How Embedded Finance is Disrupting the Modern Economy?

The seamless inclusion of financial services in people’s everyday lives is progressing into a new phase. Many individuals and businesses find financial services most effective when they’re part of an interconnected customer experience rather than being separate interactions alongside that experience. 

People and businesses now increasingly anticipate that financial products and services will be closely woven into their day-to-day routines. For instance, they expect to be able to pay for parking as they enter a parking garage or obtain immediate financing when making a purchase. These integrated experiences are more than just “digital financial services”; they’re pushing us toward the next major change in finance. Financial services will become an embedded element of a wider experience chain: financial services in the era of experience. 

Businesses that aren’t primarily focused on finance have been quicker to realise that we’re entering an era where people are highly connected digitally and where financial services are becoming more integrated across borders and are easier to access. Many of these businesses are using information about their customers and their behaviours to make the customer experience better and to find new ways to grow. They aim to make customers more loyal to their brand, keep them coming back, increase the number of people who actually make purchases and encourage customers to buy from them again. In this era, where experience matters a lot, financial services are more effective when they’re designed to make financial transactions smoother, easier and more convenient for people. 

The current shift in finance termed as embedded finance, is being primarily driven by changing customer expectations. Various industries like retailers, software companies, online marketplaces, automotive manufacturers and e-commerce platforms are integrating financial services into their customer experiences. 

As per a study conducted by Ernest & Young, in which teams reached out to over 20 global financial technology leaders, 94% of them emphasise that a financial product’s success hinges on how well it addresses real-time customer needs (important to note that many existing financial products don’t meet this benchmark). Consequently, there’s a growing interest among both financial and non financial institutions in developing embedded financial offerings. This trend opens up opportunities for substantial growth for all involved parties. The study estimated that the market size of global embedded finance across the entire value chain will grow from  $264 billion in 2021 to $ 606 billion in 2025. 

Several embedded value proportions are becoming more prevalent. For instance, retailers storing customers’ credit or debit card information in their app facilitate instant, one-click payments. Additionally, e-commerce platforms enabling merchants to establish a financial account within the platform eliminate the necessity for a separate, traditional business bank account. According to E&Y survey, over 70% of respondents believe that more than half of financial services will be provided through non financial services platform in the near future. 

Embedded finance encompasses various sectors, but payment reign supreme in terms of revenue. E&Y research indicates that the volume of payments processed through embedded channels hit US $2.5 trillion in 2021 and will reach $ 6.5 trillion by the end of 2023. Non-financial businesses prioritise payments as the initial and ongoing point of customer interaction, capitalising on extensive data gathered from each customer’s journey. Offering diverse services such as pre-ordering, gifting, and discounts, payments play a pivotal role in crafting fresh experiences, fostering brand loyalty, and blostering customer retention. Furthermore, as brands integrate payment processes, they streamline the addition of other products to payment flow, such as lending or insurance. 

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