The financial world is experiencing a seismic change, with embedded finance becoming the game-changer. What was once limited to conventional banks, financial services are today built into non-financial platforms, allowing businesses from various sectors to provide banking-like services. With ride-hailing apps giving instant loans and e-commerce sites extending one-click payments, embedded finance is transforming customer experiences and opening up new revenue opportunities.
For senior leaders and decision-makers, understanding this transformation is critical for staying competitive. This blog explores how non-banks are becoming financial powerhouses and what this means for the future of banking.
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Understanding Embedded Finance
Embedded finance refers to the seamless integration of financial services—such as payments, lending, insurance, and wealth management—into non-financial platforms. Instead of relying on banks, businesses can embed these solutions into their ecosystems, enhancing customer convenience and loyalty.
Key examples are as follows.
- Buy Now, Pay Later (BNPL): Retailers use platforms such as Klarna and Affirm to provide installment-based financing at check out
- Embedded Payments: DoorDash and Uber remove friction from transactions by making payments directly within their apps
- Instant Lending: Shopify and Square offer working capital to merchants via embedded lending products
- Embedded Insurance: Tesla provides direct auto insurance at the time of vehicle purchase
Why Non-Banks Are Leading the Charge?
Conventional banks no longer have to be the sole keepers of financial services. Non-bank companies, possessing immense customer information and nimble technology, are using embedded finance to fuel business growth. And here’s how they are starting to gain advantage.
1. Better Customer Experience
Customers expect frictionless payments and instant money solutions. Embedded finance eradicates third-party banking interactions, providing a hassle-free user experience. For instance, Amazon’s embedded lending program allows small enterprises to obtain money without exiting the platform, diminishing the friction surrounding conventional loans.
2. Data-Driven Decision Making
Non-banks learn about customer behavior with the deepest insights through real-time data analysis. They can thus provide highly customized financial products. Consider Apple’s Apple Card—a financial product personalized according to user consumption patterns, providing cash-back rewards and interest-free payment plans.
3. New Revenue Streams
By integrating financial services, companies make their revenue streams more diversified away from their traditional products. Sites such as Shopify, which once existed primarily to enable e-commerce, today make substantial revenues through Shopify Capital—its embedded lending product.
4. Reduced Regulatory Burdens
In contrast to banks, most non-financial firms have fewer regulatory requirements, allowing them to introduce financial services more quickly. Collaborating with Banking-as-a-Service (BaaS) providers such as Stripe, Marqeta, or Solarisbank further quickens the process.
Implications for Legacy Banks
The advent of embedded finance marks a watershed moment for legacy banks. Instead of perceiving non-banks as threats, banks can be open to partnerships to stay afloat. A majority of financial institutions are turning to the BaaS model so that companies can use their infrastructure without sacrificing regulatory compliance.
Success in this space requires careful planning, strategic partnerships, and a deep understanding of both customer needs and regulatory requirements. The rewards, however, can be transformative for organizations willing to embrace this evolution in financial services.