By FintechOS · October 07, 2021
6 minute read

Embedded Finance: how is it changing how we pay?

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Key Takeaways:

  • More and more financial institutions are embracing embedded finance
  • Open banking and APIs will only enable embedded banking to grow and develop
  • Consumer behavior is already changing to adapt

It’s been said that embedded finance is rapidly changing consumer behavior. Removing friction and pain points in the customer journey means customers are less likely to drop off or abandon shopping baskets, but it also means customers may interact with payments in a different way.

In the past, when we purchased goods or services online, the process might have looked something like this: hunting down a cash or a debit/credit card, pausing to reconsider if the purchase is actually worth it, typing in our details, pausing again, and then finally hitting a buy button, and only then could we consider it done. But, as most retailers know, those pauses are points of friction – sometimes, the physical act of paying for something might cause a buyer to withdraw. Embedded finance minimizes that risk by making payments as seamless as possible.

So what is embedded finance?

Embedded finance means letting customers focus on the job they are trying to do, and make the “financial” part of the job easier, or even make it disappear, by focusing on a primary UX context.

As mentioned before, for customers, that could mean something as simple as no longer having to key in bank details each time they pay, or just tapping on a single icon on a screen to complete a transaction. But embedded finance can also go beyond that. It could also mean customers can now avail of other choices on how to pay: they can easily take out a personal loan, pay in installments, and even obtain insurance for the goods and services they are purchasing, all without having to go to a third-party platform.

The rise of BNPL

One of the most rapidly growing modes of embedded finance is Buy-Now-Pay-Later, or BNPL. With BNPL, you can easily access financing directly from a retailer’s website, usually without a hit to your credit score.

Klarna, a Swedish fintech, is one of the best-known BNPL providers. In essence, they provide a modified installment plan, except customers can get their items straight away, and they’re not charged interest. Buyers simply choose to pay via Klarna on checkout, and Klarna will split the bill into four equal installments, with each installment due every two weeks.

This kind of financing is becoming more popular with millennials and Gen Z, most of whom have grown up with some financial crisis or another in the background. To this cohort of buyers, an “installment plan” can seem much more appealing than taking on “debt” with a credit card.

The absent-minded genius of today’s apps

In pre-pandemic times, most of us would have used Uber or a similar ride-sharing app fairly regularly. With Uber, your payment details are taken at sign-up, and then you may never have to think of them again. This is the beauty of embedded payment: you speak to the customer’s need as immediately as possible, and remove as much friction as you can.

The same is true with a food delivery service like Deliveroo. It’s very easy to lose track of how frequently you order takeaway when there is no wallet to check, no cafe to walk to, and no restaurant to call. And this kind of absent-minded spending is everywhere. Amazon can have you buying groceries with just a quick tap. Movies can be streamed with an easy click. And even the games on your phone are happy to let you have extra poke balls, or another weapon, or another level — all with just a little swipe.

Your digital piggy bank

But embedded finance isn’t just all about how consumers spend. It can also be about how customers might try to save.

Acorns, for instance, integrates investments and savings into their current accounts offerings. Purchases are automatically “rounded up”, with the spare change going into a micro-investment account.

Another example is DriveWealth, which partners with fintechs, banks, and other financial institutions. DriveWealth is integrated into a partner’s platform, and ultimately lets a customer invest in portfolios or brands that make sense to them, in amounts that they can manage: £10 in Nike or $5 in Apple. DriveWealth makes investing easy and accessible, and because it’s embedded in a banking service or app, there is very little friction.

Insurance

In the first instance, embedded insurance might mean a more timely and integrated offer. For example, the Amazon checkout now offers an upsell for gadget insurance when buying various higher-priced electronics. Similarly, Trainline provides a one-click option to add single-journey travel insurance when booking tickets.

There’s no separate insurance application process: you remain in your primary UX context and keep the focus on the main job you are trying to do. It’s a win-win. Insurance may be even less of a visible decision at the next level, and already bundled with a product or service. For example, Tesla offers insurance directly as part of the standard car purchase process, and Amazon offers buyers and sellers coverage for property damage or personal injury claims arising from products sold through the platform.

Looking into the future

Imagine an AI assistant for your life who arranges everything so that your pantry is never empty, and your kindle is always stocked with books tailored to your tastes, and birthday presents are always sent out — without you even having to waste a moment’s thought. Imagine having that same AI assistant monitoring your “wealth management activities” and solving “anything that goes wrong” while constantly helping you to avoid things going wrong in the first place. With technology where it is now, this scenario is not far off.

Today’s embedded finance landscape gives us a clue to the future ahead, where our desires are instantly accessible (paid in installments, if necessary) and goods and services are automatically protected.

There are pitfalls of course: consumers not adequately thinking about the loans they’ve instantly accessed, or budget management problems when expenditures are hard to track. However, as more and more financial institutions embrace embedded finance — and the more scrutiny it attracts — it’s perhaps reasonable to expect that the ecosystem, and its associated checks and balances, will have a similarly rapid evolution alongside.

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