What Is Embedded Finance?

Embedded finance and (BaaS) banking-as-a-service are financial services options that more and more companies are beginning to offer. Types of embedded financing services include bank accounts, wallets, payments, and lending offered by nonbank companies.

Many companies see offering embedded consumer finance as a way to boost customer loyalty by providing customers with easily accessible and easy to use financial options. Some of the best known examples of embedded finance include Amazon, Klarna and Afterpay.

In this post, we’ll ask, “what is embedded finance?” and examine the implications of this new financial trend.

What is meant by embedded financing?

Embedded financing allows brands and merchants to embed financial services quickly and cost-effectively into customer experiences.

Put simply, embedded finance is where financial tools or services - like lending or payment processing - are provided by a non-financial provider. For example, a retailer might offer point-of-sale insurance for the goods it sells in store.

Embedded finance has actually been around for some time, from Uber to late night food-ordering platforms. All kinds of companies, from enterprise-level businesses to startups (including retailers, technology companies, insurance providers and logistics businesses), are starting to offer their own embedded financing to customers. Furthermore, integrated or embedded finance is frequently used by ISVs, or independent software vendors. 

Embedded consumer finance can be either white label or co-branded, and it’s generally delivered to customers using new technologies and capabilities. Banking as a service, for example, is accessible to customers via an API.

Because of this, companies that provide embedded finance need to adhere to strict regulations around risk and compliance. This is one reason many embedded finance providers decide to partner with fintech software vendors, who can intermediate and help them build these new business models.

Benefits of embedded finance

• Embedded finance is designed to streamline the financial customer journey, making it easy for customers to access the services they need when they need them. Previously, customers may have had to approach a bank to secure a loan to pay for larger purchases. With embedded finance, however, they can make a purchase and access credit to pay for it in the same place.

• Embedded financing removes pain-points for consumers, making it more likely they’ll complete their purchase and enjoy customer satisfaction. This helps companies to boost brand loyalty and can result in more repeat purchases.

• Companies offering embedded finance gain access to new customer data that can help them drive company growth. They can gather important data around behaviours as customers start to use their additional services. This can provide a way to enhance personalisation efforts, among other value-add endeavors. 

Examples of embedded finance

• Buy now, pay later: This has created a new way to access credit for shoppers, allowing them to access a greater range of products than before by enabling them to pay in instalments, rather than in one, lump sum. If you’re using buy now, pay later, your business can use GoCardless to leverage Direct Debit to collect payments from customers. 

• Point of service credit: These can be used by consumers to fund larger purchases and usually require consumers to be creditworthy. Consumers may be offered the option to pay by instalments at checkout, with a third party taking on the risk for the credit modelling check.

• Integrated insurance: When buying a new appliance, for example, customers can buy insurance for it.

• Banking as a service: This is a model where a licensed bank can integrate its digital services directly into the products of a non-banking business, for example, a retail store. The retail chain can then provide banking services to its customers, from loans and savings accounts to credit cards.

• Navigation apps: Google integrates with parking solutions providers so that drivers can pay for their parking from their driving navigation app.

As momentum for embedded consumer finance builds, both financial and non-financial organisations will have to learn to serve their digitally discerning customers more effectively. Traditional banks, in particular, will have to re-evaluate their position in the customer journey, and identify where they can provide extra value, and with whom they should partner.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.