What is Embedded Finance?

Embedded finance has become a major feature of global commerce. In the US alone it accounted for $2.6 trillion, or nearly 5% of total financial transactions in 2021, and by 2026 it will exceed $7 trillion, or over 10% of total US transaction value.

Embedded finance works by integrating software called an API (Application Programming Interface) into a business’s digital sales and accounting systems. APIs provide software compatibility between different computer programmes – typically acting as a medium between a business and a bank. Embedded finance APIs provide access to various financial services that allow businesses to fulfil transactions without the presence of the customer’s bank – as seen when shoppers buy online by entering their credit card details. Embedded finance is most often seen with payments, but it can also manage other financial products, such as loans and foreign exchange.

How Does Embedded Finance Fit into Financial Services and Fintech

Sitting at the crossroads of commerce, banking, and business services, the payments industry has been the biggest beneficiary of embedded finance. Whereas non-cash payments once meant interacting with your bank or writing a cheque, embedded finance has merged financial payments services into the nervous system of everyday life. Often, these are running in the background to maintain permanent access to products and services that consumers use without giving much thought to the way they pay for them – such as gym memberships, subscriptions, streaming media, utilities, telecommunications, and so on.

The creators of embedded finance are not banks, they are fintech companies that partner with banks and other technology providers to embed financial products into a seamless, convenient, and easy-to-use customer experience. The explosive growth of online shopping, digital experiences, and the need for fast access to a myriad of services is driving high demand for embedded finance products. This has made embedded finance the fastest-growing sector in the fintech industry – with global revenues of $54.3 billion in 2022 and forecasts of expansion to $248.8 billion by 2032.

Examples of Embedded Finance and How it is Utilised

Embedded finance is most visible with payments, but it has many other uses, such as allowing an e-commerce merchant to provide insurance, a restaurant app to offer one-click delivery, or a ticketing agency to allocate concert seats on demand.

Let’s take a closer look at embedded finance in action:

Embedded Finance in Lending

Businesses and individuals seeking loans were once restricted to banks and a handful of private lenders. The application process was often slow and opaque, and applicants could sometimes wait weeks for an approval. That is no longer the case. Embedded finance has given rise to a new generation of online lenders who require little formal paperwork, instead using the power of their technology to discern risk, check the applicant’s details, and the application’s ‘fit’ within their lending criteria. In many cases, the applicant will receive an initial approval in seconds, and funds deposited to their bank account within one or two days.

Embedded finance in Banking

Traditional banks were initially slow to rise to the embedded finance challenge, but they are now investing heavily in embedded finance solutions. From partnering with businesses to provide direct payments gateways, to selling loans by finding new distribution opportunities through embedded lending partners, banks are now using new embedded finance tools and strategies to improve their customer service, sell more products, increase revenues, and drive overall demand for financial services.

Embedded Finance in Insurance

Buying insurance used to take an age and required piles of paperwork. Now, buyers only need to enter their details into a comparison website and let the algorithms search for the best policy at the best price. The buyer can select the policy they want from a range of options, sign the agreement, make a payment, and get instant cover without ever leaving their sofa.

Embedded Finance in Payments and Foreign Exchange

The era of open banking – where consumers are able to share their banking details directly with businesses to allow payments to process instantly – has changed the way we pay for the goods and services we need. Without embedded finance and APIs (which utilise the instant access brought by open banking) payments would be slow, as businesses needed to contact banks and credit card companies for authorisation, and funds would typically take three or more business days to clear as they passed through the traditional bank automated clearing system (BACS).

Buying or selling foreign currency was also once an expensive and opaque activity. Banks often provided little to no transparency as to commissions, charges and fluctuating rates. Now, embedded finance has given birth to a new cohort of FX brokers who let buyers and sellers see rates in real-time and compare costs before committing to a transaction. Additionally, many of the hurdles that slowed transfers down and increased risk have been removed, giving clients greater confidence in international payments.

Benefits of Embedded Finance

Embedded finance has revolutionised the world of financial services, benefitting businesses, financial institutions, and users alike:

Embedded Finance Benefits for Businesses

• Alternative source of revenue: Businesses get a share of the income from customers from the financial products (such as insurance) sold on their websites and apps.
• Competitive advantage and customer trustworthiness: Businesses offering financial products like insurance, easy financing, and online payment as extras, and doing so with high transparency, are more attractive to customers than businesses that don’t.

Embedded Finance Benefits for Financial Institutions

• Easier customer acquisition: Embedding their offerings on websites and apps gives financial institutions easy access to a large customer base at minimal cost.
• Relevant collection of data: Financial institutions get access to customer financial data, plus other valuable data like shopping preferences.
• Easier management of consumers: With businesses running the websites and apps that deal with customers, user management responsibility is divided between financial institutions and businesses, easing the burden this used to place upon the banks.

Embedded Finance Benefits for Users

• Convenience: Easy access to financial services like online payment options.
• Appropriate offerings: The financial deals users are presented with are not only conveniently placed but also relevant to the website or app they are using.
• Inclusion: Embedded finance enables underserved users to gain access to formal financial services that they would typically be unable to obtain due to the complicated processes and filtering criteria used by banks.

Faster, Better, Easier

Embedded finance has quietly and swiftly changed the way we live. From payments and loans to insurance and foreign exchange, integrated financial services have improved our relationships with financial services to deliver more choice, greater convenience, faster transactions, and a better customer experience.

Discover the Benefits of Embedded Finance

If you're looking for an embedded finance solution, Clear Treasury’s API allows you to integrate our industry-leading end-to-end FX payments solution into your business’s financial ecosystem – giving you full control. Contact us to find out more.

Open an account with Clear Treasury today for quick, secure, and cost-effective international currency transfers. Talk to us to find out how you can mitigate the impact of currency risk on your international payments with forward contracts, stop losses and more.