Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members


Bank accounts, wallets, lending, and transfers (nonbank financial services) are becoming widely accessible and have acquired prominence in present times.  These banking-like services that non-banks offer, a type of embedded finance adopted by companies, intends to foster customer retention and increase their lifetime value.

Today, the launch of embedded financial services that serve customers and businesses are being considered by companies of all sizes and stages of maturity; including telcos, logistics firms, supermarkets, major software and tech companies, insurance agencies, and automotive manufacturers among others.  Customers like the convenience of embedded finance solutions: A small business can get a bank account through its accounting software, and a customer can pay through the store.

Based on insights from McKinsey, let’s take a closer look at the key factors that are driving the embedded finance landscape today.

Rise of Business as a Service (BaaS)

Financial institutions today in a bid to meet the growing demand for embedded finance, and increasingly providing banking as a service (BaaS): Bundled financial services that nonbanks use to support and enhance the customer experience.  Since BaaS is typically delivered to clients through APIs and needs good risk and compliance management on the part of the embedded finance partner, it has necessitated new technology and capabilities to make it work.

According to a leading market research firm, Forrester, Indians trust Google more than banks with their capital, and 59 percent are open to switching to a digital-only bank.  New business models, such as pay-for-use monetization, B2B2C and B2B2B delivery capabilities, and careful branding consideration will be required by banks to unlock the true potential of BaaS.

When it comes to selling their goods and services via partners, banks fear that it could potentially wreak havoc on their client relationships.  However, if end users begin to implement embedded finance in large numbers, it would necessitate the launch of BaaS business lines by banks. The silver lining here is that by allowing partners to sell banking products can be a high-volume, low-margin business for banks. Presently, the digital transformation that many banks have undergone will also enable BaaS.

Evolution of embedded finance

Embedded Finance Infrastructure can potentially lower the barrier for digital networks to deliver financial services to their customers natively (by 10x).  The advent of tailored and embedded financial products can support over 100 million potential borrowers. It has the potential to be the largest FinTech surge till date.  Many financial processes can be streamlined in embedded finance solutions. A lacuna existed between the customer and financial institution before the advent of embedded finance. A conventional financial services provider, such as a lender or bank, was often required to bridge the gap for the borrower.

It can be said that the many waves of FinTech infrastructure growth in India have culminated into the various developments that we see in Embedded Finance. The evolution of UPI has laid the groundwork for developing FinTech apps and so has the implementation of Account Aggregators (NBFC-AA) and the Open Credit Enablement Network (OCEN). An article highlights that embedded finance has emerged as a $7 trillion global market by 2030, thanks to the growth of non-bank technology firms.

As a phenomenon, embedded finance is already profoundly altering the fintech and banking landscape while making banking experiences more seamless for customers. Today, it can find use in the digital networks of B2C, MSME, and even e-commerce organizations to enhance and enrich customer experiences with financial services.

Future outlook

The rise of open banking solutions and new financial technology as well as consumer data has unlocked new vistas for value and growth in all industries, apart from banking.  This has fostered innovation and is set to change how financial services are perceived and offered in the long-run.

– Lionel Alva

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members

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