Fintech Focus: Fintech Focus: Why Embedded Finance is Becoming Popular
In the near future, both consumers and businesses will be spoiled for choice as some of the financial services that have hitherto been exclusively reserved for banks and other traditional financial institutions are released. The buzzword is “embedded finance”, and together with its equally famous cousin, open banking, the next phase of the fintech disruption goes beyond just enabling payments to transform how people and businesses access credit, insurance and a host of other financial services. Here’s why.
Embedded Finance is actually an umbrella term that covers a lot, and some of them you may already be familiar with. It is about “integrating financial services such as payments, lending and insurance that are usually offered by banks or other financial institutions into non-financial platforms,” explains Stella Elele, product manager at Flutterwave. “So it’s about customer-facing platforms such as an Uber or a Wakanow, which can meet a customer’s different needs in the right form at the right time by building financial services into their channels for customers,” she says.
By adding financial services to its core product offerings, Elele says companies can enable their customers to access financial services as part of a user journey customers are already familiar with. For example, a customer who buys travel tickets to Dubai at the popular online travel agency Wakanow may need travel insurance, or she may not be able to pay for the trip right away. Wakanow can build in a credit program that allows the customer to lock the desired travel agreement by giving credit to the customer at the time of purchase.
The Wakanow example may be dramatic, but the truth is that embedded finance is actually more common than people think. If you have ever made payments in the app when you took an Uber or while buying food through Jumia Food, you have already interacted with built-in finances in practice.
But this simple utility case for embedded economy is left behind. Built-in finance is now expanding beyond just creating more convenient payment experiences to bring services such as insurance, lending and investment within reach of consumers and businesses in some of the most non-financial products. A good example of this solution package is the buy-now-pay-later concept which is popular among e-commerce companies.
Why?
The appeal of embedding financial services everywhere
Now that we’ve cleaned up what a built – in economy is, we can deal with why it’s so appealing.
An obvious reason is that bundling various services that would previously take the customer time and perhaps even money to access, simplifies the shopping experience. Consumer expectations have changed. They want to be served. Bringing credit, insurance and payments into one user flow is a great way to meet these expectations. Says Lizanne Correa-DSouza, Flutterwave’s VP of Products, “People are not going to go into a bank anymore to ask for a loan … They are used to being able to make all the life decisions on the phone and what it does is get ancillary services such as financial services to access them in the form of embedded finance. ” Because people are more digitally focused and stay in touch via mobile platforms, service providers have to bring even more services closer.
In addition to this, the fintech movement has come of age. Simply put, payment processing, while still important, is only part of the pie of financial services. And established players in the broader financial services industry continue to keep up with both technology and changing demands from consumers. The emergence of disruptive neo-banks and challenger banks illustrates this gap. If people do not want to stand in line in a bank hall for hours to gain access to short-term credit for their small business or buy an item that can improve their quality of life, why lose money trying to earn them? “This lack of access is now being met by several players in the fintech industry who are trying to close the gaps in helping consumers access the financial services that they would not normally be able to do through a large corporate banking institution,” he said. Correa-DSouza.
In addition to this, some have predicted that the global built-in finance market will be worth $ 7 trillion by 2030. If this forecast has half a chance to come true, it is a simple matter for fintech brands and challengers or older banks to form partnerships that allow embedded financial services to flourish.
Given the above reasons, it is now clear why everywhere you look, it seems that all other technology companies seem to gather financial services into their core product offering.
The challenge of making financial services available everywhere
Regardless of the amount of embedded financial products from technology companies, large and small, there are still significant challenges for companies that are attracted to it. Correa-DSouza, explains that non-banking units such as Flutterwave do not have the deep experience and historical overview of consumers that banks have. “So we need to get this data about what customer trends are, what credit scoring trends are, and drivers and factors for it from other data sources,” she explains.
Paytech companies like Flutterwave need to understand the economic models around traditional financial services and how they can fit this into a broader strategy. In addition, by taking on banks in their area, companies that enable embedded financial services must now comply with the same regulatory environment that underlies traditional banking.
“As a non-banking company trying to offer embedded financial services, the most important thing is to be very clear and very specific about what regulatory requirements are and how to comply with them,” notes Correa-DSouza. – The regulations in each country are different. You have to know them inside and out, and you have to understand why they exist. “
Flutterwave builds on its success as a payment processor for small and medium-sized sellers to build its built-in financing offer together with its lending partners. “Through our partnerships with other financial institutions, we can offer a wider range of services than one would normally receive from an individual financial institution. So the benefit of being a platform provides [our users] access to more offers on the lending, investment or savings side, “says Correa-DSouza,” We operate mainly as a referral network, and [our users] can then access. In the future, we look to help improve the credit rating and decisions of our lending partners through data and information that we can have and share with the consent of the small business. “
The bottom line is that incorporating financial products (not just payments) into mobile applications that people use is already changing the way people find and use these services – and the pandemic accelerated that. “A bank in my pocket is something that is going to be here to stay,” says Correa-DSouza, “and I do not think consumers will ever go back to the old way of doing things now that they have been in. able to experience a digital mobile-first experience that they see value in, in the form of time-saving simplicity and access. ”
This level of access (and the potential reward) is the promise of building in lending, insurance and asset management – to name a few – everywhere for both consumers and small businesses.
