Many clients have been asking about embedded finance, and as every schoolteacher knows for every person who asks a question, there are at least 10 others who have a question but are afraid to ask it. For both the questioners and those afraid to question, we at Perficient thought we would provide some background on embedded finance.
What is Embedded Finance?
Before we get into some of the more obscure and complex examples, let’s make sure we all agree on what the term embedded finance means. Put simply, embedded finance is the placing of a financial product in a nonfinancial customer experience, journey, or platform.
While that sounds new and exciting, remember that history doesn’t repeat itself, but it rhymes. I remember when my mother stopped shopping at one department store because they wouldn’t give her a charge card in her own name, but another store would on their private-label charge card. It was a 1970s version of a retailer offering a financial product – credit, to enable sales and, if mom didn’t pay the charge in full at the end of the month, increase profits on the transaction via charging interest. Later, mom would send me to the corner candy store to buy milk and bread with a couple of dollars. If milk or bread prices had gone up that week, I would sign the receipt agreeing to pay the nickel or dime I was short at a later date. When dad was paid on Friday, after cashing his check at the bank and getting his wages from the teller, he would stop by the store and pay off the accumulated family debt with a quarter or so. Again, a financial service – credit – had been extended at the point of purchase to facilitate the transaction.
Getting Your Company Started With Embedded Finance
On the digital frontier, Perficient sees many clients that want to provide a digital equivalent to a 1970s charge card or the current equivalent to signing a paper receipt agreeing that you’ll pay your debts. Clients want embedded finance to streamline financial processes for consumers, making it easier for them to access the services they need when they need them. Even easier than having an 8-year-old sign a cash register receipt.
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To begin, our clients must identify their intentions behind wanting to implement embedded finance into their functions. For instance, they may see embedded finance as the driving agent for improving customer service, growing an existing customer segment, or launching a new product extension to meet a perceived need.
Whether with the assistance of an experienced digital experience consultant such as Perficient or by themselves, one looking to implement embedded finance must finalize a strategy that analyzes the digital needs of their company and its clients. Buy/build and gap analysis studies are integral in helping determine where embedded finance may reap the most benefits.
There are several methods for embedding finance and banking programs into non-financial products and services. The first one is investing in an additional offering within your brand’s digital platform. This can include offering lending services or creating embedded bank accounts for other businesses or consumers. Yes, your company will retain the credit risk, but it will also reap all the incremental revenue, from increased sales and service/interest. The risk is that the software must be maintained going forward.
A second approach would be to join the embedded finance movement as a connector, a bridge between financial service providers and non-financial services businesses. This may require a data transfer to a bank that will underwrite the credit or credit card or payment, leaving the non-financial firm with increased sales, but no credit, fraud, or payment risk.
Another option is to collaborate with a company that focuses on embedding the financial infrastructure into its product or service and become a part of that ecosystem. There are many third-party ‘banking-as-a-service’ companies that use API integrations to embed financial services into the user experience of non-financial companies. Companies, whether by themselves or with the help of an experienced consulting firm such as Perficient, will need to analyze which offers the best service, at the best cost, with the lowest risk while integrating into the rest of the tech stack. This approach will keep all incremental revenue with the firm while minimizing the risk of the software apps becoming stale.
Embedded Finance and Blockchain
You may be wondering if embedded finance conflicts with distributed ledger technologies such as blockchain. As shown in numerous online articles published by Perficient, distributed ledgers such as blockchain define the technology and openness of the database, not the financial product or service being offered. Embedded finance is quite compatible with blockchains — be they public or private, hybrid or consortium, storing NFTs or real numbers, your blockchain technology strategy is not in conflict with your embedded finance strategy.
In this blog, we defined what embedded finance is and what companies should consider as they decide whether they should pursue embedded finance as a firm. When considering this, remember companies with embedded finance offerings are not snake oil salesmen. Embedded finance provides consumers options to increase convenience and savings, such as zero-interest point-of-sale loans, or rewards for using a brand’s e-commerce app. In future articles, we’ll look at embedded finance from a banking, payments, lending, and insurance offerings perspective.