Embedded Finance- A step closer to financial inclusion in India
Introduction
Embedded finance is the financial services industry’s future. It’s when a non-financial service provider, like a retailer or a ride-sharing business, joins forces with a financial service, like payment processing, lending, or insurance, and disrupts the whole landscape. As embedded finance becomes more prevalent, it can be fascinating to look at some embedded finance examples to see how it’s being used and where there’s room for innovation and growth.
Financial Inclusion and its Challenges in India
In the last few years, India has made significant progress in terms of financial inclusion. In recent years, the number of Indians with bank accounts has risen, and it is now estimated that nearly 80% of Indians have bank accounts.
FinTech companies in India are increasingly making their presence felt as the government of India strives to expand financial services to the underbanked segment of the population. From 2014 to 2018, India ranked second in the global FinTech adoption index, with over 1,300 FinTech start-ups and investments totaling USD 5.72 billion in FinTech. However, since 76 percent of India’s adult population is financially illiterate, only 52 percent of bank accounts are active, which is a challenge the country faces in achieving financial inclusion. India must work to improve financial inclusion in order to provide financial services to the unbanked and to provide a secure environment for FinTech companies to operate.
Opportunities for Embedded Finance
Embedded finance has the potential of simplifying financial processes. Before the advent of embedded finance or banking, there was typically a gap between a customer and the company they did business with. A conventional financial services provider, such as a lender or bank, was often required to fill the void for the borrower. A bank would issue a credit or debit card to a customer who made a purchase, or a lender would grant a loan to an individual who wanted to buy a home, vehicle, or other large items. With Embedded Finance, the third-party bank or lender is no longer required. Embedded finance companies have discovered a way to serve as a link between themselves and their customers. This would be notably beneficial to people living in semi-urban and rural areas with limited access to physical banks or lenders. However, thanks to India’s digital revolution, this gap can now be bridged with just a cell phone and access to the internet.
Areas Embedded Finance has transformed
1. Embedded Payments:
Paying for something can be painful at times. Consumers suffer physical pain when they pay with cash. The pain may be enough to make someone reconsider a purchase in some situations. Customers can buy almost painlessly thanks to embedded payments. A customer using an app with an integrated payment program doesn’t have to search through their wallet for cash or locate their credit card; instead, they simply tap a few buttons, and they’re done.
Ride-sharing apps like Uber and Ola are examples of applications of embedded payments. You don’t have to give the driver cash or pull out a debit or credit card to pay when you take a ride with one of those services. Instead, after the trip, you complete the transaction in the app. Embedded payments are also available for something as simple as Starbucks. People can order and pay from their phones using the app. It also gives them points that can be used to make potential purchases.
2. Debit/Credit Card Transactions:
Debit cards make it easier for businesses to pay vendors and staff. Companies may send payments to their own branded credit cards instead of cutting checks or making direct deposits. The business will choose to pay the card issuer all or part of the interchange charge in return for a white label debit card.
PayPal is an example of a company that uses cards to simplify payments. The choice to connect a PayPal account to a bank account is available to users. They may also apply for a cash card from the company, which allows them direct access to the PayPal account’s balance. Rather than waiting a day or two for the money to arrive in their bank account, a person with a cash card can use it right away by paying with it or withdrawing cash from an ATM.
3. Lending:
Whenever someone required money in the past, they would apply for a bank loan or use their credit card. Embedded lending now allows customers to apply for and receive a loan at the time of purchase. LazyPay and Simpl are two examples of embedded lending use cases. Both systems enable customers to break down a large online transaction into smaller monthly payments. For example, a $100 payment is divided into four $25 installments.
4. Investments:
Investing can seem complicated and out of reach to the average citizen. Embedded banking applications that make investing easier are attempting to change that. Spenny, an application that invests people’s spare change by rounding up purchases, is one example. Investing with Spenny is easy and hassle-free. The app takes care of transferring money to a user’s account, so they don’t have to remember.
5. Embedded Insurance:
Embedded insurance policies remove the need for an insurance provider or broker during the purchase of a policy. Purchasing a vehicle or a house used to necessitate purchasing insurance. It was also a completely different step in the procedure. Some businesses have found ways to incorporate the application for an insurance policy into the process of making a big purchase in order to save time and money. Tesla, for example, is one such company. It has an insurance policy that allows customers to buy the right amount of coverage almost immediately. In addition, insurance purchased directly from Tesla is typically less expensive than insurance purchased from a third-party insurer.
6. Embedded Banking:
Embedded banking isn’t just a fancy way of saying “embedded finance.” There are also cases of businesses providing banking services to supplement conventional financial institutions’ checking or savings accounts. One example of embedded banking is Ola’s Ola Money, which enables drivers to be paid instantly by the ride-share business. Shopify has a similar embedded banking use case for businesses. The aim of Shopify’s banking feature is to enable small business owners to open a separate business bank account rather than using their personal checking and savings accounts.
7. Embedded Finance Landscape:
How do businesses incorporate banking or financial services into their own goods or services? They have a variety of options. Companies that aren’t in the fintech sector are sometimes looking for ways to provide financial services. Shopify, for example, has started to provide companies with lending services as well as bank accounts. Udaan is another example that has made similar moves with developments such as Udaan Credit. Some companies serve as connectors, bridging the gap between financial and non-financial services. These companies focus on embedding the required infrastructure into the businesses’ products or services. FinBox, for example, provides powerful and easy-to-use APIs and SDKs that help companies integrate financial services into their business.
What the future beholds for Embedded Finance
Embedded finance has endless benefits. Businesses and companies benefit from this functionality because it allows them to create new sales sources every time a customer uses them. The user-friendly interface improves the overall consumer experience, increasing product stickiness and encouraging loyalty and repeat purchases. Another advantage is that companies now have access to more data, allowing them to serve their consumers better. As a result, either the business or the website’s conversion rate improves. Some of the largest tech companies have already entered the financial sector, with several more on the way.
Embedded Finance is pushing organizations to alter their business practices drastically. In the delivery of financial services, anchor channels would be critical. It will usher in a new age of financial products that are both creative and successful. To remain dominant in their industry, businesses in all sectors, as well as lenders, must use embedded finance infrastructure. For the customers, the most exciting aspect is yet to come. Embedded Finance will provide consumers from all economic and social demographics with reliable, personalized, and easy-to-access financial services. All in all, it goes without saying that Embedded Finance is going to play a huge role in financial inclusion by reshaping the fintech environment.
