The word “embedded” literally means “fixing something firmly and deeply into something else,” and so embedded finance ultimately translates to fixing or attaching financial offerings to a non-financial offering. A simple example of this would be – pop-up for travel insurance when booking flight tickets.
According to a study, every Indian spent 4.7 hours on their phone per day with a cumulative total of 7.6 billion hours on shopping apps in 2021. However, if people can explicitly identify as consumers of products they buy, they also implicitly become consumers. of latent financial offers like payments, insurance, financing, etc. These latent financial offers come under integrated finance.
More and more consumer-facing companies have started offering such latent financial products for a multitude of reasons. As a consumer, therefore, it becomes important to understand the basics of the back-end processes that bring you these offers, what the benefits are and the main types of in-built financing, and finally, what exactly should you keep in mind when you opt for these offers. financial products.
Integrated funding process
Before diving into understanding the back-end process of integrated finance, it is important to know the stakeholders involved. There are mainly three main stakeholders:
- Consumer: This is the person who buys the non-financial product and therefore also becomes a potential customer for the integrated financial offer (as explained above). Although in some cases, due to the latency involved, one may not be able to explicitly identify oneself as a client.
- Company: The company selling the non-financial product or service to you.
- Financial institution (banks, non-bank financial companies or NBFCs, fintechs, etc.): Companies/institutions that sell/support integrated finance products. These companies do not sell financial offers directly but do so indirectly – through companies.
Types of integrated financing
Broadly integrated financial offerings can be divided into three types. Their examples are as follows-:
- Integrated payments: Online payment options such as credit card, debit card, united payment interface (UPI), etc. at checkout on any shopping website/app.
- Integrated insurance: Travel insurance when booking plane tickets or phone breakdown insurance when buying a phone.
- Integrated credit/loan: Buy now, pay later (BNPL) or equivalent monthly installments (EMI) option at checkout on any shopping website/app.
Benefits of integrated finance
While it may seem like a simple off-the-shelf concept, integrated financial products require careful thought and collaboration from both the business and the financial institution to design, plan, and ultimately implement. So what benefit do these companies get from offering you these products, and what benefit do customers like you get from choosing these products?
- Other source of income: Businesses get a share of revenue generated by customers through financial products sold on their respective website/app.
- Competitive advantage and customer loyalty: A website offering additional financial products like easy financing, insurance for the product the customer is buying, online payment options, etc. would be much more appealing to customers than a website that does not offer these options.
- Upper order value: EMI and BNPL (Buy now pay later) options give customers extra padding to make high-value purchases and buy more products than they normally would.
For financial institutions
- Simplified customer acquisition: Collaborating with businesses and embedding their offerings on relevant websites and apps allows banks/NBFCs to easily access a large and relevant customer base at minimal cost. Through websites/apps, financial services can also be extended to seemingly riskier customers, which may not be possible through the normal route.
- Collection of relevant data: With the proper placement of financial services, financial institutions have access not only to their financial data, but also to their non-financial data such as shopping preferences, frequency of use of specific services such as taking taxis, etc which can further be used to arrange specific financial products at a macro level and sell other offerings at a micro level.
- Simplified consumer management: With companies managing websites and applications dealing with customers, responsibility for user lifecycle management is split between financial institutions and companies, easing the burden on financial institutions to respond to queries, service customer, etc
- Convenience: As a user, you get convenient access to financial services such as online payment options or EMI facility at the time of payment or occasional use of a website/app.
- apt offers: The financial offers you have access to are not only well placed but also relevant to the website/app you are using.
- Adapted offers: The financial services available directly on the market are not very flexible and user-friendly in terms of offers and processes. However, integrated finance offers tailor-made one-click financial services to potential consumers. For example, getting a personal loan or getting an option to buy it now and pay later at checkout.
- Inclusion: Integrated finance enables underserved users to access formalized financial services, which they might not get in the normal course of business due to complicated processes and stringent financial institution screening criteria. It also acts as a foot in the door for underserved users for future access to formalized financial services.
- Better experience: As a consumer, getting additional offers in a convenient way always leads to a better overall shopping experience.
Should consumers be wary of embedded finance?
While integrated finance is supposed to make financial services more accessible, convenient and relevant, as a user it is important to keep some basic things in mind while opting for them.
- Terms and conditions: Like any other financial product, it is extremely important to read the terms and conditions carefully and personally understand what exactly you are signing up for.
- Convenience vs. Informed Decisions: Although integrated financial services offer a high degree of convenience, they do not always offer the best deal on the market. Therefore, it is always prudent to compare all the offers in the market before opting for any of them. For example, the premium charged for a travel insurance policy may be cheaper if purchased directly compared to an airline ticket booking website.
- Involuntary purchases: Due to the consumer psyche, convenient and widespread access to financial services sometimes leads to unintended purchases that could lead to regrets in the future. For example, buying an expensive product just because an easy financing option is available at checkout.
Embedded finance is one of the fastest growing subsectors in the fintech industry. The potential for its growth is prevalent in a country like India with a massive population of young people on the internet. Over time, we can expect more and more innovations and unique offerings in this area for different types of users and businesses. However, as a user, it is important to have a basic knowledge of the financial actions in which one can participate online and the implied consequences of these, whether positive or negative.