Why is embedded finance becoming popular in India? | The Financial Express

Why is embedded finance becoming popular in India?

Embedded finance has created new avenues for companies, where they can bridge the gap between enterprises and end users

Why is embedded finance becoming popular in India?
By simplifying a customer’s buying process, embedded finance creates an interface that makes transactions seamless. Representational image

By Anubhav Jain

Financial services in India have grown exponentially due to the advent of emerging technology solutions, and regulatory policies. Further accelerated by the pandemic, digital transactions have gained traction, forcing companies to innovate their financial offerings. An example of digitization in the fintech sector is how businesses seamlessly integrate financial mechanisms into their own business platforms using APIs. Embedded finance integrates financial services or tools within the products or services of a non-financial organization. 

Take for instance an e-commerce store offering digital wallets to enable contactless payments that are instant. Online ridesharing companies and their financial services are also an example of embedded finance, where customers are able to make payments even before reaching their destinations, through instant payment methods.

Embedded finance aims to streamline financial processes in both consumer and business commerce by reducing barriers to entry for various products and services, enabling ease of payments at various touchpoints. The embedded finance industry in India is set to grow significantly by 46.0% on an annual basis to reach US$4,801.8 million in 2022 alone, as per a report by Research and Markets. 

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Embedded finance has created new avenues for companies, where they can bridge the gap between enterprises and end users with the help of below mentioned use cases: 

  • Embedded Payments: Online payment options at the point of sale, where customers are given the flexibility of payment options like digital wallets, netbanking, credit card, debit card, UPI, etc. are examples of embedded payments.
  • Embedded Insurance:  When a customer purchases a product at the point of sale in real-time bundling and sale of insurance, it is an example of embedded insurance. Travel insurance while booking flight tickets or mobile insurance while buying a phone can be considered as examples of embedded insurance. 
  • Embedded Investments: It allows platforms to integrate stock market investment into their vertical offerings. This is particularly popular among API-based brokerage firms.  
  • Embedded Lending: Buy now pay later (BNPL) is an example of embedded lending, where customers can convert purchases into monthly installments that are free of interest.

The embedded finance ecosystem primarily consists of key institutions like digital platforms, financial institutions, and infrastructure companies that strategically work together to provide solutions to customers. NBFCs owning a customer-facing digital platform such as an app, or a website can offer customized financial solutions to customers. Financial institutions, on the other hand, provide financial services that are regulated and compliant, allowing them to use their network and manage loan requests within the ecosystem. When looking to strengthen their product offerings, and enhance CX, the embedded finance ecosystem has paved the way for:

  • Embedder: Embedders entail brands that provide a product or a service as an offering to embedded financial services across touchpoints to enhance CX.  
  • Enablers: Enablers include tech providers, linking embedders-providers, allowing easy exchange of data. 
  • Providers: Providers are banks and NBFCs who license financial products and services.  

With digitization, and acceleration of automation and inclusion of APIs, banks can scale BaaS, making embedded finance more accessible to companies. Technology solutions are powering the payments ecosystem with more businesses thinking of how they can engage their customers with financial offerings. 

  • Leveraging AI/ ML: AI and ML have varied applications in embedded finance. It allows lenders to simplify credit decisions and assess credit worthiness through data analysis.  It is especially more critical for B2B businesses, where they can look at streamlined AI-driven processes with regards to loan authorization. AI can also enable suppliers to offer curated offerings with and help them with sales conversations.  
  • IoT: IoT can enable banks to strategically reach customers with connected cars, or connected homes. For instance, lenders can partner with manufacturers to make credit offers. The finance aspect here is natively embedded into the customer’s need at the moment even before competing products can be considered.
  • Cloud computing: As embedded finance continues to transform with technology services, cloud computing will play a huge part in establishing aspects like scalability, serverless architectures which will help save time, effort and resources to meet the quick needs of the most demanding applications.

By simplifying a customer’s buying process, embedded finance creates an interface that makes transactions seamless. For end users, it creates the perceived value of accessibility and convenience. The benefits of embedded finance for them include faster transactions, usability of the interface and accelerated convenience. For enterprises and particularly fintech companies, embedded finance has many benefits. Such as, reselling a third-party service by promoting a lending service for customers to use when they buy your product. Providing them with a single transaction interface can streamline processes across companies. Additionally, it generates revenue streams, increases a product’s stickiness with the help of a user-friendly interface and ultimately increases the conversion rate for an online/offline store with the help of data intelligence, enabling companies to understand how they can better understand their customers by gaining more visibility into their transactions and accordingly modifying product offerings to better suit their needs. 

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The fintech ecosystem in India is at the cusp of innovations to meet the ever-rising consumer demand for integrated experiences, adoption of technology advancements, and experiential banking. Businesses must look to leverage embedded finance to increase their share of revenue, create competitive advantage by offering flexibility in financial services. For fintech companies, the criticality of embedded finance lies in collaborating with businesses and embedding their offerings on websites to access a larger customer base.  

Embedded finance is one of the fastest growing areas in the fintech industry, with huge potential for growth in a developing country like India, owing to the young population that is increasingly adopting new age technologies. The future of embedded finance will be disrupted with more innovation and unique offerings for different types of end users and businesses.

(The author is the Co-Founder and CEO of Rupifi. Views expressed above are those of the author and not necessarily of financialexpress.com)

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First published on: 31-10-2022 at 10:47 IST