Embedded Finance: What Is It and How Does it Work?
If you operate a business, you may have encountered embedded finance. This term typically refers to financial services that are offered or used by non-financial companies. In this article, we’ll explain what embedded finance is and how it is used in various situations.
The Meaning of Embedded Finance
The term “embedded finance” generally describes financial products that are offered by a business. These services may include banking, insurance, lending, and payment products.
Often, embedded financial services are offered and used by non-financial companies, such as e-commerce stores, services that rely on mobile apps, and other online businesses.
However, some types of embedded finance are offered by financial companies that typically do not provide specific financial services. For example, a payment processor may offer loans, banking, and investments through a suite of embedded financial services.
As such, “embedded finance” can apply to a fairly broad range of services, but the term generally refers to financial services that are available outside of their usual area — and often in partnership with a third-party or external financial service.
How Embedded Finance Works
Above, we explained embedded finance works in a general sense. However, there are some variations in how embedded finance works across different types of businesses.
Companies may create and provide their own embedded financial services, partner with another company to provide those services, or rely upon an entirely outsourced suite of embedded financial services. But generally, embedded financial services are linked to some external source of funds so that customers can make payments quickly and seamlessly.
Not every instance of embedded finance is retail-oriented. Embedded finance may be used privately by a business and some of its clients. Embedded accounting and bookkeeping, for example, are primarily intended for businesses rather than general uses.
Regardless, most instances of embedded finance involve a company offering an array of financial services that would otherwise not be available through that company.
Is embedded finance changing businesses and the financial world?
Embedded finance is changing the way that businesses provide services while simultaneously giving customers new ways to access those services.
The growth of embedded finance is the result of businesses integrating their activities with smartphones, mobile devices, and the internet. Widespread adoption of these digital technologies has greatly contributed to the rise of embedded finance.
Because embedded finance shifts financial activities to non-financial platforms, it has also drawn transactions and usership away from traditional institutions such as banks.
These trends are reshaping the worlds of business and finance alike. Because customers and businesses are increasingly engaging with one another online, embedded finance is more commonplace than it ever has been before.
Embedded Finance Examples
Many types of financial services can be offered through embedded finance, but there are specific types of embedded finance that are fairly common.
For example, some businesses might make use of embedded finance to provide a payment option that allows customers to pay with credit rather than cash. Or, customers that sell high-value products might provide insurance as part of each sale that they make. Either type of embedded finance may rely on a connection to outside financial services.
Other specific examples of embedded finance include “buy now pay later” services, banking apps in ridesharing platforms, integrated payment processing on e-commerce platforms, and insurance products that are offered through travel sites and services.
Embedded finance may also be used to handle in-game video game purchases, app store payments, subscription payments, and other types of digital payments.
What financial services can be embedded?
Though embedded finance can potentially work with any aspect of finance, the following categories of financial services are very common:
Embedded payments allow customers to make seamless payments within an app or service. Typically, this feature is part of e-commerce stores, app and game stores, and mobile and web-based services where users frequently need to draw funds from an external account.
In other words, embedded payments allow companies to access a variety of user payment sources without needing to direct users elsewhere. With embedded payments, businesses can draw user funds from multiple connected sources quickly and affordably.
The rideshare platform Uber, for instance, is commonly cited as an example of embedded payments due to its acceptance of a wide variety of payment types.
Embedded Banking, Digital Banking Solutions, and Virtual Wallets
Embedded banking is seen when companies provide financial accounts and bank-like services. One way that this feature can be provided is through virtual wallets and IBANs.
Payset, for example, offers virtual IBAN accounts. This allows users to send and receive multiple foreign currencies and transact over several international payment networks.
In other words, companies can use embedded finance to offer services that allow users to store, spend, and receive money — all without the need for the company in question to take on the task of operating as a full-featured bank.
Non-financial businesses may offer embedded lending, which allows customers to obtain a loan as they make their purchase.
This type of lending allows businesses to accept payment without waiting for customers to obtain a loan. Likewise, it allows customers to buy what they need without applying for a loan at an external bank. Ultimately, this lending model makes the relevant transaction faster and easier for businesses and customers alike.
Embedded lending has some overlap with “buy now, pay later” (BNPL) services. Klarna is one notable service that makes use of an embedded lending and BNPL model.
Not all embedded lending is aimed at customers. Amazon, for example, has partnered with Parafin to offer cash advances to merchants that sell on its marketplace.
Embedded insurance is a term that describes products and services where insurance is included in the cost of the purchase.
Auto companies, including Tesla and BMW, have provided this type of insurance on vehicle purchases. However, this feature is not limited to the auto industry: the ski and snowboard pass provider Ikon, for example, has included injury insurance with ski pass sales.
Typically, companies work with external insurance providers to provide this feature.
Embedded Accounting and Bookkeeping
Embedded accounting applications gather customer financial data from multiple sources, allowing businesses to quickly view data, manage vendors, and produce reports.
With embedded accounting, customers do not need to manually gather and assemble data from different sources. This approach can save plenty of time and money.
Embedded billing is also related to this category of embedded finance. The e-commerce platform Shopify has recently integrated tools from Melio, giving business users a way to pay and manage their bills directly from the platform’s administrative tools.
Embedded Credit Scoring and Credit Monitoring
Embedded credit scoring allows companies to quickly and easily assess their customers’ credit scores based on data from existing sources.
With this ability, companies can quickly check and approve qualifying customers for services while avoiding delays that are otherwise related to credit scoring. As a result, users can gain approval and get access to the service that they need as quickly as possible.
Investment and Wealth Management
Embedded investment services provide users with investment opportunities, typically within a larger financial application. This type of service is usually offered in partnership with another brokerage or investment management firm.
The China-based payment app Alipay, for example, has offered investment management and advice in partnership with the U.S.-based investment advisor Vanguard.
Benefits of Embedded Finance
Embedded finance carries numerous benefits for businesses and customers alike. Below are some of the ways that you might be able to take advantage of embedded finance.
Benefits for Business Owners
Embedded finance has numerous benefits for businesses, including:
- Streamlined or “frictionless” payments: Embedded finance may help your business accept payments and handle transactions in a simplified way
- Competition: Because embedded finance offers users a variety of options, it can make your company more attractive than competing services
- Support for payment types: With embedded finance, you are not restricted to traditional payment methods; instead, you can allow customers and clients to pay by card, credit, or loaned funds
- Driving growth: Embedded finance may help you operate on a larger scale by increasing your ability to manage payments; it may also attract new customers if you are able to market the appeal of streamlined payments
- Consumer satisfaction: Customers may be satisfied by a wider variety of financial products at your business; this can help you retain customers as well
- Greater income and reduced costs: Embedded finance can help businesses bring in greater profits, reduce costs, and find new revenue sources
- Data management: Embedded finance will give you more control over your financial data, assuming that your embedded finance services handle data in a useful way
Benefits for Users
Customers and clients also stand to gain when a business offers access to services powered by embedded finance. Benefits to users include:
- Convenience: When a company offers embedded finance services, its users gain access to a greater number of payment and financial options
- Better security: User data may be more secure under embedded finance models, as users need to sign up for fewer financial services; users may also need to manage their own security less thoroughly than they would with traditional finance
- Financial inclusion: Embedded finance offers services that customers may not be able to find elsewhere, meaning that users can take advantage of more opportunities
- Improved experience: Customers may report greater satisfaction if they are given more options through which they can make a payment
Use Cases of Embedded Finance
Embedded finance can be used in several specific applications. For example:
- Request-to-Pay (R2P): R2P allows businesses to send bills and electronic payment requests through existing payment methods quickly and inexpensively
- Purchase order and invoice financing: Embedded finance can help you carry out various business transactions in a straightforward way
- Buy now, pay later (BNPL): Embedded finance can allow customers to make BNPL purchases (ie. instalment payments without interest)
- Virtual accounts and IBANs: Businesses can use virtual accounts to handle customer funds together and add integration with other platforms
- B2B applications: Embedded finance can power transactions between businesses
- QR code purchases: Some embedded finance options offer support for QR code payments, allowing integration with mobile financial apps
- On-site and in-app credit: Embedded finance tools can allow companies to provide user credit alongside other regular payment options
The Future of Embedded Finance
Embedded finance is rapidly gaining importance. Business and commerce is increasingly conducted online, and companies and customers alike have turned to digital payments.
The size of the embedded finance industry is on the rise. June 2023 data from Reportlinker suggests that the embedded finance market could reach $384.8 billion by 2029.
Banking and traditional finance, meanwhile, are a multi-trillion dollar industry. Though traditional finance will undoubtedly remain dominant, some traditional banks and institutions will likely integrate with, or directly offer, embedded finance services.
In short, the growth of embedded finance could result in less direct reliance on the traditional finance sector. But embedded finance also involves an interconnected system of financial services that will co-exist with older financial systems.
Frequently asked questions
What is a multi-currency account/virtual IBAN?
A Payset multi-currency account allows you to receive money in 34 different currencies and send money in up to 38 currencies, all within the same account.
You can deposit and withdraw funds, convert currencies at competitive exchange rates, and hold your chosen currencies to capitalize on market movements.
A Payset multi-currency account allows startups and business owners to receive payments from clients virtually anywhere in the world and pay suppliers, staff, and contractors quickly and affordably in their chosen currency.
- Funds can be deposited and withdrawn from the account for a small fee.
- Account holders can send and receive money with other Payset users for free.
- Depending on your region, you can use various payment networks from your Payset account, including SWIFT, SEPA, ACH, Fedwire, Faster Payments, BACS, and CHAPS.
- Once you register an account, you will be provided with a Virtual IBAN (International Bank Account Number), which makes all of these transfers easy.
- We provide you with local payments and collections. For example, transactions in USD, EUR, CAD, and GBP are processed through the local payment networks, which is far cheaper and takes minutes as opposed to days
Are there limits on the amount of money I can send and receive?
No, there are no transaction limits on Payset multi-currency accounts.
However, higher-volume transactions may require additional anti-fraud verification. If you plan to make a large transaction, contact us in advance to avoid verification delays.
How is Payset regulated?
Payset allows you to receive payments in 34 currencies. You can send payments from your account in 38 currencies. For more details, check our payment guide.
How do I add money to my account?
How do I send money from my account?
Once you have opened your verified IBAN account and added money to a balance, transferring funds is simple.
Simply log in into your account and add a beneficiary, then simply “make a transfer” in your preferred currency to that beneficiary.
Types of Multi-Currency Accounts
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