Skip to Content
8 minutes read

Embedded Finance: Everything You Need to Know

By Robert Kazmi
By Robert Kazmi
8 minutes read

Embedded finance has been a common part of life for decades at car dealerships with finance departments and big retail chains that offer branded credit cards. However, thanks to technology, embedded financial services can be added to almost any application or software product.

Embedded finance not only offers non-financial companies an opportunity to engage with customers and increase their service offerings, but embedded finance also offers financial institutions a chance to forge new partnerships and drive growth. 

Embedded finance solutions are changing the FinTech landscape, and as more organizations utilize these financial products, the embedded finance market will grow and reach new heights. The embedded finance revolution is well underway. Now is the time to learn more about it. 

This post will explain embedded finance, the different types of embedded finance products, and how embedded financial services will change FinTech forever. 

What Is Embedded Finance? 

Embedded finance is the integration of financial services into non-financial products or services. Embedded finance brings financial services to customers where they are, even when they are at non-financial service providers. 

You can’t define embedded finance without explaining the different types of financial products it offers. 

Embedded financial services cover various financial products, from loans and payments to insurance policies. The key element of embedded finance is that it offers financial products outside of traditional financial service providers like banks or credit unions

Instead of being a separate part of a consumer’s life, embedded finance delivers financial services when needed, which is convenient for buyers and sellers. 

Traditional examples of embedded finance include airline credit cards and car rental insurance. However, thanks to FinTech innovations and modern technology, many new embedded finance options exist, from buy-now-pay-later offers on eCommerce sites to payment options like Apple Pay. 

How Do Embedded Financial Services Work?

If you are interested in embedding financial services in your application or software, you are likely wondering how it is made possible. Non-financial organizations rely on API integrations from a traditional financial services provider to make embedded finance possible

As the embedded finance market has grown, more traditional financial institutions have begun to offer embedded finance APIs. Integrating a financial services API in your application can improve the customer experience and unlock new revenue streams. 

The Different Types of Embedded Finance Products 

If you are a non-financial institution interested in embedded finance, you will likely want to know what is possible. There are several different types of embedded finance products that your organization could incorporate into its software, including the following:

  • Embedded banking 
  • Embedded payments 
  • Embedded lending 
  • Embedded insurance 

Embedded Banking 

Embedded banking is sometimes used as a synonym with embedded finance since a financial institution like a bank is typically involved in delivering embedded services. However, to explain the different offerings, embedded banking will stand alone. 

Embedding banking enables non-financial institutions to offer customers a branded checking account to hold funds and make payments. Embedded banking is typically used to gain access to funds faster. 

For example, the ride-share app Lyft offers drivers a branded checking account and associated debit card. Using this account, Lyft drivers can get paid and access their funds immediately after a trip instead of waiting until the end of the week to get paid. 

In addition, since Lyft has partnered with other brands, Lyft drivers using this debit card can get exclusive rewards and cash back not offered by other cards or banks. 

In a similar move, Shopify offers an embedded banking service called Shopify Balance, enabling eCommerce stores to get paid faster by banking with Shopify. Shopify Balance also has a branded debit card with special cash-back rewards for purchases made to grow a Shopify store. 

Embedded banking is designed to increase brand loyalty by offering special rewards and, more importantly, financial convenience. 

Embedded Payments 

Embedded payments simplify paying for goods and services by connecting payment methods or even bank accounts with the best financial apps.

Instead of entering a card number, which is inconvenient and could cause the user to abandon their purchase, embedded payments enable customers to make payments with one click. 

For example, the Starbucks app enables users to connect and save their credit or debit card information. Then, when they want to order a coffee, they only have to click a button. This simplifies the shopping experience for users by removing a critical friction point. 

In addition, it helps companies like Starbucks make more sales by making the process easier for customers. 

Embedded payments could also link a bank account in the example of the app SmartPay Rewards. Customers link their bank accounts with the app, save money, and earn rewards when using it to buy gas and items from convenience stores. 

As we saw in the previous example, discounts and rewards are a great way to build brand loyalty and keep customers returning to your product. 

Embedded Lending 

Before the capabilities offered by embedded finance, customers had to visit the bank or use a credit card if they wanted to borrow money. Unfortunately, both options carry high interest rates and are not always attractive for consumers.

Embedded lending enables organizations to offer more favorable loan terms at the point of sale. If you have seen buy-now-pay-later offers during the checkout process recently, this is an example of embedded lending. 

There are several embedded lending options available currently, including Klarna, Affirm, and Afterpay. These options typically enable users to pay a predetermined weekly or monthly fee based on their purchase price with no interest as long as the payments are made on time and in full. 

With embedded lending, your organization can make more sales by giving customers with less money on hand an opportunity to purchase without worrying about accumulating interest. 

Embedded Insurance

Insurance is an adjacent financial service, but it is included in embedded finance since it can be offered to customers at the point of purchase. Embedded insurance offers customers policies when they need them most without requiring engagement with an insurance company or agent

Embedded insurance is effective because it can be embedded in the flow of the checkout. Users can choose an option that adds an insurance policy to their order. This is a great way to easily insure a product at a highly competitive rate. 

Embedded Finance’s Impact on FinTech 

Whether you operate a FinTech firm, a bank, or a non-financial business that is interested in using embedded financial services, it is helpful to explore the ways in which embedded finance is changing the business landscape. 

Changing Relationships with Consumers 

Thanks to embedded financial services, the relationships banks and businesses have with consumers will shift. For one, with more non-financial organizations acting as financial institutions, banks will have to get comfortable sharing customers.

In addition, customers will have to accept that the traditional concepts of banking services will be fluid as more businesses offer services only banks used to provide. 

New Revenue Streams 

Embedded financial services will create abundant revenue opportunities for businesses of all kinds. By integrating financial services into current offerings, entire new paths of revenue will be opened. 

In addition, as the services continue to evolve, companies will find new and innovative ways to capitalize on these services to drive revenue and deliver unbeatable value to their customers.

More Partnerships 

Embedded finance is already driving new corporate partnerships. This is expected to accelerate as more services are made available and more businesses start integrating them into their offerings. 

Businesses that want to stay ahead of the curve should remain open to partnering with the right companies to provide value and rewards for their customers. 

Greater Competition 

In many ways, the true potential of embedded finance is uncharted territory. Not only will more businesses begin offering these services and driving competition amongst themselves, but these services will begin competing with banks too. 

For example, Shopify Balance is already encouraging businesses to forgo the traditional business bank account and bank through Shopify. Banks and other financial institutions must be open to innovation to remain competitive. 

Final Thoughts 

Embedded finance is exciting and provides ample opportunities for businesses to take advantage of. If you want to learn more about embedded finance or FinTech, reach out to an experienced FinTech development partner like Koombea

Girl With Glasses

Want to Build an App?

Request a free app consultation with one of our experts

Contact Us