How Embedded Finance Is Disrupting Traditional Banking
While cryptocurrencies continue to hog the limelight in the FinTech world, it is arguably Embedded Finance that poses the biggest threat to traditional financial institutions.
By merging various aspects of financial services into apps and products, embedded finance is empowering businesses to open up new revenue streams and rethink how they interact with their customers, and vice-versa.
What is embedded finance?
While it can take many forms, embedded finance is essentially an umbrella FinTech term for technical solutions looking to streamline a range of financial processes.
Traditionally, there has always been a gatekeeper between a consumer and a business. For example, if you’re using a credit card to buy a mobile phone from a store, the money needs to be issued from your bank before it arrives into the business’s accounts. Of course, this is an automated process. But that third-party bank is still an important part of the chain. Without them, you might as well be swiping any old piece of plastic over the credit card machine, for all the good it would do.
Embedded finance is attempting to do away with third-party financial institutions in order to create direct links between consumers and companies. Many tech companies are currently developing new apps and platforms that will support their own in-house financial services, which they can offer to customers as part of their overall service.
If this all sounds a little too sci-fi, don’t worry. Here are four practical examples of how embedded finance is already being implemented to great effect.
Embedded banking and payments
Embedded payments have already gained traction thanks to companies like Uber and Starbucks. The Starbucks app lets customers order and pay for their coffees directly from their phones. The coffee chain also rewards customers with points when using the app, which can be redeemed on future purchases.
Likewise, Uber’s ride-sharing app enables users to pay for the car journey transaction using the Uber app after the ride is over. Uber have taken embedded finance a step further with the introduction of Uber Money, which provides Uber drivers with accounts and their own branded debit cards, allowing Uber to pay their drivers instantaneously through their own payment infrastructure. The advantages of this move go far beyond faster payment transactions. In Mexico, for example, Uber has been able to offer debit cards to a large contingent of drivers from poorer backgrounds who never had access to traditional banks before.
Rather than apply for a loan from a bank or use credit on a card, embedded lending solutions offer consumers a “buy now, pay later” option at the point of purchase. An example of this is AfterPay, a “pay later” service originating in Australia that fronts customers with the money to purchase products immediately online or in-store. Customers can then pay the “loan” back in four equal instalments across the following weeks. The repayments even remain interest-free so long as each instalment is paid on time.
FinTech platforms such as Acorns and Revolut are simplifying how people invest their money through clever systems that make saving and building an investment portfolio easy and manageable. Rather than committing to saving a pre-agreed upon some each month with the bank, these programs have introduced features which round up people’s spare change on purchases. For example, when spending $1.90 using your Revolut card, 10c will then go to a savings account. Over many purchases, these small amounts will gradually grow into a handsome sum. Similarly, Acorns makes investing in stocks more intuitive with stock portfolios that automatically adjust to financial fluctuations, without the need for users to constantly keep an eye on market values.
As embedded banking is eliminating the need for third-party banks, embedded insurance bypasses the need to rely on insurance brokers to purchase an insurance policy. Some companies have introduced ways to embed the action of applying for an insurance policy into the process of making a major purchase. Most famously, electric vehicle company Tesla now provides its customers with the option to purchase insurance directly through its own car sales program and even offers better rates than going through a third-party broker.
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