Embedded finance: New opportunities for businesses and financial companies

Embedded finance changes the way how people interact with financial services. Nowadays, financial companies are the points of contact for financial services customers. For example, when we purchase in a supermarket, we need payment services. So, we use a debit or credit card, which is an access tool to our bank account. When we need insurance, we contact an insurance company. To summarise, when we need financial services, we approach a bank or another financial institution, either face-to-face or digitally.

The increasing digital engagement of customers, especially after the COVID-19 pandemic, is one of the observed trends. Hellenic Bank reports the decrease of the branch network from 63 branches and 25 cash offices to 58 branches and 6 cash offices in Cyprus during the 2021 year. The trend continued in the 2022 year. As at 31 December 2022, the Bank’s branch network included 55 branches. Bank of Cyprus as well reports that the adoption of digital products and services continued to grow and gained momentum in 2021: about 80% of individual customers were digitally engaged versus 60% in 2017. As at the end of December 2022, 93.9% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels. Digital innovations disrupt the traditional “going to the bank” approach to getting financial services.

Embedded finance is the next wave of innovation. Non-financial companies start to offer financial products and services. Digitalisation of financial products and services enables this opportunity. For better customer experience, non-financial organisations embed financial services into their business processes. Businesses offer digital financial services exactly when and where they are needed. Whatever you do, embedded finance is next to you. Embedded finance can be defined as the delivery of digital financial products and services by non-financial companies and organisations.

For example, e-commerce retailers, telecom companies, and others offer banking services directly on their websites without re-directing customers to a bank. Lyft, a taxi company, offers a card associated with the account in its application for drivers. Taxi drivers get paid instantly after every ride and can spend the funds immediately. Amazon offers financial products by proposing a wide range of credit and payment cards. Tesla offers insurance to buyers of a Tesla car by leveraging on knowledge of the vehicle and driver’s details.

Embedded finance innovation is all about partnerships. It opens new opportunities for both businesses and financial institutions. To offer embedded finance, businesses, FinTech companies, banks, and financial institutions form technological chains, in which they play their roles as distributors, technology providers, or balance sheet providers. In an embedded finance environment, the products and services become more customised and end-to-end digitalised. This integrated and seamless approach creates value for customers.

Embedded finance is a powerful tool for building customer relationships and expansion of the customer base. At the same time, it is a challenge for the finance industry. Financial institutions, which serve end customers directly (via F2F or digital channels), must adapt to serve businesses, which function as distributors in selling embedded-finance products to their consumers.

Is it time to review your business from the embedded finance perspective and built-in financial services into your products?

Andrey Afanasiev, Associate Professor of Finance and Risk Management, and the Director of the MSc in Financial Services at the University of Limassol.