Highlights:
- Embedded finance refers to the practice of incorporating financial tools into a non-financial organization’s sales process for goods and services to customers.
- Common examples of embedded finance include point-of-purchase financing, home insurance paired with mortgage lending, and on-the-spot employee payouts.
- Financial services organizations should consider embedded finance as a massive opportunity for growth.
- Having the right cloud-based communications platform can facilitate the building of partnerships with fintech in the embedded finance space.
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“Embedded finance” refers to the practice of incorporating financial tools into a non-financial organization’s sales process for goods and services to customers. It has become an increasingly popular way to deliver a more optimized customer experience. Given its implications to the industry, the embedded finance trend is something that all financial services providers need to recognize and understand.
Embedded finance and its impact on financial services
The following is an overview of embedded finance and its impact on financial services, including examples of its uses and strategic options for providers.
Examples of embedded finance
As a relatively new and evolving trend, the opportunities for embedded finance are vast and wide. There are several prominent industries and places where it already exists. The following are common examples of embedded finance:
Home insurance and lending
Given its financial significance, the real estate sector is home to perhaps the most impactful examples of embedded finance aimed at consumers and business buyers. Traditionally, property buyers had to identify and evaluate insurance and loan providers independent of property acquisition. Shopping for the best insurance coverage and financing adds to the stress of finding the right home or building.
With embedded financing, real estate businesses offer insurance and financing options directly to prospective buyers. Rather than interacting with multiple companies across three industries, buyers can learn about loans and insurance plans for which they qualify from the realtor. This streamlines the home-buying experience and helps give agents the ability to ensure offers come from qualified buyers, thus benefiting property sellers. There are also potential advantages from an economic scale that lead to lower collective costs for buyers.
Point-of-purchase financing
Large-scale retail purchases like major appliances, furniture, and decor are other consumer purchases that are more appealing when financing options exist. Even moderately-priced items can attract more buying interest with loan options. For these reasons, retailers have embedded certain financing options into the checkout process.
Online sellers like Amazon, for instance, have partnered with fintech to offer immediate financing decisions to buyers. If qualified, consumers can purchase their items and make regular payment installments for the repayment term, such as 6 to 12 months. The convenient access and timely decision attract buyers with limited cash. PayPal offers buy-now-pay-later options to customers, allowing them to spread the costs of PayPal-purchased items over four installments. These financing examples are a more digital version of the classic layaway program, but the buyer gets the item right away.
Small-business cash management
Over the last 20 years, small-business and home-based business operators have become a major force in eCommerce. Small producers or resellers rely on platforms like Amazon, Etsy, Shopify, and others to sell their items to consumers worldwide. These operators naturally need a method to receive money from payouts and to cover costs associated with their business.
Previously, the only option was to have an external bank account that allowed the business to cover costs and receive funds transfers. Embedded finance makes it faster and easier to connect business activity to money. Some of the shop platforms now offer sellers debit cards and other cash-management tools to provide immediate access to sales revenue.
Employee payouts
Innovative employers in certain sectors have provided debit cards to employees that allow them immediate access to income. Uber is one example. Drivers can quickly gain access to money earned from trips by using their Uber-provided debit cards. This incentive is attractive to workers in industries where income is earned in a dynamic and inconsistent manner. Employers that offer this option also gain a competitive advantage in sectors with limited employee pools.
Partnership opportunities with fintech
It is tempting for a traditional provider of financial services to regard embedded finance as an annoying competitive trend. However, savvy providers recognize that this trend is significant and enduring. Financial services providers must consider partnerships that could help them grow. A partnership could either allow a financial services organization to improve upon a solution that it offers already or create a gateway for the organization to access a previously untapped market.
The common thread in the examples above is an effort to streamline the relationship between purchasing and financing, or selling and cash access (in business operator cases). Thus, partnership opportunities exist in any industry where buyers (or sellers) need convenient and efficient access to money, insurance, or related financial services. Rather than waiting around for fintech developers to come to them, a more proactive and innovative approach to seeking partnerships improves a financial services organization’s likelihood of connecting with top players.
Importance of digital communications upgrades
To leverage opportunities in embedded finance, an organization needs advanced communication systems for its team. A top cloud-based, cross-platform communications system allows a financial services organization to manage interactions with customers across all key digital channels, including social media and chat. This technology eliminates a lot of the common bottlenecks that get in the way of fast resolution on service contacts, which is necessary to compete in a category where streamlined customer experiences are the core objective.
Organizations can also automate workflows with a collaborative system to allow for more consistency in their level of service. Routing customer contacts to the ideal agent or department is another common benefit, which protects against redundancy or wasted time for customers.
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Let RingCentral provide the infrastructure for embedded finance partnerships
The financial services industry cannot ignore the power of embedded finance. It is not a fad; it is a transformation in the digital economy designed to optimize buyer and seller experiences. The sooner your organization embraces this trend and identifies compelling opportunities, the more likely you are to achieve a profitable position.
To facilitate embedded finance, cross-platform communications systems are essential for industry support functions. Equip your agents with a top cloud-based solution like RingCentral, which allows for ideal communication regardless of channel and improves your ability to provide superior customer experiences quickly. RingCentral has a solution designed specifically for the needs of financial services providers. Request a free demo today to see how it works.
Originally published Mar 01, 2022