance, which provides financial services in non-financial platforms, making it easier for customers to access investment opportunities.   

By leveraging innovations like AI, blockchain, and cloud computing, embedded finance has democratised investment options, making them more accessible, personalised, and cost-effective for consumers. Additionally, embedded financing has gained interest from 60% of Indian consumers, which translates to a fantastic 45% compound annual growth rate (CAGR) for the embedded finance sector.

Continue reading to learn more about how embedded finance has revolutionised investment platforms and empowered investors. 

The Evolution of Investment Platforms
There have been landmark changes in the investment landscape due to the advent of technological advancement and changing market dynamics. Below is a brief overview of the critical phases in this transformation:

Traditional Investment Models
Stockbrokers, banks, and financial advisors have been the investment gatekeepers for centuries. They had a very limited number of products to offer, which required hefty fees and a strict account minimum, creating entry barriers. 
The system was slow and depended on telephone calls and face-to-face meetings. Also, it lacked transparency and accessibility and thus could not be opted by a majority of individuals. 

Emergence of Online Brokerages
The late 1990s and early 2000s witnessed the rise of online brokerage platforms such as E*TRADE, Charles Schwab, and Robinhood. These online platforms offered commission-free trading opportunities to individual investors and allowed them direct access to financial markets. 
It democratised investing by reducing fees, offering greater transparency, and allowing users to manage investments via user-friendly digital interfaces.

The Rise of Embedded Finance
The latest shift is embedded finance, which involves financial services, such as payments, banking, and investing, built directly into everyday apps. E-commerce platforms and mobile payment apps, like PayPal and Venmo, are excellent examples in this regard.  

This combination allows users to invest without having to visit dedicated financial platforms, thereby removing the traditional barriers and facilitating a more intuitive and accessible investment experience. Additionally, embedded finance provides the ability for more holistic money management through both investment and expenditure tracking, savings, and similar services in the same platform.

Prominence of Unlisted Shares
Another notable trend is the rising popularity of unlisted shares as investments. As financial services become more digital, unlisted shares, previously available only to high-net-worth individuals and institutional investors, are now open to retail investors. This broadens their choice of investments in public and private markets.

What is Embedded Finance?
Also called embedded banking, embedded finance is an integration of financial services, including lending, payments, insurance, and wealth management. This helps non-banking businesses provide a host of financial products to their customers, suppliers, partners, and employees without establishing the financial infrastructure or seeking regulatory approvals. 
The embedded finance infrastructure reduces barriers for digital platforms to make financial services natively available with minimal investment and development time. It also helps businesses offer 'native' Fintech experiences within digital platforms which customers use on a daily basis. 
Thus, embedded finance helps create more integrated, convenient, and intuitive access to financial services for consumers.

Key Components of Embedded Finance in Investments
Here are the essential components of embedded finance in investments:

- API Integration: Embedded finance leverages API integration, which allows non-financial companies to offer financial services, such as UPI payments, loans, and more, on their apps or websites.     
- Real-time Transactions: Facilitating real-time payments and fund transfers is another key feature of embedded finance. This not only makes payments much easier but also helps improve the transaction experience for both customers and businesses. 
- User-Friendly Interface: When it comes to the user interface, embedded finance mainly focuses on the customer experience. It integrates financial services into the interface of non-financial platforms to allow users to have everything in one place without switching between different applications.
- Varied Financial Services: Embedded finance comprises a wide range of financial services, including payments, banking, lending, insurance, and investment. This diversity allows businesses to tailor their services to align with the needs of their user base.
- Data Security and Compliance: To safeguard sensitive financial data, embedded finance focuses on implementing security measures like high-grade SSL encryption, firewalls and multi-factor authentication (MFA). It also strictly adheres to international data protection compliances, ensuring high user data safety.  
- Ecosystem Collaboration: Embedded finance allows collaborations between financial and non-financial companies, enabling them to create a dynamic ecosystem which allows them to benefit from each other’s strengths.  

Examples of Embedded Finance
Here are some noteworthy examples of embedded finance:
1) Apple Card & Goldman Sachs
In 2023, Apple introduced a high-yield savings account with Goldman Sachs, letting users earn interest at a 4.15% annual percentage yield on their Daily Cash rewards. It is also insured by the Federal Deposit Insurance Corporation (FDIC), signifying Apple’s increasing stance in the embedded finance industry.  
2) Amazon & Affirm
Affirm’s BNPL (Buy Now Pay Later) partnership with Amazon supports the e-commerce giant’s embedded finance strategy through flexible payment options for customers. This has resulted in a significant increase in conversion rates and sales. 
Furthermore, the integration of Affirm on the Amazon platform increases customer loyalty. Also, its growth and performance directly benefit the latter’s investments through stock warrants, aligning the interests of both companies.
3) Cash App & Bitcoin
Cash App has integrated Bitcoin directly into its payment platform. It enables users to easily purchase, sell, and hold their Bitcoin alongside traditional currency, thereby enhancing the value proposition through investment capabilities within the app. 
This platform also allows consumers who maintain diversified portfolios to have fluid transactions using both fiat and cryptocurrency, making Bitcoin accessible and mainstream.

How Does Embedded Finance Work?
Embedded finance works on the principle of using APIs, which connect non-financial platforms with financial services. It allows users to access a myriad of financial products and services on the same platform they are currently using.
These can range from payments, e-commerce, business management, banking services, and even investment opportunities. Advancements in cloud computing also fuel the growth of embedded finance as they allow for the easier storage and processing of data.

Benefits of Embedded Finance in Empowering Investors
Here are some of the notable advantages of embedded finance:  
(i) Accessibility: Through embedded finance, users can access financial services within their familiar platforms, thus eliminating the need for various separate applications.

(ii) Enhanced User Engagement: The integration of financial services enhances user engagement by offering quick and relevant financial options.

(iii) Advancement: Blending financial services with non-financial platforms fosters innovation, resulting in newer and better financial products. 
(iv) Cost Reduction: Companies can reduce development costs by using ready-made platforms and infrastructure to provide financial services.
(v) Market Expansion: Embedded financial services allow the extension of financial services into new markets when compared to unconventional financial organisations.
(vi) Access to Unlisted Shares: Investors can now access unlisted shares through embedded platforms. This opens up private equity investments for them besides the traditional stocks, which has otherwise been challenging since unlisted shares have not been accessible to retail investors.

Challenges of Embedded Finance in Investments
Here are some major drawbacks of embedded finance in investments:

(i) Data Privacy and Third-Party Risk
As financial data is shared among different stakeholders, the risk of cyber threats looms larger. Non-banking financial sectors may not offer the same kind of safety assurance compared to the banking systems, which can potentially hinder the entire system's functioning.

(ii) Identity Theft
Various new fraud technologies, such as deepfakes, facilitate scammers to conduct account takeovers and steal identities. Besides, existing loopholes in laws and security systems allow cybercriminals unrestricted access to accounts. According to BioCatch, 55% of fraud cases in India involve account takeovers.

(iii) Regulatory Challenges
Embedded finance encompasses services from multiple sectors, making it challenging to keep up with the changing regulations.
 
(iv) Customer Acquisition Risks
Embedded finance simplifies customer access, but it also carries the risk of deterioration in risk assessment quality and limitation of user data. While conventional banks invest great effort in developing safer methodologies for onboarding customers, embedded finance platforms often do not have similar security measures.

(v) Regulatory Challenges
Adhering to regulatory compliances becomes difficult when financial services converge with other industries. A synchronised regulatory approach across sectors is essential for the seamless implementation of embedded finance across various sectors.

(vi) Growing Risk of Unlisted Shares
When it comes to unlisted shares, the challenge is elevated as most retail investors cannot afford or are unaware of such private investments. This might cause greater risks related to mispricing and poor regulation in this emerging field.

(vii) Digital Divide
According to recent statistics, although embedded finance could improve access to finance, poor access to the internet and technology would hinder many people from enjoying its benefits. 
For instance, in India, only 31% of rural areas have internet access, as opposed to 67% of urban areas.

Technologies Driving Embedded Finance in Investments
Several cutting-edge technologies are behind the growth of investment-based embedded finance, leading to innovations in the delivery of financial services. These include: 

●    API and Open Banking
APIs facilitate safe and secure sharing of financial data across multiple platforms, while open banking frameworks encourage innovation by obligating banks to share customer data with approved third parties. For instance, companies can use Recurring Payment APIs to collect periodic payments from customers using UPI Autopay and e-NACH. 
●    AI and Machine Learning
These technologies provide personalised investment strategies by analysing vast amounts of data, predicting market trends, and providing advice to individuals. 
●    Blockchain and Tokenization
Blockchain technologies provide transparency and security in investment activities across decentralised finance or crypto and digital assets globally. They include cryptocurrencies, tokenised assets, and even unlisted shares.
●    Cloud Computing and Big Data
Cloud computing and big data analytics provide scalability, which facilitates real-time investment tracking and risk management, thus helping investors make wise decisions.

Key Players and Innovations in Embedded Investment Platforms
A number of fintech companies, together with traditional financial organisations, drive the implementation of embedded finance features across investment platforms: 
Fintech Companies
- Robinhood 
Robinhood (HOOD) functions as a top-notch embedded finance platform by unifying mobile banking with stock trading services that provide free trades to users.
- Revolut 
Using a single all-in-one platform, Revolut provides its users worldwide the ability to conduct banking transactions and handle cryptocurrency trading and stock and commodities trading.
Traditional Financial Institutions 
- JPMorgan Chase 
JPMorgan Chase introduced robo-advisory services to expand its customer base through embedded finance delivery of automated wealth management tools.
- Big Tech in Finance
The tech giants Apple, Google and Amazon continue to build financial service capabilities within their ongoing operations and settings. Apple Wallet from Apple contains high-yield savings accounts within its framework, and Amazon, along with Affirm, provides Buy Now Pay Later solutions.

Future of Embedded Finance in Investment Platforms
Thanks to continuous technological advancements, embedded finance is set to significantly enhance the accessibility of financial literacy. Some emerging technologies, such as augmented reality (AR) and virtual reality (VR), may provide engaging and immersive experiences for financial education. 

Moreover, collaborations between fintech companies and educational institutions can seamlessly incorporate financial literacy into standard learning environments. As embedded finance advances, its effectiveness may promote inclusivity, build trust, and uphold ethical standards. 
By equipping individuals with user-friendly financial tools and educational resources, embedded finance can transform the global financial landscape, addressing disparities in financial knowledge and access.

Summing Up
Embedded finance is changing the way customers access investments by integrating opportunities into non-financial platforms. Technologies such as APIs, AI, blockchain, and cloud computing are driving this change, offering customisable and tailored options for businesses and investors. 
However, companies willing to implement embedded finance on their platforms need to keep tabs on the latest trends in the financial market. Thus, they should stay updated on the latest regulations and consumer patterns, allowing them to make timely and informed decisions.