Embedded Finance: The Future for Software Companies
The rise of Embedded Finance is reshaping the software industry, opening new doors of opportunities and growth.
Embedded finance, an integration of financial services into non-financial platforms, is not a mere trend in the tech world but a revolutionary shift in how businesses approach finance.
This groundbreaking integration provides significant benefits and represents a potential goldmine of opportunities for software companies.
Why Software Companies Need to Start Paying Attention to Embedded Finance
In today's increasingly digital age, the landscape of the financial sector is rapidly changing. Traditional banking, payment methods, and financial services are being redefined and revolutionized by a concept known as embedded finance. Embedded finance has become the latest buzzword in fintech, the strategic frontier for digital innovation. It's time that software companies, irrespective of their industry, take note and explore the potential of this growing market segment.
An Emergent Market
According to Bain's research, embedded finance accounted for about 5% of all US financial transactions in recent years, equivalent to $2.6 trillion. This value is expected to exceed the $7 trillion mark within a few short years. With such potential, it's no wonder that investors and innovators are quickly turning their attention toward this sphere.
Moreover, the pandemic has further accelerated digital transformation across sectors, forcing businesses to reimagine their operations and interactions with customers. As digital ecosystems become more complex, the demand for integrated, seamless experiences is only growing stronger.
Why Should Software Companies Care?
Now, the real question is, why should software companies - regardless of their vertical start paying attention to embedded finance?
Enhance User Experience
Embedding financial services directly into your software platform greatly enhances the user experience. It eliminates the need for users to leave your platform and go to a separate financial service provider. By offering a more holistic digital experience, your users can complete transactions more quickly, leading to increased engagement and satisfaction.
New Revenue Streams
Embedded finance opens up new monetization opportunities for software companies. By incorporating financial services, companies can generate additional revenue through transaction fees, premium features, and partnerships with financial service providers.
Competitive Differentiation
In a fiercely competitive digital landscape, embedding finance could be a unique selling proposition that sets your platform apart. It can create a unique value proposition and help you establish a competitive advantage.
Foster User Loyalty
By offering convenient, integrated financial services, companies can build and foster user loyalty. When users are able to manage their finances within a familiar platform, they are more likely to stick with it. This can lead to increased user retention rates.
Increased Data Insights
Embedded finance can provide companies with valuable insights into user behavior. These insights can then be leveraged to personalize user experience, develop targeted marketing strategies, and inform future product development.
The Way Forward
Embedded finance represents a significant opportunity for software companies to reshape their business models and unlock unprecedented growth. As the lines between technology and finance continue to blur, the companies that embrace this trend will be those that stay ahead in the digital age.
Are Embedded Finance and Banking-as-a-Service (BaaS) the Same?
These two terms have many people scratching their heads. Are they the same jargon in the fintech landscape?
Banking-as-a-Service and embedded finance are closely related. They both have roots in the digital age and fine-tune financial services for businesses and their customers. They are the key reason why companies in different industries can harness the power of modern financial technology.
Despite these similarities, BaaS and embedded finance are different. Let's dive deep into each before revealing their differences.
What is Embedded Finance?
Embedded finance involves nonbank organizations offering banking-like services to retain customers and improve their lifetime value.
Embedded finance integrates financial products into digital interfaces that customers interact with daily, such as customer loyalty apps, accounting software, shopping cart platforms, and digital wallets.
Remember the last time you paid for food delivery services or rideshare through Lyft, Uber, or DoorDash app? Or the last time you paid for fitness and wellness sessions via the Mindbody app?
Payments via these apps perfectly demonstrate embedded finance in action. The apps enable cashless transactions without physically using a credit card by linking nonbank service providers to financial institutions (banks).
End consumers prefer the simplicity and convenience of transacting directly via software they use daily instead of solely depending on traditional banks every time they need to transact. Embedded finance gives them just that.
Other examples of embedded finance are the digital buy-now-pay-later (BNPL) solution on a business website and the insurance option for customers buying a particular product online.
Companies of all sizes and types—logistics companies, insurance providers, software firms, big techs, retailers, insurance providers, and more—want to leverage embedded financial services to streamline how they serve and interact with their audience.
Because of embedded finance, customers can easily access digital financial services via a nonbank digital interface.
What is Banking-as-a-Service (BaaS)?
Banking as a service allows nonbanks to offer bank-like services by connecting to an existing tech infrastructure of a traditional bank. The tech link between the conventional bank and the non-financial company is possible through application programming interfaces (APIs) and webhooks.
Without BaaS, any company that wants to offer financial services would have to become a financial institution. That means obtaining a license and building a stand-alone tech infrastructure to offer financial services.
Because of banking as a service, a nonbank company can offer financial services to customers without starting a banking business or developing a stand-alone banking system. BaaS requires access to a traditional bank's technology using APIs and webhooks.
The Power of Application Programming Interface (API)
API provides the channel for front-end financial solutions that users interact with to communicate with the back-end system. APIs ensure front-end apps and back-end systems understand each other.
In the world of financial technology, APIs allow financial solutions to communicate with existing banking infrastructure. Without APIs, nonbanks would have to develop a stand-alone banking system to offer financial products to their customers.
The Differences Between Embedded Finance and Banking as a Service
Embedded finance and banking as a service are two sides of the same coin. Without the former, the latter wouldn't exist. Let's dive deeper to understand how they differ.
Embedded Finance is front-end, While BaaS is Back-End
Embedded finance focuses on users' access to integrated financial services (e.g., paying for rideshare via nonbank software like Uber and "Buy Now Pay Later" options).
On the other hand, banking as a service focuses on the foundational technology that financial institutions and non-banks depend on to form a partnership and render financial services. (i.e., the APIs and webhooks that connect nonbank digital platforms to an existing banking system).
Embedded Finance Would be Difficult to Exist Without BaaS
Embedded finance is more about customers accessing the financial product. BaaS centers on the background technology that makes embedded finance possible. Without BaaS, it would be a challenge for embedded finance.
Embedded finance can be used in branding, while BaaS can't.
As mentioned earlier, the "Buy Now Pay Later" option in eCommerce is an example of embedded finance. When people buy online, they know exactly the brand providing the option of point-of-sale installment loans.
For example, Affirm is one of Amazon's buy-now-pay-later options. When you use it at checkout, you will know exactly the option to pay later is from Affirm since Amazon will tell you at the time of purchase.
This is not often recognized with BaaS as it's the foundational technology that supports the front-end provider.
Conclusion
Embedded finance offers software companies a myriad of opportunities. From enhancing the customer experience to expanding revenue streams, building deeper customer relationships, gaining a competitive advantage, and promoting financial inclusion, the benefits are immense.
As fintech continues to evolve and disrupt traditional boundaries, software companies must consider the potential advantages of incorporating financial services into their offerings. By embracing embedded finance, they will not only enhance their profitability but also contribute to societal well-being, making this an opportunity not to be missed.
Innovation and adaptability have always been the keys to success in the fast-paced tech industry, and the rise of embedded finance presents an exciting new frontier for software companies ready to explore the benefits and rise to the challenge.