Embedded finance has rapidly grown to become the new buzz within the banking and financial sector in recent years, creating new opportunities for banks, non-banks, and even new market entrants. Advancements in technology have led the financial industry to new levels of innovation, improving customer journeys, creating access to more credit facilities, achieving higher scalability, building operational resilience, and increasing profitability. As more financial opportunities are created for consumers, it creates new forms of partnership between banks and technology providers that underpins what is now being attracted as the embedded finance revolution. 

Research by McKinsey & Company indicated the value of embedded finance reached a whopping $20 billion in the United States alone in 2021. According to Oracle, the embedded finance market is valued to exceed $7 trillion in the next 10 years, which would make it twice the combined value of the top 30 banks today. Despite the opportunity scale the concept holds, many banks, software providers, Fintechs, and potential distributors still need clarification as to what embedded finance involves and how they can participate to win.

To many traditional and existing banks, the concept of embedded finance can pose a threat to their business models that require agile partners to step in between them to offer embedded financial services directly to customers. However, more innovative banks are perceiving the concept as a unique opportunity to reinvent their distribution strategies and engage with customers across multiple touchpoints. As can be seen, the threats and opportunities of embedded finance can influence strategic thinking for financial players to better understand and undermine the need to adopt and integrate it, let alone prepare technology infrastructure to support new demand and supply of financial products.

So, What is Embedded Finance?

In simple terms, embedded finance is the integration of financial services and products, by non-financial players, within platforms that consumers and businesses use on a daily basis. By integrating and embedding multiple financial services for everyday consumer use, it enables a more seamless and frictionless user experience. 

Payments were one of the first use cases of embedded finance essentially making life easier for both consumers and businesses to make purchases all at a touch of a button. Other forms of embedded finance that have also been developed include embedded lending, allowing buyers to access deferred payment facilities at the point of sale, and embedded insurance, access to insurance products at the touch of a button without having to search through different insurance providers. As more financial services are embedded at the consumption level, it disrupts the status quo of how businesses and consumers make transactions on a daily basis. 

Embedded finance already supports a number of customer propositions for new digital offerings. Some examples include e-hailing services such as Grab, which embeds payment services for improved user transactions via Grabpay. Airline companies like AirAsia also make use of embedded finance such as insurance services via its Air Asia Super App, which enables users to buy add-ons with their flight tickets upon checking out.

Embedded finance offers more avenues for banks and financial institutions to sell their financial products. This concept allows non-banks such as brands or merchants to create new propositions and customer experiences, all in a single platform.

How does Embedded Finance work in practice?

Embedded finance works such that it leverages technology to create a digital ecosystem whereby users can access financial products without having to go through or be redirected to multiple user journeys. Financial Services (FS) providers generally connect their financial products with non-FS firms through APIs to facilitate the transfer of data between one another. Non-FS firms offer their functionalities through their products and technology capabilities to seamlessly embed FS’ financial products into third-party customer journeys. Figure 1 shows a simplified model of how it is conceptualised to function.

Figure 1: Simplified Embedded Finance Conceptualisation. Source: Deloitte

How Should Banks Embrace the Concept of Embedded Finance

As described earlier, threats and opportunities will be seen by many banks that are looking to consider adopting the concept of embedded finance. There will be several adoption challenges that banks will need to recognise that may challenge traditional banking processes when conceptualising the idea of embedded finance. Some challenges can include switching to different revenue streams, developing new customer engagement pipelines, regulatory compliances, and exposure to new distribution partners that may raise concerns about market reputation and ongoing risk management.

Banks need to induce more methodological forms of strategic thinking when considering the possibilities of developing an integrated digital ecosystem. This goes with observing both opportunities and threats together. Gartner, a technological research and consulting firm devised an Embedded Finance Framework (shown in Figure 2) that suggests a wider perspective on looking at different opportunities and threats to enable banks to think more innovatively about how they can source and distribute their financial products. The framework describes the embedded finance market space and focuses on how different financial products can be combined to address the needs and wants of customers. Furthermore, it looks at whether banks should consume products from third-party providers or distribute their products themselves.

Figure 2: Gartner Embedded Finance Framework. Source: Gartner

The framework is organised based on four quadrants where Gartner has defined each as below:

1. Augment — the process of augmenting existing or future financial services offering with financial components sourced externally.
2. Productize — the process of transforming existing financial components into products in their own right, and distributing the resulting products to other enterprises that might want to offer that functionality to their own customers. 
3. Contextualize — the process of relying on third-party components to better understand the “Why?” of customers selecting specific products and services, making transactions, and planning for future product development based on the evolution of this context.
4. Diversify — the process of providing third parties with nonfinancial components (while including components related to financial services); therefore, transforming (diversifying) the role of a financial service provider.

For banks, success would be defined based on a clear differentiation on which quadrant they are positioned in and the provision of developing a digital ecosystem that would embed their financial products and services. 

In Summary

Although the concept of embedded finance has been here in recent years, it still presents a great potential to reshape how financial services can be accessed. Businesses that look to capitalise on this opportunity should begin by assessing their current processes and resources to determine if they are ready to develop an embedded solution. Businesses should also navigate priorities in different avenues such as regulatory compliances and outcomes, delivering a seamless customer journey, connecting with the right partner(s), and risk management to enable them to design and implement a successful embedded finance strategy.

Interested to learn how JurisTech can be your partner to create revolutionising embedded solutions, connect with our team today at contact@juristech.net. You can also learn more about JurisTech’s solutions here.

About JurisTech

JurisTech (Juris Technologies) is a leading Malaysian-based fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond.