Jan 26, 2023
Deep dive into the world of EmFi and learn how it is beneficial for both businesses and customers, why it is trending and its place within the financial value chain
Before the rise of embedded finance (EmFi), the majority of financial services provided to consumers and small businesses alike were handled by local bankers and providers. Business transactions and relationships with financial services are changing as EmFi gains popularity among businesses seeking to maximise productivity and efficiency.
Rather than having to access standalone financial services from traditional institutions, it is more convenient for clients to access payments, lending, insurance, and other financial services from one company. This proposition guarantees cost-reduction and risk-reduction benefits to businesses throughout the value chain.
In this article, A Beginner’s Guide to EmFi: Part 1 Introduction to Embedded Finance, we dive deep into the world of EmFi. Find out how it is mutually beneficial for both businesses and consumers, why it is trending, and its place within the financial value chain.
In a nutshell, EmFi integrates financial services into products or services provided by non-financial businesses. Some examples include an e-commerce merchant providing insurance at check-out, a coffee shop app that offers one-click payments or a branded credit card of a department store. EmFi offers all businesses the platform to innovate beyond prior systems while simultaneously making quicker, simpler, more delightful experiences.
Effective solutions meet customers' needs and provide the financial options they require, whether a loan, a payment or an insurance plan. This approach makes buying products faster and easier for customers while providing opportunities to streamline back-end processes for businesses. EmFi enables financial services to be used in conjunction with a customer’s product or service, in real-time, rather than being entirely separate. Shopify, an e-commerce platform, is a good example, as it has started to offer lending services as well as bank accounts to businesses.
A customer-centric approach is key to EmFi's success. This can be achieved by offering convenient value propositions and aiming for a mutual benefit for the business and its customers. The outcome is that customers increase their financial management productivity whilst businesses boost their resources, automate operations and give rise to more revenue opportunities. By incorporating banking software into the website or mobile app, businesses offer people the possibility to purchase a product through the digital channel, finance their purchases, and even apply for an insurance policy in the checkout process, all with a single click.
EmFi is beneficial for both customers and businesses as it removes various problems faced by current or prospective customers while simultaneously creating new growth and retention opportunities.
Advantages for customers:
Advantages for businesses:
Forbes estimates EmFi will generate $230 billion in revenue by 2025 globally, an increase of tenfold from $22.5 billion in 2020. The LATAM region is growing more rapidly than other regions, and EmFi revenues are expected to increase even further from $7,495.9 million in 2022 to $28.735.7 million.
Collaborations, however, are crucial, especially in Latin America, where banks still need help with technologies and interfaces. Non-financial businesses that cannot yet provide financial services can also benefit from this. Furthermore, EmFi is poised to flourish as government regulations improve and frameworks are brought in due to peak customer demand.
Increasing products and service delivery with a strong user experience and little resistance is expected to, in turn, increase cross-sector strategic alliances in LATAM over the upcoming quarters. For example, Pomelo builds state-of-the-art fintech infrastructure that enables businesses to create a fintech business and launch cards “much faster” across LATAM. With its launch in 2020 in Argentina, Pomelo has quickly expanded into other countries in LATAM, including Brazil, the trophy country.
"The adoption of EmFi solutions will increase as the use of digital solutions increases. With smartphone penetration already high, COVID simply fast-tracked the adoption of digital services that are now part of people’s everyday life.”
By Peter Barcak, Founder and CEO of credolab
Fintech infrastructure and online integrations have matured immensely since the recent global pandemic. Due to the increasing reliance on digital services, users have become accustomed to online shopping and experienced the convenience of one-stop shopping. Crucial changes in commerce, merchant and customer behaviour, and technology have also enabled this progress:
It is important to distinguish between the different types of EmFi and their key advantages before diving into the value chain. The key categories of EmFi include, but are not limited to:
There are three key categories of players within the EmFi value chain: provider, enabler and embedder.
Previously, each player had a distinct role. Now, with the advancement of technology and the market, players compete with each other to gain higher revenue by growing across the value chain. As a result, these three individual categories start to overlap and lead to a multi-directional exchange.
With EmFi, all participants in the ecosystem can offer customers the services they need to improve their experience in a secure, simple, and cost-effective manner through a single interface. Stripe, for example, has partnered with Goldman Sachs and other banks to offer embedded financing to third-party platforms and marketplaces. Apple Card also partnered with Goldman Sachs to allow iPhone users to apply digitally (integrated with Apple Pay and the device's Wallet app). In this way, cashback on purchases and interest-free purchases are offered with no fees and no handling charges.
EmFi offers financial businesses the opportunity to establish important partnerships with non-financial businesses. For B2B marketplaces and e-commerce platforms, choosing the right partner is crucial to driving payments or offering credit terms to their customers. Making the right decision for the future can be challenging, and a partnership's full integration into a business makes it even harder to change.
However, as these partnerships progress, EmFi will become more prevalent. A wide range of businesses, including retailers, travel, and software firms, have started adopting EmFi into payment services to improve accessibility. Dealroom describes EmFi as a "multi-trillion-dollar opportunity" that generates more potential than the combined total of all fintech startups and top global banks and insurers. By 2030, EmFi is predicted to reach $7.2 trillion, twice the combined value of today's top 30 banks and insurers.
“In the next few years, we will see Embedded Finance(EmFi) expand into various sectors: Education, Healthcare, Real estate and Agriculture. All are attractive in terms of the size of the opportunity as well as the potential to offer innovative EmFi products. We will also see increasing partnerships of Fintechs with leading consumer brands and leveraging Open Banking APIs to integrate EmFi within the overall customer journey.”
By Bharath Kumar Vellore, General Manager of APAC at Provenir
In the Education Technology (EdTech) sector, global policies have helped students gain greater access to loans. Unfortunately, these often come with high-interest rates, which negatively affect the financial health of students. EmFi and its access to deep customer analytics make it possible to more accurately evaluate a student's ability to repay loans and lend accordingly.
In the healthcare industry, patients are hindered or delayed in receiving treatments because of high costs, lack of transparency in pricing and payment options. EmFi can make the healthcare industry more profitable by decreasing costs, connecting and providing flexible and convenient payment options while simultaneously solving these issues.
According to a report by Bain, different industries show varying maturity levels in EmFi. Retail, e-commerce, food and mobility show a high degree of growth, while industries including real estate, travel and health are still in their early phases. These differences are directly related to barriers, including regulation, compliance and digitisation of services. Despite the slow advancement of some industries, there is still tremendous potential for growth.
Therefore, it is no surprise that Venture Capital (VC) investments are expressing a deeper interest in this sector. According to Statista, VC investments in EmFi skyrocketed in 2021, gaining a value of$4.25 billion, which is almost three times more than in 2020. Thus, businesses constantly seek partnerships to expand business models and raise VC investments.
Today's business environment emphasises delivering a superior customer experience, valuing customer time, and building a seamless ecosystem for the customer. EmFi enables businesses to understand customers' habits and needs better, thereby driving business development. Simultaneously, fintechs have evolved due to new customer and provider relationships, increased revenue streams, partnerships, and competition from previously unrelated industries.
However, EmFi is only just beginning its transformation in the financial sector. With increasing recognition of customer needs, businesses will adapt business models to maximise revenues and deliver the best customer experience.
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