How embedded finance is transforming the fintech industry?

The outbreak of the pandemic provoked each and every other business to embrace the resilient approach and accelerate their digitization strategies like never before. As anticipated, it pushed organizations over the technology tipping point and transformed businesses forever. As we further head towards the future, the adoption of digital technologies appears to be here for the long haul. And digitization in the fintech sector is one of the most notable examples. By integrating financial mechanisms into overall business strategy, traditional businesses are engaging finance on an entirely new level. It can be said that the era of “embedded finance” is beginning to have an impact as according to a report by Barclays, the embedded finance revenues are estimated to reach $140.8 billion by 2025, which were nearly $16.1 billion last year. On a deeper and bigger scale, embedded finance really spurs major innovation; hence, it seems to be the future and not just any financial fad.

What is embedded finance?
The amalgamation of a non-financial service provider with a finance service is known as embedded finance. Without having to redirect users to third-party websites, it permits any sort of organization to incorporate banking software directly into its websites or mobile applications as another service within their range of services with the assistance of BaaS (Bank-as-a-Service). Therefore, for online purchasing, it suggests the option of paying in installments as well as offers insurance and allows to instantly take out a consumer loan on digital platforms outside banks, among other options. Moreover, a firm can easily integrate payments on its website so that the customers don’t need to feed in their bank details for every other transaction.
In simple terms, embedded finance is the utilization of monetary instruments or services like loans, payment processing, or insurance, and more, by a non-financial provider. For instance, an electrical shop that offers point-of-service insurance for products sold in the outlet. Offering these services, until recently needed sizeable investment in resources, time and technological progress. However, owing to API (Application Programming Interface), these integrations are much easier now. APIs are known as sets of instructions that link two bits of programming to one another to facilitate the exchange of messages or data. It’s a framework that acts as a gateway between organizations, consumers and financial institutions such as banks.

How is it transforming the fintech sector?
Embedded finance is driving organizations to definitely change the manner in which they direct their business, and fintech firms play a pivotal role in the distribution of financial services. If businesses wish to stay dominant in the market, they must leverage embedded finance infrastructure. As a result, the financial institutions, be it banks or fintech players, will enjoy better margins, thereby transforming the sector for the better. Let’s explore further to know more:

Access to a large customer base: Financial institutions can access different borrower pools that have explicit qualities. They do so by utilizing the distribution dissemination abilities of businesses that have embedded finance. For instance, a B2B e-commerce platform is connected with numerous small businesses. By offering financial solutions to vendors on the e-commerce platform, financial institutions can take advantage of this network.

Profitable business: Financial institutions increase their margins and reduce costs for end-users i.e., customers through enhanced underwriting and efficient loan lifecycle management. While driving repeat transactions, they can also acquire more clients at a lesser expense all the more proficiently. This enhances their margins, which implies they can offer similar financial products to the customers at an optimized cost.

Rise of new fintech players: To give access to bank accounts, payments, and lending; the several fintech firms set up every year require banking partners. Big tech organizations and other nonbanking players can provide financial services, however, can’t become banks themselves in many markets, where the regulatory bar for doing so is high. Consequently, Banking-as-a-Service (BaaS) seems to be the only viable means for fintech players to provide embedded finance to the end-users. These players require regulatory support and balance sheet or other funding sources combined with end-to-end BaaS infrastructure solutions to serve their large customer bases.

The bottom line
In the world of ever-evolving technologies, embedded finance is, certainly, going to persist because of its customizable nature. It will bring about new opportunities and diminish the gap between various industries and their interactions. Organizations should be available to work together to construct a greater market, endure, and stay ahead of the competition. Software solutions providers and fintech firms play a critical part in enhancing the overall landscape of financial services. Hence, it can be said that embedded finance is the bridge between cutting-edge technologies and the financial industry to speed up cycles of exchanges past borders. Fintech organizations have begun embracing embedded finance to drive revenue in the tech-driven future with high end-user engagement.