What is embedded finance?
Embedded finance is the process of incorporating a financial digital product in a nonfinancial digital platform. This provides customer seamless, frictionless  access to payment, lending, and insurance from non-traditional service providing digital platform. It is a B2B2C model.

Real-life examples of embedded finance:

• Credit or debit card information on file provides end to end experience to Uber and Lyft users.
• With Google Maps, users can find participating street parking near their destination and pay for it from the application using already integrated Google Pay. It provides frictionless experience in paying the parking fees.
• Travel insurance while booking flight tickets or phone breakage insurance while buying a phone.
• Zaggle with its new platform called Zoyar in partnership with banks provides credit cards to corporates for financing their business spends

Players:

• Consumer: Anyone who wants to purchase goods, services from the non-financial platform.
• Non-financial platform: They provide aggregation of services across different service providers, there by building the interconnected, unified, seamless experience to customer. It embeds financial products in their platforms and make it available to it end consumers.
• Tech Enablers: Provides the required infrastructure, APIs.
• Regulators: Provides funds, risk framework, place to stage the deposits etc. They are the one who will device the financial products, provides compliance frameworks etc.

Challenges:

• Data privacy: With huge customer data transfer, data privacy will be concern and will need adequate risk mitigation procedures. Certifications like ISO 27001 are used to guarantee this.
• User Experience: Building the seamless, non-disjointed experience will be a challenge.
• Ownership of regulatory violations: In case of any event, there should not be any ambiguity on who own the responsibility about regulatory violation.
• Operational and cyber resilience.

Major Embedded Financial Services:

• Payments: Moves money from non-financial (e.g., E-Commerce Platform) to product owners.
• Lending: Provides instant access to credit from a point of sale (POS) either through the merchant or an integrated third party.
• Banking: Provides banking products e.g., debit cards and checking accounts embedded into non-financial areas e.g., e-commerce platforms or retail outlet.
• Insurance: Insurer provides the insurance product while purchasing the non-financial product. User buys both i.e. insurance and non-financial product on the same digital platform.
• Investment: Provides way to invest by providing the investment products in their ongoing business journey.

Driving forces:

The two major factors which are driving the embedded finance adoptions are favorable regulatory changes as well as the digital maturity of the platforms.

 1. Favorable regulatory  changes :

• PSD2 in Europe introduced open banking regulations, requiring banks to provide secure access to customer data through APIs. This has led to fintech companies like Tink and Plaid integrating banking and payment services into their platforms.
• The Open Banking Implementation Entity (OBIE) in the UK drives open banking adoption by setting technical and security standards for APIs and promoting collaboration between banks and third-party providers. Open banking platforms like Yolt, Moneyhub, and TrueLayer allow consumers to aggregate accounts, access transaction data, and initiate payments across multiple banks.
• The UK’s FCA Sandbox allows fintech companies to test innovative financial products and services, supporting embedded finance growth. Regulation D changes in the US have expanded access to investment services, democratizing access and making them more accessible.
• Australia’s Consumer Data Right framework, including open banking regulations, allows third-party providers to access banking data with consumer consent, facilitating the development of embedded finance solutions.
•  Regulation D changes in the US have expanded investment services access, democratizing access to investment products. Australia’s Consumer Data Right framework allows third-party providers to access banking data with consumer consent, enabling embedded finance solutions.
• Singapore’s Monetary Authority promotes open banking and API-driven innovation in the financial sector, enabling financial institutions to provide third-party APIs. Singapore-based companies like Grab and InstaReM integrate financial services and payments into their platforms.

2. Digital Maturity: 

In recent years, we have seen digital maturity across all digital platforms. Here are few important ones:

• Digital Adoption Rate: The rate at which users are adopting and engaging with a digital platform can reflect its digital maturity.
• User Experience (UX) Design: The quality of user experience design on a digital platform can indicate digital maturity.
• Mobile Responsiveness: In the mobile-centric era, a platform’s responsiveness and optimization for mobile devices are crucial indicators of digital maturity.
• A mobile-responsive platform that offers a seamless and consistent experience across various devices demonstrates adaptability to evolving user preferences and the ability to cater to a mobile-first audience.
• Innovation and Continuous Improvement: A digitally mature platform shows a commitment to innovation and continuous improvement.

Considering the favorable regulatory  changes with digital maturity, embedded finance is going to change the landscape of how customer is going to do financial transactions.

Market Size:
As per this report (Source: https://www.futuremarketinsights.com/reports/embedded-finance-market) The market is valued at US $ 54.3 billion in 2022 and is likely to reach US $ 284.4 billion by 2032, with CAGR 16.4 %

Conclusion:
This segment is going to grow with customer literacy and innovation in this space. Embedded finance benefits both businesses and consumers. Consumers now have better and more accessible access to financial services, while businesses also have additional options for expansion and new revenue sources.