Victors are already arising in the race to provide banking and payments stack for embedded finance. However, incumbents and new entrants still have time to declare a share of this dynamic market.
Small business startups may never interact with banking. In their eCommerce or accounting platform, they can open a deposit account and order a debit card to meet most of their financing needs. Usually, Banks are not the operators of these platforms. They are software companies that partner with banks and technology providers to embed financial products into a seamless and easy-to-use customer experience. This new form of partnership underpins the embedded finance revolution. Payments have been one of the first use cases of embedded finance, and embedded finance providers arise from the payments industry.
What is Embedded Finance?
Placing a financial product in a non-financial customer experience is embedded finance. For a few decades, nonbanking companies offered financial services via private-label credit cards at retail chains, supermarkets, and airlines. The next generation of embedded finance seems powerful because of the digitization of financial products that users interact with daily. It includes customer loyalty apps, digital wallets, accounting software, and shopping cart platforms.
Financial services become a natural extension of a non-financial experience, such as shopping online, scheduling employees to work shifts, or managing inventory. This more deeply embedded form of embedded finance is what has grown so significantly in recent years. The digitization of commerce and business management has massively expanded opportunities to embed finance in non-financial customer experiences.
Embedded Finance Distributors and Products They Offer
Embedded finance is likely to appear in any environment where a critical mass of end customers has frequent digital interactions. The digital platform operator, which we refer to as the distributor of embedded finance. Retailers, business-software firms, online marketplaces, platforms, telecom companies, and original equipment manufacturers offer embedded finance. All these categories have seen high levels of activity in embedded finance during the past year or two.
Distributors and their end customer demand are already maturing for payment, deposit, issuing, and lending. The embedded finance product portfolio will likely expand as customer onboarding, and real-time risk analytics and services grow more sophisticated.
Who are the enablers of embedded finance?
The distributors of embedded finance rely on two sets of providers. The first one is technology providers who are fintechs. They provide the platform through which distributors can access, customize, and offer embedded-finance products.
The second one is balance sheet providers, responsible for manufacturing embedded finance products, providing risk and compliance services, and offering access to funds for lending and deposit products.
A few fintechs like QisstPay built their technology layer on top of their own balance sheet. They provide embedded finance to distributors such as retailers, business-software providers, marketplaces, and OEMs by themselves, with no need for additional partnerships.