Embedded finance is becoming a popular term in fintech world today. In this post we provide you a detailed overview of this term and what it means.

Traditionally, business have focused on handful business objectives. For example, Walmart might want to sell your groceries and Instagram might be just an app to share photos. In either case, a business once successful and grown to a certain extent ends up dealing with lot of money. A lot of this money comes via people though some of it might also come from other businesses.

At this point, the app or website or even brick and mortar store ends up allocating a lot of their resources to handle the money. For example, Costco or Walmart have actual humans that help you checkout products. They also have online payment processors that process payments on their behalf. Soon, these business are dealing with a complex web of financial transactions, associated laws, risk analysis, fraud detection etc.

As readers would notice that large businesses like Walmart might be dealing with more money than many small banks and might be doing nearly all the work that a bank also does such as fraud detection, customer support, check processing cashbacks etc.

Embedded Finance

Many businesses have discovered that at this point, it might actually make more sense for the business to officially provide financial services as part of their core business itself. However, in USA a lot of such activities require a banking license which is hard to obtain. Walmart tried for over 10 years and then gave up.

Embedded finance is an idea that the business closely partners with an existing bank or similar institution to provide financial services within the business’s own ecosystem/app/website etc. so seamlessly that the end user may never have to deal with the underlying real bank.

One good example of this is Apple Credit Card. Apple has partnered with Goldman Sachs and Mastercard to provide this credit card. However for customers this is pretty much an extension of their Apple Phone. Walmart also has partnered with multiple providers. JP Morgan’s embedded finance specifically targets Walmart marketplace sellers.

Pillars of embedded finance

In embedded finance often only a subset of financial services are provided to the user. For example, Apple provides an Apple credit card but not a checking account.

1. Payments

The most important pillar generally is payments. A lot of merchants do this through co-branded credit cards such as airlines credit cards. But some also provide close integration with banks to allow a checking account based payment. Walmart does this today.

1. Store of value

Many provide a store of value such as Amazon Gift Balance. Here you can trust some money with the business and then use to easily for payments. Sometimes you can also earn money and withdraw it to your bank account.

Apps like Wise for example allow you to keep money in multiple currencies and use it accordingly.

1. Lending

Another popular feature is lending. Credit cards is an example of this but many apps will allow you to earn you paycheck 2 days before the actual date.

1. Tax Management

Some apps will help you to manage your taxes better by looking at all your earnings.

1. Insurance

A lot of merchants allow you to buy insurance to protect your purchases. This is also a great example of embedded finance.

Conclusion

Embedded finance is when the non financial business provides financial services by partnering with real financial institutions within their product. It is a popular area of product development and is only going to grow.