What is Embedded Finance?
Embedded finance is everywhere these days. If you have ever initiated the purchase of an item from a store or website only to be offered the opportunity to split payments up or to purchase an extended warranty, that’s embedded finance. In other words, it’s when a non-financial organization offers financial products and services to its customers as an enticement to make purchases more affordable over time.
From the outside, many consumers might make the assumption that their local big box retailer offers financing, but this is actually an add-on service where the retailer partners with a financial institution to offer these services. Ultimately, embedded finance and embedded banking services are designed to remove obstacles to purchase and streamline transactions that people might not otherwise make due to the high cost.
The idea of embedded finance is not new, but the rise of embedded fintech and digital tools such as the ones created by Envestnet | Yodlee have made it more accessible to consumers across the globe, whether at point of sale or in the comfort of their own homes. This seamless user experience has led to growth in embedded finance for financial institutions everywhere.
How Does Embedded Finance Work?
Embedded finance helps serve firms looking to take advantage of tools and services available to them to optimize client experience during the checkout process or at times of inconsistent engagement by pairing these tools around lending. The simplest example of this type of embedded lending is the “buy now, pay later” concept used by department stores, big box retailers and the like.
Other examples include embedded payments (using digital forms of payment as opposed to cash or physical transactions), as well as embedded financial wellness services. Embedded banking services offer budget and cash-flow tools such as mobile banking for consumers to track their spending and break it down into granular categories to see where their money is being spent. This not only informs consumers, but also keeps them engaged.
Until recently, this was difficult to achieve. Often, consumers would use their credit cards to make payments, but that locked them into one type of financing (i.e. through their bank at whatever rates and payment schedules they’d previously agreed upon). Offering additional credit to buyers has vastly expanded consumer options. With so many tools at the disposal of lenders and consumers, the idea to increase the free flow of credit and encourage more purchases by making them more affordable over time has paid off.
Yet another example involves companies extending credit to their employees, as Uber recently did when it offered debit cards to drivers which allowed them to earn cashback on fuel and other vehicle-related purchases. This has proven to be an excellent path to new revenue streams and is easy to embed.
What are The Benefits of Embedded Banking?
From a business standpoint, embedded finance and embedded banking serve as revenue opportunities, but they also offer new and different ways to engage users. From the standpoint of the user, it removes the friction of the purchasing experience by offering new services and features to take advantage of.
To quickly differentiate between embedded finance and embedded banking, the former is more of an umbrella concept that includes lending, working with financial advisors as well as lenders and brokerages, while the latter has to do more with the everyday transactions of the banking experience.
What is Banking as a Service (BaaS)?
Banking-as-a-Service allows financial institutions to open their services up to third-party APIs with the aim of creating new services to better serve existing customers and to attract new ones.
Examples of BaaS include credit card rewards programs that pay cash back on certain types of purchases, or airline rewards programs that serve up discounted — and even free — flights to those who travel frequently. A major advantage of this approach is that it encourages customer loyalty in a fiercely-competitive landscape. Fintechs are largely responsible for these features and it is an avenue they need to pursue in order to stay competitive.
Get Started With Envestnet | Yodlee
As financial services become a part of the stack for non-bank tech companies worldwide, we recognize that building a FinTech product from scratch can be an uphill battle. We’ve partnered with Productfy to deliver embedded finance solutions into your next big idea.
Enhancing Embedded Finance Processes
Envestnet | Yodlee can embed aggregation, banking, finance and wealth management tools through Harvest, Wellness App, IAV, Transaction Data Enrichment and AbeAi. Get more insights in the importance of embedded finance in our recent embedded finance webinar.
Envestnet | Yodlee is also deeply experienced in enhancing banking as a service. As independent financial data aggregators for financial institutions, wealth management firms, FinTech and other innovators, we provide a trusted and secure open ecosystem by offering responsible access to consumer-permissioned data. Learn more on our Open Banking page.