The evolution of banking has been a hot topic for years. Embedded finance is liberating the financial industry and enabling the integration of financial services into larger ecosystems. The concept translates every opportunity into a concrete, customer-centric use case.
While the world of finance is changing, now APIs (Application Programming Interface), cloud technologies and open architecture are rearranging the seats around the finance table.
It is enabling banking services that can be integrated into third party apps and software that can be pushed out to customers as an add on feature.
Embedded financial infrastructure is empowering companies to provide payments, lending, brokerage, and insurance delivered as services. These aren’t just white-label platforms. Instead, these services are unbundled and delivered in the form of an API.
That way, clients in any industry that wants to launch financial products continue to own their customers and the customer experience through an integration into their software.
Why will every company be a fintech company?
To start with, let’s say every company’s end goal is to retain lifelong customers and generate revenue, one way or the other. The approach for this could be either by selling products, services or just being an intermediary marketplace that connects producers to consumers. Either way there is always a scope for an offering that deals with money in some form.
With this in concept, the financial industry opened up the market for embedded finance providers, an intermediary.
The providers bridge the gap of conceptualisation to implementation and provide necessary ready to use tools for anyone and everyone to add financial offering to their product flow.
Companies like PhonePe, Udaan and Ola have already built proprietary platforms by offering financial services to small businesses and commerce. It allows them to become a ‘Super App’ and enhance attractive add-on financial offerings to build platform stickiness.
Let’s look at a couple of benefits that no company would like to miss out from:
1. Generate new revenue stream
Most customers get irritated when redirected to multiple applications to do additional tasks. For example, while booking tickets to travel abroad, users often have to go to another forex platform to collect foreign currency or travel cards.
In such cases, the best resolution is to have a single unified flow in the customer journey. Customers would stay loyal to a brand if they have an easy-to-use single platform.
Companies can monetize such transactions. It helps companies to have a new revenue opportunity without having to invest in acquiring new customers.
2. Transform to smooth cash management
Virtual account management solutions is one of the embedded finance functionality that gives companies the power to conduct all of their business transactions seamlessly.
Companies can use virtual accounts to make payments on behalf of and receive collections on behalf of from all of their organisations entities and locations. Furthermore, they can help simplify fund segregation as cash flows into and out of the business.
3. Personalised banking experience
Embedded finance solutions offer functionalities that corporate banks can deploy so that their clients can define, manage, and customise their banking account structures through their own virtual account whenever they want to, wherever they want to, using modern channels that are as fast as they are secure.
This creates a friction less banking experience that is nothing short of an absolute joy to use. Instantly open, close, and modify all virtual accounts under your purview.
Companies can create and amend bank account structures, view their complete transaction history and perform every single transactions on virtual accounts through a mobile device such as your phone or tablet, on your computer, or any other electronic device.
The solutions have the potential to revolutionise the way companies experience corporate banking.
4. Improve customer experience
Companies can create a unified journey for their customers through embedding relevant financial services. Offering more services to the customers will eliminate their need to deal with a third-party vendor for completing their transactions.
It will result in higher profits. Adding to that, the direct connection between the customer and the company will help improve the customer experience significantly.
5. Use existing resources
Organisations need not worry about the expenses and resources needed to acquire new customers or procure high-level infrastructure.
Embedded finance providers enable companies with ready to use customised APIs to add financial angle in an ongoing system.
Factors driving embedded finance innovation
1. API integrations
From a tech point of view, API integrations have become an enabler to faster, less costly, and more efficient feature development approaches. Earlier, a company would require substantial programming resources, which would take months to develop a product.
And if you plan to add financial feature then it can take years to go through never ending bank regulations and hectic collaborations, pass intense governance, risk, and compliance requirements to build one integration.
But now, low-code APIs simplify the addition of new interactions, delegating the complexity to the API providers. API providers have managed to tackle and optimise through various add-on features that can be easily adapted and set out to the market.
While governance regulations, risk management, and compliance are fundamental, the API providers follow strict protocols. They go through all regulators to provide plug and play APIs to business and to help clarify the security requirements and streamline adoption.
2. Open banking
Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).
While the trend toward open banking was initially a regulatory requirement, it’s now becoming a competitive advantage for financial institutions with the mindset and capabilities in place.
Many financial institutions realised that businesses have loads of data on customer purchases and other behaviour. And companies can reach to their target users in much easier way through building their own customised financial services which can also serve as an efficient revenue channel for both the parties.
3. Digital-first users
Mobile consumers are used to instant gratification, and an abundance of options and traditional models are becoming obsolete. Response times for any product or services have reduced to minutes and, game-changing financial services, driven by fintech, are coming to market quicker than ever.
Simplifying and speeding up access to financial innovation drives business efficiency to growth. And embedding finance services into ongoing functions is the simplest way to improve operations and access the end consumer faster.
As the pace of financial innovation quickens, no single institution can provide the best of all opportunities, and that’s where embedded finance enables the ability to easily mix and match services to meet both merchant and customers’ needs in the best possible way.
Scope of embedded finance in traditional business format
1. B2B E-retailer Payments
B2B e-commerce platforms connect medium and small size enterprises with a marketplace of distributors. They bring benefits of scale to a vast number of sellers across regions.
Let’s consider one of the use-cases. B2B settlements take over a month-long pipeline due to paperwork and manual reconciliation for thousands or even millions of transaction. With Virtual accounts, these platforms can create accounts for themselves and as well as for their partners, this will give better visibility on the money movement and ease out the reconciliation processes.
As transactions are reconciled faster, it saves several man-hours and to-and-fro manual operations between buyer and seller and can help MSMEs manage cash flow and deal with various contingencies.
FMCG companies have to spend hours scanning through bank statements with a fine-toothed comb to ensure the expenses, credits, and debits all match up. This bookkeeping activity, called payment reconciliation, drains time, demands effort, and gives rise to multiple errors in records.
The operating and maintenance costs of a virtual account are significantly lower than its physical counterpart. Moreover, it’s easy for a business to open hundreds to thousands of virtual accounts for each of their distributors, while doing the same for physical accounts would be nothing short of a nightmare.
Companies can collect payments from their distributors in the assigned virtual account and reconcile them with ease. Not just the details, a business can understand an overview of transactions taking place across departments or even geographies. Compliance ensures all regulatory requirements are followed to the dot.
3. Education Sector:
Bookkeeping can be termed as a common problem in any sector. But imagine if every month, you got to check each transfer done by 1000+ students manually, then what?
That’s where embedding financial services can be the best suite to manage finances for colleges and other such educational institutions. It allows them to focus on what they do the best – teach!
Everyday fundamental operations can be digitised and automated, such as
1) Virtual account for collection of fees & auto-reconciliation.
2) Store all these fees in a master virtual account and do payouts to vendors, suppliers, salary to teachers etc.
3) Open savings account for students and teachers which can be used as college ID card as well
4) Salary payouts to teachers through these accounts
5) Collection of donation in virtual accounts and auto-issue donation certificates to donees
Ineffective HR technology can create havoc in HR operations. The Human Resources Information Systems (HRIS) are supposed to streamline recruitment, improve payroll efficiency, ensure timely reimbursement cycle, employee verification, etc.
An HRIS that doesn’t meet the needs of an organisation can be ineffective because it’s outdated, improperly installed, or too complex an application for HR staff with limited skills. Here embedding the right financial services in the platform can bring solutions over multiple levels, such as,
- Scheduled salary payouts by the month-end
- Payments and reconciliations of reimbursements
- Open and validate bank accounts
- e-KYC of employees
There could be never ending solutions to business that embedded finance can bring upon.
But if you look ahead, it’s the end user who is poised to win from this, as banks and tech companies increasingly compete to deliver the best, most personalised, financial products.
Eventually consumer would want to choose and trust who is helping them in providing convenience and easy decision making with their money. Banks have done an amazing job building that trust for decades, and tech companies have done the same to establish trust on handling data.
The path to success is to establish trust on equal footing with traditional brick and mortar institutions, giving consumers and small businesses greater options with the same security they demand when it comes to their money.
I believe that in the not-too-distant future, new -age trusted tech brands in addition to their core offering will easily provide add-on financial services to their audience which would make the banking & financial services accessible in any platform of choice!