Embedded finance: The future of disruptive banking?

traffic in Hong Kong at sunset

Embedded finance enables any company to incorporate banking products such as lending, BNPL, payment services, wallets, and rewards direct into their customer experience as a service within their range—and without having to redirect users to a third party. That means they can integrate payments on their site so buyers need not enter their card details for every transaction, as well as provide insurance, issue their own credit cards, and enable customers to pay in installments for online purchases. If banks want to offer embedded finance they must also refine their branding, as well as consider new business models, such as B2B2C and B2B2B distribution and pay-for-use monetization.

Until a few years ago, offering embedded finance required an immense investment of time, resources, and technological development. That’s no longer the case—thanks to application programming interfaces (APIs), sets of instructions connecting two softwares to facilitate the exchange of information. An API acts as a gateway between customer, company, and bank, and means the customer enjoys a frictionless, faster, streamlined shopping experience, with banking transactions available when and where they need them. But it goes much broader than APIs, of course—and Toqio is a prime example of the power of building a range of integrations into a platform so businesses don’t have to.

How does embedded finance work?

Traditionally, financial services has comprised three categories:

  1. The transfer of value in space
  2. The transfer of value in time
  3. Risk management

Each category can be integrated into a non-financial program and delivered via a network. But embedded finance is different because it integrates a financial services company into the product offering of a non-financial services company. Take digital wallets, for example. To use a digital wallet, the customer stores their payment card information in the app. The card has been issued by a traditional bank. The user can then use the app to make a purchase at a brick-and-mortar store, online, or in the app store. They can also send money to other users without having to enter their card or bank account information every time.

Is embedded finance the future?

There are many opportunities for growth for those companies embracing embedded finance.

  • Changing consumer behaviours: people’s purchasing habits have changed in the last few years. Online shopping is exponentially becoming the norm, and purchases on the nontraditional platform of social media is also on the rise. Embedded payment programs can ease this transition from in-person shopping to digital.
  • Banking disruptors: a few years ago, it would have been unusual to open a bank account with an eCommerce company, or use an app for every transaction. Now, banking disruptors and neobanks are the norm for many people.
  • A mindset of sharing: security concerns and the risk of data breaches are ever-present, but people are now more willing than ever to share such personal information as their bank account details with third parties.
  • End customers: People crave financial services that offer them what they want when they want it. For example, the adoption of online payments and even BNPL has become a pivotal element of the customer journey when buying online—and customers love it!
  • Increasing customer lifetime value (CLTV): Boosting CLTV doesn’t just make your company more valuable, but also enables it to raise customer acquisition spending—and consequently fuel growth. Embedded financial services increase CLTV by improving the margin as an additional source of revenue, enhancing the customer experience (and by extension strengthening customer loyalty), and reducing friction and effectively boosting conversion.

As the market evolves, it’s possible that BaaS and API banking will become as ubiquitous as mobile and online banking, and therefore compel banks to build and maintain these offerings. Achieving long-term differentiation with BaaS will be tough, though, so banks will need to distinguish themselves based on their rates, products, and reach.

However, it’s also possible that the market will become more prone to returns on scale, much as cloud computing is presently dominated by big players. In such a winner-takes-all landscape, only those select BaaS providers at the top of the pecking order in cost structure, technology, and analytics will benefit, leaving the rest in their wake.

Embedded finance is likely to especially suit some industries:

  • Agriculture: As the world population grows, embedded finance programs will be able to manage and minimize risk for farmers and agricultural companies, and give them greater insight into how to feed the planet.
  • Education: Student debt is higher than ever, but embedded finance could lead to student loans accounting for the individual’s income potential when they leave university, helping them avoid borrowing more than they can comfortably afford to repay.
  • Gig economy: Many companies employ gig workers who can’t secure a bank account. This results not only in payment problems, but also in an unhappy workforce.
  • Health: Embedded finance presents an opportunity in the private health insurance market. Transparent pricing and multiple payment options encourage people to seek the help they need, and diagnosing and treating conditions early saves consumers and the healthcare industry alike a huge amount of money in the long term.
  • Lending: By embedding finance in the digital economy, customer journeys become frictionless by virtue of customizable forms and data integrations. That’s how we at Toqio empower our clients to become the lender their customers love.
  • Payments: With smoothly integrated embedded finance at your fingertips, you can create accounts and initiate payments direct via an API. This is precisely how Toqio accounts become an extension of your existing platforms, and a powerful enabler of new ones.
  • Real estate: Embedded finance has the power to reimagine home insurance, creating a smoother, more affordable experience for homeowners. And embedded lending presents an opportunity for disruption in the mortgage market.
  • Transportation: As the way we move from A to B undergoes radical change, there’s fertile ground for new embedded financial services, such as car insurance programs that adjust their premiums based on a driver’s measured and tracked habits, or whether the car is human-operated or driverless. Embedded fintech could also create a seamless auto-financing experience at the dealership.
  • Urban planning: Embedded finance can streamline banking for consumers by centralising their financial details, and embedded banking systems hone local governments’ capacity to collect taxes and issue fines.

The future’s there for the taking

As more companies and ecosystems embed financial services in their offerings, banks should strike while the iron’s hot in deciding how to approach this unprecedented financial paradigm. They must develop an effective, future-proof BaaS strategy now, complete with a realistic understanding of their path to transformation and cost structure. Most importantly, of course, they should clearly envisage the potential impact of a significant rise in customer demand for integrated banking experiences on their business.

Stay up to date
with all our exciting news!