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Embedded finance explained: Everything you need to know

When someone uses an app to request a ride, purchase from TikTok or order food, they are engaging in embedded finance. These options are growing and reshaping financial services.

Embedded finance is changing financial services by integrating lending, insurance and investment options into nonfinancial organizations. It eliminates the need for traditional financial intermediaries and provides convenience to consumers.

As consumer behavior and technology evolve, businesses are increasingly adopting embedded finance -- ways to save payment options making it easier for customers to access financial services.

This trend not only alters how financial services are delivered but also provides new opportunities for fintech companies and businesses to enhance customer experiences, boost loyalty and expand their revenue streams.

A study from Marqeta found nearly 42% of survey responders use both traditional and digital banking providers, and the same study found 86% of U.S. mobile wallet users have made purchases through a retailer's embedded mobile app.

Around 65% of businesses surveyed do not currently offer embedded finance services but plan to consider adding these services, according to a report from Juniper Research.

What is embedded finance?

Embedded finance incorporates financial services, such as lending, payment processing and insurance, into the infrastructures of nonfinancial organizations. This process is done without the need to route these services through traditional financial institutions and uses companies such as Affirm, Afterpay, Klarna and Uplift to finance a product purchase instead.

Embedded finance is not a new concept. Nonbanks have offered private-label credit cards for retail stores and airlines for years. Another example includes sales financing at car dealerships. These arrangements offer a channel for the banks behind them to reach the customer without direct contact.

Customers see examples of embedded finance on digital interfaces they interact with such as digital wallets, shopping cart platforms, loyalty apps and even social media e-commerce platforms. Embedded finance started with the changes in consumer behavior and technology. With the digitalization of e-commerce and business management, the opportunity to offer nonfinancial customer experiences has increased.

Businesses create application performance interfaces (APIs) that let nonfinancial entities access financial services directly on their sites. These APIs act as bridges and make it easy for businesses to incorporate various financial offers and services for customers directly on their sites using a partnership with these financial companies for payment processing, insurance and loans.

Examples of embedded finance

Having embedded finance options brings financial services to a customer right when they need it instead of searching for services separately. Here are some of the most popular types of embedded finance services.

1. Embedded banking

Embedded banking is also known as banking as a service. With embedded banking, nonfinancial companies offer customers accounts under their brand. Customers use the company's platform for business. Examples include Lyft's checking account and debit card for drivers and Shopify Balance for store owners to avoid opening a separate account.

Embedded banking is designed to increase platform loyalty. It gives added benefits such as quicker payments.

2. Embedded lending

Typically, lending is done separately from a purchase, and many buyers need lending for certain purchases. Embedded lending allows businesses to offer lending services at the time of a sale. Before embedded lending, customers would reach for credit cards or a traditional loan from a financial institution -- both of which might have higher interest rates. The benefits of embedded lending to a business include increasing sales since customers have immediate access to loan options.

The "buy now, pay later" (BNPL) option is one of the most popular forms of embedded lending. BNPL offers installments over a decided period with no interest, and the buyer can choose between various options such as weekly or monthly payments.

3. Embedded payments

Embedded payments make digital purchases quicker by saving payment information, so customers do not have to re-enter credit card information. For example, several apps such as Starbucks and Panera let users save payment types. As a way to show brand loyalty, customers can also earn points for rewards in the app.

Social media sites are also offering embedded payments to purchase featured items directly from their platforms. Recently, TikTok created an in-app wallet feature called Balance, and Facebook and Instagram offer Meta Pay.

Credit cards are just one aspect of embedded payments. Direct bank account payments from customers spare the retailer from having to pay extra costs to credit card processors. Businesses can keep all the payments on their own platform so they can process transactions quickly and make it easier for the customer to purchase without finding their physical wallet.

4. Embedded investing

Embedded investing enables noninvestment service providers to provide clients with investment options, generating extra income for businesses. Typically, customers had to open a new account with a financial institution such as Fidelity, Charles Schwab or Edward Jones. Users could also move to other online stock trading options such as Robinhood or E-Trade.

Now, customers can invest in cryptocurrency with platforms they already use -- such as PayPal or Venmo. Consumers are looking for and expecting sites to offer additional services in a way that a super app would, where people can perform multiple tasks on one platform.

5. Embedded insurance

Embedded insurance might not be new, but with the rise of fintech, it has spread quickly in digital marketplaces. Users can buy insurance with online purchases immediately, so it's offered when people need it. There might even be options, such as the term. Most of these embedded insurance options are from partnerships with fintech companies. Customers add insurance to their purchases, such as an extended warranty.

6. Embedded fintech

Embedded finance can also integrate other fintech processes into a financial institute's website or app. For example, a bank can offer additional services such as reviewing subscription services for a customer and helping them remove unused services to save money. Other services might include investing in cryptocurrency from their banking app to avoid signing up on another website.

Future of embedded finance

Embedding financial services can create new revenue streams for businesses. Working with financial providers, nonfinancial organizations can offer additional services and create more relationships with other businesses and consumers. Traditional finance companies will face more competition, so they will look for ways to offer additional services and improved customer service to stay competitive.

Niche banks, such as neobanks for employees -- which enable companies to provide banking for their staff as an additional incentive to boost retention -- might be on the rise. Neobanks are also referred to as challenger banks. They typically focus on a small number of financial services -- such as savings and spending -- and they insure deposits by collaborating with a bank that is insured by Federal Deposit Insurance Corp. Chime, Revolut and GoBank are examples of neobanks.

Embedded finance will continue to grow as some areas are still in the early stages. More sectors might offer embedded finance as consumers look for the convenience of these services.

Amanda Hetler is a senior editor and writer for WhatIs where she writes technology explainer articles and works with freelancers.

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