Opening doors with embedded finance

Pavlo Khropatyy, Senior Delivery Director, Head of Financial Services and Insurance at Intellias

 

Financial services used to be a “private members club”, however, the rise of Fintechs, open banking, and the API economy has stripped this layer of “exclusivity” from the finance space. Just as cloud computing democratised digital product distribution, embedded finance enables non-financial brands to make payments, lending, and insurance offerings part of their product portfolio, argues Pavlo Khropatyy, Senior Delivery Director, Head of Financial Services and Insurance at Intellias.

Until recently, most businesses relied on complex legacy financial systems, located and managed in-house. This approach was slow to change and adapt as well as costly to maintain. On the other hand, companies might be locked into an expensive financial outsourcing contract with a third party. However, the past few years have witnessed the rise of a new type of approach to finance: embedded finance.

At its simplest, embedded finance sees non-finance sector companies use tools and services, such as payment processing or point-of-service insurance. This approach dramatically reduces the barrier to entry because, rather than building and maintaining a complicated internal infrastructure, non-finance brands can invest in off-the-shelf blocks from other industry leaders. At the same time, modern IT platforms enable fintechs and banks to distribute their own core products as an embedded service.

APIs drive the revolution

At the heart of this brave new world of finance are application programming interfaces (APIs): essentially lego-like building blocks, each of which serves a different purpose and all of which can be interconnected. So, companies don’t need to develop new financial products from scratch; instead, they select the functionality they need. Each API encapsulates a set of features and enables the exchange of data between the business and the financial platform. Thus, it becomes easy to integrate payments deep within your own app or website. Furthermore, with a low barrier to entry, and minimal integration and maintenance costs, APIs help companies of all sizes reduce their time to market considerably.

The impact of Open Banking

Consumer financial data used to be the domain of the established big banks, making it difficult and costly to share that information with third parties. Instead, Open Banking drastically reduces the amount of red tape non-financial businesses need to deal with to access this data and exchange it with other players. The principles underlying Open Banking expand the perimeter of financial data to new participants, with standardised best practices for embedding API-based financial services and applications. The advent of Open Banking, in tandem with the rise of APIs, has thus enabled non-technology companies to tap into vast economies of scale, growing more profitable with the assistance of ecosystem partners.

A great example of this can be seen in Google’s business model. What began as a smart web search engine, now spans multiple profit centres, from cloud computing to finance and advertising. Google Pay is a perfect example of an embedded finance solution, trusted by millions of businesses and consumers worldwide to enable payments. It also allows users to send money and offer 0% APR financing for some purchases. Despite this, Google isn’t a finance company in the traditional sense. Rather, it is leveraging its existing product ecosystem, deep customer insight and strategic partnerships to extend its reach into new markets.

This is how embedded finance can be effectively used to help brands from other industries outside the financial sector to form their own ecosystem or join existing ones to grow more profitable by collectively using each other’s power as a force multiplier. So, an online retailer might use their own proprietary customer data to calculate the value, return rates and risk profiles, and then use an API to create personalised lending offers. This produces improved margins on the embedded finance solutions and inspires the creation of new financing options.

What can embedded finance do for me?

The transition to embedded finance ecosystems delivers multiple benefits as noted above, however, we can sum up the key advantages as follows:

Lower product/services development costs: much of the work has already been done by third parties and is available as APIs, so it can literally be as simple as plug-and-play.

Faster expansion to new markets: this approach reduces time to market by slashing development times, enabling an agile approach to growth.

Horizontal product portfolio growth at high speed: companies are encouraged to explore beyond their traditional boundaries with access to new markets and services.

Lower customer acquisition costs and improved customer retention: customer acquisition costs can be burdensome. Embedded finance makes it easier to attract new customers via new products and an easy-to-use ecosystem that encourages retention.

Ultimately, embedded finance can help you to diversify revenues through cross-selling and up-selling new services; increase conversion rates by offering contextually relevant financing options at the point of sale; minimise operating costs by taking ownership of the payment platform, and enhance the customer experience by integrating the payment experience more deeply into your existing ecosystem. Now is the time to put embedded finance at the heart of your payment infrastructure and embrace the many opportunities it has to offer.

spot_img

Explore more