Imagine living in a world where a small business owner can avail a loan in just a few clicks in their smartphone or a farmer can arrange the money for buying the seeds for their farm without physically visiting the bank.This isn’t a glimpse into a distant future; it’s the reality being shaped right now by Embedded Finance. In a landscape where millions still find themselves excluded from the traditional financial system, this innovation isn’t just a technological breakthrough; it’s a beacon of hope for financial inclusion.
Embedded finance era represents a seismic shift in the financial landscape, integrating banking and financial services seamlessly into everyday non-financial platforms. This innovation has the power to bring the unbanked — those without conventional banking services — into the fold of the global financial system.
Embedded Finance: Seamlessly Integrating Financial Services into Everyday Activities
Embedded Finance refers to the integration of financial services into non-financial platforms, fundamentally transforming how consumers access and use financial products. It enables companies in various sectors to incorporate banking services directly into their customer interfaces, offering a seamless user experience. This approach allows consumers to access financial products such as loans, insurance, or payment services as part of their everyday interactions with non-financial businesses. For example, a customer might be able to apply for a loan or make an investment directly through a retail or social media app, rather than going through a bank. Embedded Finance not only simplifies transactions but also broadens financial access, especially for those who have been traditionally underserved by conventional banking institutions. The adoption of Embedded Finance comes with a multitude of benefits, both for businesses and consumers alike. For example, the integration of financial services into various platforms generates valuable data, which can be used by businesses to provide personalized financial advice and tailored product recommendations. This entire integration represents a significant shift in the financial ecosystem, blurring the lines between banking and other industries.
The Unbanked: Who are they?
You may think with the kind of growth the financial services have made almost everyone has a bank account. According to the World Bank’s Global Findex database, 1.4 billion adults worldwide remain unbanked in 2022. This represents 14% of the global adult population. There is a huge population that is underbanked as well.
Access to banking services is a fundamental aspect of economic participation and financial well-being. However, millions of individuals around the world remain unbanked or underbanked, lacking access to traditional financial services such as deposit accounts, loans, insurance, and payment systems. This exclusion could be due to a lack of documentation, limited access to physical branches, or high fees. This exclusion has far-reaching consequences, hindering individuals’ ability to save for the future, manage their finances effectively, and seize opportunities for economic growth.
One of the most significant impacts of embedded finance is its ability to reach these unbanked and underbanked populations by seamlessly integrating financial products and services into existing non-financial platforms. Embedded finance is opening up access to financial opportunities for those who have traditionally been underserved by traditional banking institutions.
How Embedded Finance Empowers the Unbanked
Embedded Finance is revolutionizing financial inclusion for the unbanked by embedding banking services into everyday used digital platforms. For instance, mobile apps are now providing banking services, enabling users to open accounts, make transactions, or apply for loans directly from their phones. This approach significantly lowers the barrier to entry for financial services. Moreover, Embedded Finance facilitates access to credit and microloans. Platforms are increasingly using alternative data to assess creditworthiness, allowing those without traditional credit histories to obtain loans. This is crucial in empowering the unbanked to start businesses, handle emergencies, or make significant purchases by offering a range of financial tools previously inaccessible to them. This innovative approach of embedded finance is a game-changer in addressing financial exclusion, creating a more inclusive and equitable financial ecosystem.
Making It Work: Technological Enablers
The need of the hour is to bring both the financial and non-financial world together and embedded finance does exactly that underpinned by several key technologies:
- APIs facilitate the integration of financial services into various applications and websites, enabling a smooth user experience.
- Digital verification methods allow efficient and secure identity checks, a cornerstone in remote banking services.
- The widespread availability of mobile phones and internet connectivity plays a critical role, as they are the primary means through which the unbanked access these services.
Together, these technologies not only make Embedded Finance possible but also ensure it’s secure, accessible, and efficient, thereby extending financial services to previously excluded populations.
Examples of Industries Adopting Embedded Finance
The reach of Embedded Finance extends across various sectors, demonstrating its versatility and adaptability. Here are some examples of industries that have embraced Embedded Finance:
- Retail: E-commerce platforms are incorporating payment gateways, lending options, and insurance services to offer comprehensive financial solutions to their customers.
- Social Media: Social media networks are exploring features like peer-to-peer payments, in-app purchases, and financial advice services to enhance user engagement.
- Healthcare: Healthcare providers are using Embedded Finance to facilitate patient payments, insurance claims processing, and medical financing options.
- Real Estate: Real estate platforms are incorporating mortgage calculators, property financing, and escrow services to simplify property transactions.
Role of Embedded Finance in Real Life Scenario:
Ambika, a 28 year old woman is from a remote village in India. She has a handicraft business, creating traditional handcrafted apparels and home decor. She has limited access to traditional banking services due to her remote location and the complexities involved in opening and maintaining a bank account. This lack of access has always been a significant barrier to expanding her business. With the advent of embedded banking, a popular payments app which was widely utilized by the villagers for upi payments integrated other financial services into the app. This platform partnered with a financial institution to offer microloans and also started offering ecommerce capabilities.
Impact on Ambika’s Business:
- Access to Credit: Through the e-commerce app, Ambika applied for a small loan. The app used alternative data (like her transaction history and mobile usage patterns) to assess her creditworthiness. She received a microloan with a manageable interest rate, enabling her to buy more materials and hire additional help.
- Digital Payments: The app also allowed her to accept digital payments for her products. Customers from across India could now purchase her textiles online, and the payments were directly credited to her digital wallet within the app.
- Financial Management: With her business growing, Ambika started using the app’s built-in tools for tracking her earnings and expenses, which helped her in better financial planning and understanding her business health.
As a broader impact, when Ambika’s business flourished, it created a ripple effect in her village. She hired local help, thus providing employment. Witnessing her success, other villagers started leveraging the financial services offered through the app, leading to more economic activities in the village.
The impact of embedded finance goes beyond convenience or just technological innovation. It offers a lifeline to those traditionally marginalized by the banking sector and acts as a catalyst for financial inclusion. As we embrace this evolution, Embedded Finance stands as a testament to a future where financial tools are accessible to all, paving the way for a more equitable global economy. Click here to know more about DataNimbus solutions that bring the financial and non-financial world together.
What is the impact of embedded finance?
Embedded Finance empowers the unbanked, providing credit, digital payments, and financial management. This fosters individual and community growth, breaking down financial barriers.
What are the advantages of embedded finance?
Embedded Finance fosters financial inclusion, enabling efficient credit assessments, convenient digital transactions, and personalized financial advice through valuable data insights.
Why is embedded finance the future?
Blurring industry lines, Embedded Finance ensures inclusive, equitable transactions using key technologies, making it the future of a secure, accessible, and efficient financial ecosystem.
What are the applications of embedded finance?
Embedded Finance adapts across sectors—retail, social media, healthcare, and real estate—offering comprehensive financial solutions, showcasing versatility in enhancing user engagement and simplifying transactions.