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Navigating through the world of Embedded Finance – Dr. Nisha Mary Thomas

30 Dec 2023

Embedded Finance is now widely discussed topic in the corporate world. The business magnates are now deliberating on effective utilization of Embedded Finance for capturing new market segments, enriching consumer experience and adding new sources of income. Globally, the embedded financial services industry is expected to reach a value of USD 230 billion by 2025, a significant rise from its revenue of USD 22.5 billion in 2020. The embedded finance sector in India has grown steadily at a compound annual growth rate of 45 percent and is projected to attain a value of USD 5 billion by 2022.

So, what is Embedded Finance? Embedded Finance involves offering financial products like lending or insurance within the ambit of non-financial service. The concept of Embedded Finance has been around for quite some time. For instance, retail chains, supermarkets and airlines have partnerships with banks. These strategic alliances enable banks to reach wider customer base and provide financial products within the context of non-financial activities. Successful examples of Embedded Finance include partnership between ICICI Bank and Amazon Pay, and alliance between HDFC Bank and Ola Electrics. As of June 2023, the Amazon Pay-ICICI Bank credit card accounted for almost one-third of the bank’s entire credit card user base. The successful alliance has encouraged Amazon Pay to partner with more banks and credit cards to meet the rising financing requirements of its consumers and small businesses. Similarly, Ola Electric has partnered with leading banks like HDFC Bank which can offer loan services to the customers of Ola Electric Scooters.

So, why has the concept of Embedded Finance picked up the momentum recently? That is because the future of embedded finance is expected to be very disruptive. The next generation of embedded finance integrates financial products into digital interfaces that consumers use daily, thereby blurring the lines between traditional financial institutions and non-financial business. This deep integration allows for a seamless and convenient experience for consumers as they can access and utilize financial services within the context of their regular activities. Such deep integration benefits business as well as they can enhance their offerings, provide a more holistic experience, and capture a larger share of the market.

Embedded finance is expected to revolutionize many industries. For example, embedded finance is now being used by music industry to streamline the finances of content creators and musicians. Kobalt, a Swedish company, offers a centralized platform that connects the musicians directly with music hubs like Spotify and YouTube to access their royalties. This eliminates the need for musicians to navigate through multiple platforms to receive their earnings. The embedded finance can be used in healthcare system to automate medical billing process. By integrating with insurance providers and electronic health records, healthcare providers can offer easy and fast billing and reimbursement process. By collaborating with financial institutions, the healthcare providers can offer customized financial solutions and payment arrangements that align with the patient’s financial circumstances. The travel and hospitality sector can also use embedded finance to offer convenient solutions like dynamic currency conversion and integrated travel insurance. The embedded finance can be used to offer installment-based payment solutions which will enable travelers to make affordable travel plans and enjoy a better travelling experience. The FinTech firms can use embedded finance to offer customized budgeting solutions, convenient digital payment solutions, and attractive investment opportunities to its customers.  

Embedded Finance is expected to be in high growth trajectory in near future. Several factors are driving the growth of Embedded Finance. First, there is a sharp rise in the number of people using digital platforms owing to its ease of use and convenience. As of 2022, there are about 1.2 billion internet users in India. Second, the deep penetration of mobile commerce in the country gives ample opportunities to firms to offer innovative financial solutions at the users’ fingertips. According to I&B Ministry, there are about 600 million smart phone users in India. Third, the consumption of digital financial services is on a rise. As per NPCI, the transaction value of UPI between January to October 2022 was about USD 1.2 trillion.  The Times of India forecasts the market size of Buy Now Pay Later industry to reach USD 45 billion by 2026. Finally, the key driving factor behind Embedded Finance is the changing face of the consumers. The expectation of Generation Z on how to bank, save, pay and invest is very distinct from its predecessor of Millennials. They demand innovative financial services that are frictionless and fast. According to report by IBM Institute for Business Value, more than 60 percent of global consumers have applied for loan, executed investment decisions and purchased car insurance in online mode. 

However, the world of Embedded Finance is not fraught from any challenges. Organizations must continue to invest heavily on modernization and API standardization to ensure successful implementation of Embedded Finance. Investment and improvement in APIs are a must to ensure realtime exchange of data to offer seamless integration of financial services into systems and applications. There are concerns regarding privacy and data security as Embedded Finance involves use of sensitive personal and financial information. Hence, organizations must develop robust infrastructure to protect data privacy and to prevent cyberattack. Finally, the success of Embedded Finance is dependent on correct assessment of risk profile and credit worthiness of its users. To protect itself from fraud losses from payments, the organizations must efficiently utilize alternate data sources and develop an appropriate risk-scoring model.

India has strong digital infrastructure which includes Unified Payments Interface (UPI), Aadhar, secured data access via Account Aggregators and open networks like Open Credit Enablement Network (OCEN) and Open Network for Digital Commerce (ONDC). Such strong foundation should enable digital innovation in Indian financial landscape. Embedded Finance is the future of finance in India. Embedded Finance is expected to pave the way for invisible and interconnected financial service experience for the next generation tech-savvy consumers. It has now become imperative for traditional financial institutions to reimagine their financial products in this embedded world and compete on differentiated value propositions. 

The following are pertinent questions that should be dwelled upon (a) What are the key factors that will propel the growth of Embedded Finance in future? (b) What are the new business risks that are posed by Embedded Finance? (c) What are the issues that the regulator must address to ensure balance between innovation and financial stability?

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