The Role of Embedded Finance in Enhancing Customer Experience

In today’s rapidly evolving digital age, embedded finance is reshaping the way financial services are both offered and consumed. This transformative technology isn’t just a passing trend; it’s on its way to become a $7 trillion market by 2030.

But what is embedded finance exactly, and which financial services can be seamlessly integrated into people’s daily activities? Most importantly, what’s the role of embedded finance in enhancing customer experience?

What is embedded finance?

Embedded finance has become an integral part of people’s daily routines that often goes unnoticed. Whether it’s making online purchases, hailing a ride with Uber, or using credit cards to buy a morning coffee, consumers are engaging with embedded finance, even if they don’t realize it. 

Simply put, embedded finance refers to the incorporation of financial solutions, such as payments, loans, or insurance, into the core products and services offered by non-financial organizations to enhance the customer’s journey.

This concept isn’t entirely new, though. It has long been a part of daily life with examples like auto loans at dealerships or private-label credit cards offered by retail stores, supermarkets, and airlines. 

Why has it gained so much popularity in recent years?

What distinguishes this generation of embedded finance from the previous one is its seamless integration into the digital interfaces customers use on a daily basis. And these are plenty; let’s take customer loyalty applications, digital wallets, or shopping-cart platforms as examples. 

This integration means that financial services blend into customers’ digital experience, becoming a natural and integral part of their daily interactions. Customers no longer need to look elsewhere for payment services; they can conduct all transactions seamlessly within the organization or company that offers these services. It’s become a natural extension of non-financial experiences like online shopping or managing daily business operations. 

As a result, the forecast for embedded financial services is nothing short of remarkable. It’s expected that embedded financial services will make around 17 times more money, reaching $384.8 billion by 2029, compared to the $22.5 billion in revenue from 2020.

This growth is attributed to the changes in commerce, technology, and consumer behavior that have influenced the evolution of embedded finance and reshaped the way people interact with businesses. The shift toward digital commerce and business management has significantly broadened the scope for integrating financial services into non-financial customer interactions. 

What’s more, the fact that digital natives came of age has made the pool of consumers and businesses open to using digital platforms for their financial services much bigger. For example, 33% of global card spending is made online, and in the USA this number reaches 50%.

How does it work?

Embedded finance operates through the use of Application Programming Interfaces (APIs), which act as bridges connecting the inner workings of the financial system with the apps or platforms where these services are embedded. 

APIs play a crucial role in ensuring the secure exchange of data and enabling smooth financial transactions. Thanks to APIs, businesses can effortlessly access a wide range of financial services without the need to build these services from scratch.

Which financial services can be embedded?

Embedded finance puts financial services at consumer’s fingertips when they need them, rather than making them a separate part of their lives. While embedded finance has the potential to work with any aspect of finance, it’s often seen in payments, loans, insurance, and investments.

Embedded payments

Embedded payments simplify the process of making payments within apps or services, especially in e-commerce stores and web-based services. 

They enable businesses to accept payments from various sources without redirecting users. This allows quick and cost-effective access to user funds. Uber is a well-known example, offering multiple payment options within its app.

According to a new study from Juniper Research, the global revenue from embedded payments equaled $32 billion in 2023 and is projected to reach $59 billion in 2027; representing a growth of 84%.

Embedded lending

Non-financial businesses have the opportunity to provide embedded lending that allows their customers to obtain loans when making purchases. It’s predicted that in 5 years, 45% of loans will be taken out in a non-financial context.

By eliminating the need for customers to wait for loan approval, this lending model accelerates transactions and makes the buying process more convenient. Embedded lending shares similarities with “buy now, pay later” (BNPL) services. Klarna and Afterpay are notable examples that employ both models.

Embedded insurance

Embedded insurance brings insurance services into non-insurance platforms, offering users customized insurance options exactly when they need them. The use of embedded insurance in Europe is predicted to reach a market volume of $12 billion by 2026.

It doesn’t matter whether it’s travel insurance embedded into booking platforms or phone protection plans integrated into mobile device purchases. This type of embedded finance provides customers with convenient and on-the-spot coverage solutions without the need for separate interactions or applications. 

For example, Airbnb provides its hosts with AirCover, offering both liability protection and damage protection. While coverage is applied by default, hosts have the option to decline the liability protection if they choose to do so.

Embedded investing

Embedded investment services provide users with investment options through non-financial platforms, removing traditional barriers and complexities. 

This approach eliminates the need for consumers to open separate accounts with traditional financial institutions like banks or brokerage firms. Instead, embedded investing seamlessly integrates investment options into existing apps, platforms, or services, making it more convenient and accessible for users. It can range from micro-investing apps seamlessly embedded into banking apps to crowdfunding platforms integrated with social media networks. 

One example is Acorns, a program that invests the change from people’s everyday purchases by rounding up the amounts. With Acorns, investing becomes automatic and hands-free. Users need not worry about transferring money to their account, as the app handles that task for them.

The role of embedded finance in enhancing customer experience

In times when digital is the new normal and time is a precious commodity, providing an exceptional customer experience has become the gold standard for businesses. Embedded finance simplifies this endeavor, emerging as a silent yet powerful force. By integrating financial services into users’ everyday activities, it makes financial transactions more accessible and user-friendly than ever before.

88% of companies adopting embedded finance have seen increased customer engagement, with 85% acquiring new customers. These numbers speak for themselves–the significance of embedded finance cannot be overlooked.

However, it’s not just about delivering financial services; it’s about enhancing the way customers experience them. Let’s explore how embedded finance revolutionizes the customer experience.

Streamlining financial transactions  

Embedded finance is all about making life easier. It integrates financial services into everyday activities, allowing customers to perform transactions quickly and without the hassle of switching between different apps. 

Imagine a scenario where people need to visit the bank every time they wish to make a card payment or an online purchase, requesting a manual transfer of funds to the restaurant or e-commerce platform. Embedded finance simplifies this process, offering a seamless one-stop solution that caters to all their financial needs. It brings financial services closer to users and lets them pay for their purchases without ever leaving the platform. 

In fact, today, having to type in your bank account details repeatedly is considered annoying and can make people give up on their purchases. Here, everything can be done instantly and on the spot using digital wallets or mobile payment methods, like Apple Pay, Google Pay, or PayPal. How convenient, isn’t it?

Making financial services more accessible

One of the standout features of embedded finance is its remarkable boost to accessibility. It prioritizes making financial services more approachable and available to everyone. A study indicates that 41% of European consumers opt for embedded finance alternatives over traditional banks, primarily due to the greater convenience of accessing financial services.

With embedded finance, customers can access an array of financial services right from the platforms they already use daily, whether it’s for shopping, transportation, or entertainment. It’s available round the clock and goes beyond geographic boundaries. Embedded finance ensures that individuals from diverse locations can tap into these services without any problems.

Serving the preferences of modern customers

Younger consumers are driving a new trend. It’s been found that 68% of Millennials and 71% of Gen Z respondents show a preference for cashless payment options. These younger generations exhibit higher spending rates compared to their older counterparts, and their purchasing power has increased significantly as they’ve advanced in their careers.

In the past couple of years, contactless payments have become widespread, and consumers have become accustomed to using digital wallets, touchless terminals, and tap-to-pay platforms. Approximately 59% of consumers reported increased usage of these tools during the pandemic, and 71% expressed the intention to continue using cashless or contactless payment methods in the future.

In this case, embedded finance caters to the desires of new-age customers who prefer convenient and cashless payments, and that greatly contributes to enhancing their customer experience.

Offering more flexibility

Today, when it comes to managing money, it’s all about choices. Whether it’s through credit cards, digital wallets, or bank transfers, embedded finance enables customers to select the payment option that suits them best. As a result, customers have greater flexibility in how they conduct financial transactions.

There’s also buy-now-pay-later (BNPL), a form of embedded lending such as Klarna and Afterpay. As of 2022, around 360 million individuals across the globe have embraced BNPL services, with Klarna having an impressive 150 million active users.

This form of embedded finance allows customers to make purchases and delay payment, often with no interest if repaid within a specified time frame. This provides flexibility by giving consumers more time to manage their cash flow and make payments that suit their financial situation. Truth be told, a survey found that 40% of BNPL users are likely to delay or cancel a purchase if this isn’t an option. 

Providing personalized solutions 

With the help of embedded finance platforms, customers can experience a new level of personalization. This personalization is achieved by analyzing user behavior, transaction history, and individual preferences, allowing financial product recommendations to align perfectly with each customer’s unique needs, and address their pain points. 

For instance, think of an embedded finance-powered retail platform that takes into account user purchase history, browsing habits, and demographic details to provide them with highly personalized credit card recommendations. 

This kind of tailored service simplifies their financial decision-making, making it not just convenient but also engaging, and ultimately enhancing their overall customer experience.

Embedded finance brings a wide range of benefits, not only for businesses but also for customers. By streamlining transactions, enhancing accessibility and flexibility, catering to modern preferences, and delivering personalized solutions, embedded finance reshapes the customer experience and elevates it to new heights.

Conclusion

Gone are the days of cumbersome financial interactions. Embedded finance has become a significant player in the evolving financial sector, offering a frictionless and user-friendly way to access financial services. 

As the world shifts towards digital and cashless payments, embedded finance caters to the desires of a new generation of users and makes financial interactions more convenient and efficient.

Ready to enhance your customer experience with our fintech software development services?

At Neontri, we understand the power of embedded finance and how it can streamline financial transactions, make financial services more accessible, serve the preferences of modern customers, offer more flexibility, and provide personalized solutions.