Complete Guide to Embedded Finance

Updated on May 15, 2023

At a Glance: Embedded finance is a current reality that involves integrating financial services into non-financial services to create new revenue streams and engage customers in innovative ways. It simplifies the process of offering fintech solutions to users and allows businesses to utilize APIs to embed and white-label market-ready fintech services in a matter of weeks. There are three main areas of embedded finance: embedded credit, embedded insurance, and embedded payments. The pillars of the embedded ecosystem include banks and other financial institutions and embedded finance infrastructure companies. Benefits of embedded finance include point-of-service lending, buy now pay later, access to more customers, standing out from the competition, and access to affordable services.

Embedded finance is not a futuristic concept, but a current reality. From Zillow offering mortgages to its users to Target providing a Target Red Card, various companies are using Banking-as-a-Service solutions like embedded finance to create new revenue streams and engage customers in innovative ways. But what exactly is embedded finance? Keep reading to find out.

What Is Embedded Finance?

Embedded lending or finance involves integrating financial services into traditionally non-financial services. Companies offering embedded finance solutions have two main objectives: 

  1. to provide their users with easier access to financial services;  and 
  2. to create an additional diversified revenue stream. 

Prior to this, businesses had to allocate significant resources such as legal, compliance, development, and product efforts internally if they wanted to offer financial services. This often resulted in financial products taking several years to launch. However, with embedded finance, this is no longer the case. Companies seeking to provide fintech solutions to their users can now utilize APIs to embed and white-label market-ready fintech services in a matter of weeks, rather than quarters.

Embedded Finance Examples

Having an understanding of the various forms of embedded finance can be beneficial in integrating them into your business. There are three main areas of embedded finance:

  1. Embedded credit
  2. Embedded insurance
  3. Embedded Payments

Let’s take a look at each of these in more detail. 

Embedded Credit

Embedded credit involves integrating credit products into a non-financial digital platform, allowing customers to apply for and obtain loans through the platform. An excellent illustration of this is when a customer wants to purchase a mattress from Casper, they can opt to convert their purchase into Easy Monthly Installments (EMI) during checkout, without having to navigate away from the website.

Embedded Insurance

Embedded insurance entails bundling insurance with the purchase of a product or service. Embedded insurance companies provide transactional technologies and APIs to integrate insurance solutions with websites, mobile apps, and other ecosystems. An instance of a company that provides embedded insurance is Tesla, which offers auto insurance as part of in-showroom or online point-of-sale purchases.

Embedded Payments

In order to simplify payment flow, numerous businesses opt to incorporate embedded payments within their platforms or apps. Nowadays, embedded payments are utilized by any e-commerce application or SaaS platform. This form of embedded service was the earliest to be added to non-financial companies.

Embedded payments enable various functionalities, such as payroll automation software, in-game purchases for video games, e-wallet integration for e-commerce applications, and other features. In certain embedded payment systems, it is also feasible to pay in installments.

Pillars of the Embedded Ecosystem

Rewrite without losing meaning: Various institutions allow embedded solutions, making sure users get financial solutions whenever they need them. The pillars of the embedded ecosystem include:

  • Banks and other financial institutions
  • Embedded finance infrastructure companies

Each pillar operates in its own unique way. 

Banks and Other Financial Institutions

Financial services, as well as compliance, credit, and regulatory risk management, are provided by banks, small finance banks, and a small group of state-licensed fintech companies.

Embedded Finance Infrastructure Companies

Fintech firms develop SDKs and APIs that facilitate the connection between financial institutions and digital platforms. With SDKs, web or mobile applications can swiftly and effortlessly incorporate various features.

Regarding embedded finance, the entire loan journey is integrated into the application or platform, including services such as customer servicing, alternate data underwriting engines, and loan lifecycle UI.

Benefits of Embedded Finance

Rewrite without losing meaning: Embedded finance represents the future, so it’s very important to integrate it if you want your company to thrive. Here are some benefits of embedded finance:

  • Point-of-Service lending
  • Buy Now, Pay Later (BNPL)
  • Access to more customers
  • Differentiation
  • Access to affordable services

We’ll take a closer look at each of these benefits below. 

  • Point-of-Service Lending – Integrated lending transforms the nature of loans. Point-of-service lending will enable businesses to finance more substantial or larger purchases.
  • Buy Now, Pay Later – Some purchasers are unable to pay for their purchases right away, resulting in the use of high-interest credit cards or waiting for several weeks/months to accumulate funds. The availability of “buy now, pay later” (BNPL) solutions such as Affirm, enables contemporary shoppers to obtain what they desire without having to pay the full amount upfront, offering users added flexibility without ever having to leave their shopping cart.
  • Access to More Customers – By expanding their customer pools, financial institutions can boost their margins.
  • Standing Out From the Competition – Incorporating financial services enables businesses to scale their platform and enhance their product offerings, thereby gaining an advantage over competitors.
  • Access to Affordable Services – Rewrite without losing meaning: Customers gain access to more affordable financial services and can enjoy a better customer experience overall.

Final Thoughts

Embedded finance is rapidly transforming the financial landscape, enabling businesses to integrate financial services into non-financial digital platforms. With embedded finance, customers can access a variety of financial services with ease, and businesses can expand their customer pools and create new revenue streams. Point-of-service lending, BNPL, and access to affordable services are some of the benefits that embedded finance offers to businesses and customers alike. 

By embracing this innovative approach to finance, businesses can differentiate themselves from the competition and provide a better overall customer experience. The pillars of the embedded ecosystem, including banks, financial institutions, and embedded finance infrastructure companies, will continue to play a crucial role in facilitating the growth of embedded finance in the years to come.

Read Next: How Fintech is Revolutionizing B2B Payments >>

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.