Indians trust Google more than banks with their money and 59% were open to switching to a digital-only bank as per a leading market research company, Forrester. This was before the pandemic. Post Covid emerged, digital adoption of financial services has accelerated further. This rise of non-bank technology companies has led to the emergence of embedded finance as an estimated $7 trillion opportunity globally by 2030.
What is embedded finance?
Over the last few years, non-bank providers have been integrating financial services into a variety of marketplaces and services. This disruptive trend of technology companies playing an important role in the financial lives of consumers and businesses can be termed as embedded finance. Here are a few examples of embedded finance:
- Payments : UPI has transformed the payments landscape and made it simple for technology companies to become payment providers. Every technology platform like Ola, Amazon, Google and even WhatsApp has a payments service.
- Consumer Lending : Credit card penetration in India remains at 59 million despite 800 million Indians having a bank account. Point of Sale (POS) based credit providers including Buy Now Pay Later companies have helped ensure the flow of credit at the right time to consumers while increasing the Average Order Value for merchants.
- SME Lending : Although small businesses are the growth engine of our economy they face a $330 billion credit gap. With the rise of B2B e-commerce platforms, the embedded finance opportunity is growing exponentially as trade is being digitised and alternative data for underwriting becomes available.
- Insurance : Insurance is something that nobody likes to think about but everybody needs. The availability of nano insurance products such as Dengue cover for Rs 49 being embedded into technology platforms is helping increase awareness of suitable products and appropriate risk coverage among Indians.
Beneficiaries of embedded finance
Consumers : Millions of customers have already benefited from embedded finance due to the attractive rewards given by the technology platforms for payments and timely access to credit at No Cost EMI from buy now pay later providers. Most importantly, we are seeing a change in trend from push driven sales of financial products to embedding the right product at the right time in the customer’s purchase journey.
SMEs: Alternative data from e-commerce platforms combined with upcoming innovations on open banking will truly unleash the power of embedded finance for small businesses and lenders
Government: Embedded finance is supporting the government’s vision of a cashless India and bridging the wide credit and insurance gaps that exist today
Enablers: Looking to build your own insurance, lending or payments business? Don’t! There is an API for that. OCEN and Account Aggregator framework are expected to deliver for lending what UPI has done for payments.
Platforms: Most platforms plan to monetise by offering services on top of their core product, for example kirana tech players. With the rise of an ecosystem of agile lenders and embedded finance enablers it is becoming simpler and quicker for platforms to monetise from an early stage.
Tech driven finance companies: Embedded finance is opening up markets that were previously difficult to service for traditional banks and finance companies due to falling distribution costs, increasing availability of alternative data and rapid tech adoption by our young Indian population.
Financial education needs to keep pace with this fast changing digital world. While currently embedded finance is opening up new opportunities, transparency and competition could decrease if the technology platforms gain more power.
Cyber security risks have also been rising as hackers from around the globe are targeting Indian companies. Our platforms, finance companies and enablers need to get ahead of this to ensure that customer and regulatory trust is maintained.
We’re in early innings of this huge opportunity and I will be rooting for each participant in the embedded finance ecosystem to achieve their full potential.
(The writer is founder of Credit Fair)
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