The NimbleFins Guide to Embedded Finance

Wondering what embedded finance is and how businesses use it? Read our guide. We've included lots of real-world and hypothetical examples to give a clear picture of how it really works.

What is embedded finance?

Embedded finance is essentially when financial products (e.g., insurance, loans, payment processing, etc.) are integrated into non-financial transactions or products (e.g. buying a plane ticket, car, sofa, concert ticket, etc.).

That definition may mean little without some context, so let's look at a few real-life examples to understand how businesses actually embed finance into their non-financial products.

Real-Life Example 1: British Airways

British Airways is a good place to start as many people will have been exposed to their embedded finance without even realising it—BA have embedded travel insurance into the sale of their air fares.

If a customer buys a plane ticket from British Airways, the customer will be offered travel insurance for their trip during the check-out process. That travel insurance is a form of embedded finance.

British Airways tacks on the selling of a financial product (travel insurance) to a transaction for a non-financial product (buying an airline ticket). This benefits BA (by earning a commission on the travel insurance purchases and getting a boost to customer loyalty for catering to needs) and benefits the customer (who can protect their trip really easily).

Example 2: Ford Credit

Now let's look at Ford car dealerships—they've embedded car financing into the car purchase process using the Ford Motor Credit Company LLC (Ford Credit), which has been providing auto financing at the point of sale for consumers and dealerships since 1959. (Despite recent innovation in the industry, embedded finance is hardly a new idea.)

Ford Credit enables dealers to offer instalment sale and lease contracts to retail customers. This benefits Ford dealers (they can remain competitive by offering attractive financing terms to customers and earn a commission on the loan; brand loyalty is boosted by the dealer catering to their customers' financing needs) and benefits customers (who can access financing easily at the point of sale).

Types of embedded finance

The types of financial products one can embed include virtually every product or service offered by a bank, such as:

  • payment services
  • loans
  • insurance
  • credit cards
  • debit cards
  • debit transactions
  • mobile bank accounts
  • and more

Below are examples of different ways in which a business or organisation might be able to implement embedded finance to benefit both themselves—and their customers.

Payments

Businesses can streamline the buying process for their customers by integrating payment tools such as Paypal, Apple Pay, Google Pay, Giropay, Amazon Pay, etc. Using these tools, customers won't need to pull out cash or a credit card to complete a purchase. Think of how Uber uses embedded payments so their customers don't need to pull out cash or a credit card to pay for a ride—the payment is seamless and automatic.

Benefit to business: less likely to lose customers at point of sale; boost to customer loyalty by making payments more convenient

Benefit to end customer: faster transactions, eliminates the need to enter credit card information or transact in cash

Direct Debits

An organisation could offer membership that is paid through monthly direct debits instead of an upfront annual payment. For example, buying a membership to the Royal Horticultural Society can be done upfront with a credit card or through monthly direct debits (the latter of which is cheaper because there are no credit card exchange fees). Your local gym might have a similar deal.

Benefit to business: offering discounts and the ability to spread out payments can increase sales and customer loyalty

Benefit to end customer: can take advantage of discounts offered by businesses for using a direct debit (discounts that are passed on by the business, which is avoiding credit card exchange fees) and may prefer to spread an expense over the year instead of paying upfront

Loans

A business selling big ticket items can offer loans (e.g. buy now pay later) at the point of sale to help lock in sales and ease the buying process. For example, a furniture retailer can utilise these types of tools (e.g. Klarna) to help their customers pay for sofas, beds, dining sets and more.

Benefit to business: customers are more likely to complete the purchase process if they have easy, instant access to a loan; customers may be more inclined to buy more (increased sales/customer) if they can spread out the cost over time

Benefit to end customer: spread out the cost of expensive purchases; instant access to credit

Savings Accounts

A tax planning software company could embed savings accounts offers to customers.

Benefit to business: customer loyalty could be boosted because the business is helping customers to save, which people like to do; the business can boost revenues through earning commissions when new savings accounts are opened

Benefit to end customer: customers can easily open new savings accounts to help increase their wealth

Insurance

A holiday company could sell travel insurance when they sell a trip; a car dealer could sell car insurance with a lease; an events company could sell insurance with concert tickets, etc.

Benefit to business: insurance commissions are an additional revenue source; customer loyalty is boosted because the company is helping their customers protect their purchases

Benefit to end customer: protect expensive purchases; save time purchasing insurance by doing it at the point of sale of the goods

What types of businesses can implement embedded finance?

Practically any business selling a service or a product can embed finance into their sales, although clearly embedded finance tools are designed for businesses that trade online or via an app. But there is virtually no limit to the types of non-financial transactions into which you can embed finance. For example, a holiday company can sell travel insurance; a sofa company can offer a payment plan to spread the payments on an expensive living room suite; a tax software company can offer savings accounts to their customers.

Should your business embed any finance products?

Any business thinking about embedding finance should consider a few key questions., because there's not much sense investing time, energy and perhaps money embedding financial products into a site if the business's customers won't use it.

Does the finance product or service make sense within the customer journey?

In most cases, embedded finance is more likely to be successful when it complements the main product or service. For example, embedded finance works well for businesses selling a product or service when it helps the end customer to:

  • pay for their purchase and/or
  • protect their purchase

Is the business's brand quite strong?

Loyal and trusting customers will be more likely to buy an add-on financial product. Take stock of what proportion of customers are repeat customers as they tend to be more brand loyal; also, customers buying big ticket items are more likely to engage with embedded finance.

How frequent are customer interactions?

This ties in with brand loyalty. The more a customer interacts, the more they tend to trust a brand. And the more opportunity to sign up for or buy an embedded finance product.

How old are the business's customers?

The younger generation has grown up in the digital age, transacting online and searching for the most streamlined buying process possible. They will be more likely to engage with embedded finance options without question. On the other hand, older customers more accustomed to brick and mortar banks may be less inclined to buy banking products from a business that is not a financial institution.

Is the company digital?

Perhaps it goes without saying, but embedded finance market solutions are designed for online transactions.

Where to get embedded finance solutions

So what kinds of companies provide embedded finance solutions? That's where Banking as a Service (BaaS) comes in.

A regular business won't have the regulatory permissions, products or expertise to build and provide financial solutions for their customers. They need to work with one or more partners to provide a solution.

It's difficult to become a bank—there's a massive amount of time, money and regulation required to get a banking licence. But nearly any business (e.g. e-commerce site, retailer, transport company, travel company, fintech, etc.) can pretty easily act like a bank (that is, offer embedded finance banking services to its customers) by partnering with a real bank that will essentially share its banking licence. If you want to learn more, read our article on Banking as a Service (BaaS) here.

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