Embedded Finance – A New Era on the Horizon
Published on : Wednesday 06-01-2021
Embedded finance has led to a rise in the number of fintechs at various stages of the value chain, offering varied propositions, says Tarun Mathur.
With increasing digitalisation and adoption of tech-driven business models, erstwhile industry definitions have changed, and boundaries blurred. Finance industry too has not been spared. We are witnessing significant transformations in finance and can easily say that the next decade might look radically different. The coronavirus too has accelerated the pace of digital transformation across industries and the most conscious players have identified and responded to the need for more integrated and compelling product propositions which are woven into the customer lifecycle and delivered digitally and seamlessly.
All this has led to ‘embedded finance’ becoming a dominant trend. It refers to non-financial companies transforming and augmenting their value propositions by adding associated financial products and services in product journeys. That is why we are increasingly seeing financial activities like payment, lending, insurance, wealth management, and other transactions becoming basic functionalities of non-financial products. It is about embedding these second-order services in already familiar product journeys which customers are accustomed to. Platform economics lends viability to integrations and collaborations. Multiple industry research reports and surveys suggest that embedded finance has the potential to transform business models and market dynamics and influence cross-industry integration. As current developments indicate, it will surely lead to market competitiveness increasing across the board.
Embedded finance is taking myriad forms. Most of us have experienced it in form of payments in cab hailing apps, insurance embedded in gadget purchase, purchasing parking through google maps in some countries or have heard of stuff like Tesla offering its own insurance to its customers. Multiple tech companies have even launched their own debit cards. Apple launched a credit card; Amazon has Amazon Pay, etc. Ultimately all this is aimed at making finance a part of the native interface of other product’s journeys. In the insurance domain, embedded insurance is enabling a shift from ‘insurance is sold’ to ‘insurance is a native feature’. We all have seen the offers related to buy now, pay later where one can immediately draw out a loan on their cards and buy the product, etc.
One may ask, what is driving this trend? When we study the changing customer behaviour, we see that the shopping behaviour has changed. More and more people are getting used to online shopping, payments, etc., and even put higher trust in tech companies compared to the traditional banks. The other reason lies in the fact that ‘embedded finance’ is enabling seamless customer experience. There are less disjointed customer journeys leading to higher chances of transaction completion. Customers need not jump from one landing page to another to complete their purchase journey. Context continues to matter most, and finance is moving to the background. There is significant ongoing development towards creation of open data protocols. Availability of off-the-shelf products on-demand are lowering the barriers of entry for young fintechs. Big Tech firms are also capitalising on this trend with fintech integrations. Data collection, algorithms, machine learning, IoT will power this trend even further.
The ‘As-a-Service’ model has gained a lot of traction, expanding from infrastructure to applications. Companies are embracing this trend as this has helped them re-invent their propositions and opened new revenue streams. It has also helped create a much more diverse spread of offerings and experiences. For example, it has given a huge impetus to adoption of an insurance-as-a-service model. Many companies have now built in insurance and lending at the point of checkout. Embedded finance has led to a rise in the number of fintechs at various stages of the value chain, from infrastructure to aggregators offering varied propositions. Financial companies will continue to turn into regulated Software-as-a-service offerings with touchpoints in marketplaces, gaming apps, streaming services, etc. This reduces the cost of acquisition drastically and allows for faster pace of scaling.
For customers, finance has moved to the background and they now enjoy product and service journeys in relevant contexts in a seamless way. In this attention economy where cart abandonment is a big issue, embedded finance can allow for availability of relevant financial propositions at the point of need to help customers complete the transaction. Customers can find the right mechanism to pay, invest, save or spend at the right time. For the brand, it adds relevance to its offerings and increases adoption of its core products. Various surveys indicate that brands have been seeing a marked increase in their cross-sell, up-sell efforts as well. Embedded finance is enabling bundling and unbundling of financial offerings besides accelerating new product development.
In a world where the customer is expecting and demanding hyper-personalised and on-demand services, we are increasingly seeing companies adopt a platform approach and a modular product structure which lend structural data advantage to embedded finance. Existing digital platforms with large user bases stand to capitalise on this trend; younger ones need to be nimble and agile as they vie to forge and own customer relationships. Ecosystem partnerships become extremely crucial in this context.
We are looking at interesting times for the finance domain. The customer is looking for simple, transparent and smooth journeys. Thoughtful execution of embedded finance by leveraging all relevant data streams aimed at providing superlative customer experience can differentiate companies across industry domains. Even financial companies have had to change their stance of rigidity. Basic financial products are becoming commoditised and portable. P2P payments, wallets, etc., have all become common components of our digital lives. There will be more partnerships among un-seemingly complementary players and experimentation in service delivery with the aim of holistic customer experience. An ecosystem orchestrator which manages to assemble and coordinate among data, technology across partners will stand most to gain.
Customers will slowly become accustomed to financial services as a native feature of other products and will use financial services from centralised hubs which they trust. Cloud based integrations are already facilitating such system interactions. Infrastructure and service layers are being disintegrated. Software solutions are becoming more interoperable. Alternative data streams and advanced analytics are helping create refined customer personas and unified customer views to curate touchpoints for embedded finance. Behavioural economics will increasingly govern creation of relevant product structures and journeys thereby increasing stickiness.
In this context, companies intending to play in this field will have to evolve quickly. It will become a fiercely contested space. There are gaps which need to and can be easily filled. Multiple industries can leverage the opportunities provided by this trend, especially to reduce friction in existing customer journeys. There are great opportunities in store.
Value chain players will have to craft mutually beneficial propositions to make the most of the synergies. We are already seeing microservices based open API architectures enabling faster and deeper integrations across systems of multiple partners. The open form of financial services is becoming more commonplace. Partnerships will be fundamental to scale and success in this paradigm.
It is a paradigm shift happening currently with a potential to disrupt age-old business models and weave finance into our digital lives. Finance will no longer be discrete service. I believe customer experience driven digital transformation will continue to give rise to newer business models in this space. With more data availability, insight driven solutioning will help create hyper-personalised digital journeys for customers. A new era centred around customer convenience is on the horizon!
Tarun Mathur is an innovation – focused corporate professional with multi-functional experience of around 13 years with industry – leading firms like Infosys, Capgemini, Reliance Industries, Deloitte, etc. He is currently working as Head – Strategy & Innovation at Edelweiss General Insurance, a group entity of one of India's largest financial services conglomerate in Mumbai. He is building high performance teams to deliver insurtech stack in a highly dynamic landscape.
Tarun has worked in India and the US in roles spanning corporate strategy, managing strategic alliances and partnerships, leading business transformation initiatives, consulting, technology product management and venture capital. He has led digital transformation initiatives for large enterprises and has helped lots of tech-led businesses scale. He is passionate about emerging technologies and evolving business models in the networked economy.
Tarun is a mentor to startups in the Artificial Intelligence, IoT, Cybersecurity and Blockchain domain. He is active in the Venture Capital space and advises and helps businesses raise funds. He has led various corporate innovation initiatives and is known for his exceptional leadership and management skills. He mentors a number of students and young entrepreneurs.
A regular speaker in various industry conferences and is associated with various consortiums and international trade and knowledge bodies, Tarun holds an BE in Information Technology and MBA degrees from SIBM, and the Kellogg School of Management, US and has won numerous awards in academic excellence.