Embedded Finance provides users with a more convenient and personalized financial service experience by seamlessly integrating financial services into the platforms or applications of non-financial institutions (such as e-commerce websites, social media platforms, mobile applications, etc.). Embedded financial services achieve seamless integration with modern platforms through Banking as a Service (BaaS) and open banking technologies, simplifying user processes, improving efficiency, and breaking the boundaries of traditional banking services, allowing customers to access financial services whenever and wherever they need them, thus enhancing user experience and satisfaction.
Embedded Finance offers various advantages to non-financial institutions (such as e-commerce platforms, social platforms, and third-party payment companies). First, it can improve customer acquisition and retention rates by providing financial services within existing customer journeys. Second, it creates new revenue streams through financial products and services, increasing the lifetime value of customer relationships. Third, it utilizes user data, behavioral patterns, and contextual information to provide personalized product and service experiences. For banks and financial institutions, Embedded Finance may be seen as a threat to visibility and relationships with end users, but through strategic customer engagement and appropriate digital capability development, it also presents opportunities for banks to offer new business models.
The development of Embedded Finance is attributed to fundamental changes in business, consumer behavior, and technology. The history of Embedded Finance dates back to 1926 when Ford Motor Company launched credit services, which were early prototypes of embedded financial services. With technological advancements, particularly in internet and mobile payment technologies, Embedded Finance has gradually become a trend. The EU’s Payment Services Directive (PSD2) in 2015 further propelled the development of Embedded Finance, introducing the concepts of open banking and open finance, enabling non-financial enterprises to provide financial services through technological means with the support of open banking and API technologies. Currently, 33% of card payments are completed online globally, and most small and medium-sized enterprises in the US rely on software solutions for business management.
In China, the development of Embedded Finance is driven by multiple factors. On one hand, the Chinese government has introduced several open policies in finance and the automotive sector, attracting more leading international companies to enter the Chinese market, providing more opportunities for financial service outsourcing, intelligent manufacturing services, research and development design, and IT support services. On the other hand, with the popularity of smartphones and the internet, Embedded Finance services have become increasingly accessible, especially in retail, e-commerce, and logistics sectors.
Embedded payments are one of the most common forms of Embedded Finance. They allow users to complete payments without leaving the application, such as processing payments directly on e-commerce websites or mobile applications. This integration not only improves payment convenience but also reduces transaction costs and fraud risks. Singapore’s gig economy platform Grab initially provided ride-hailing services and later expanded to food delivery, offering payment, insurance, investment, and loan services within its application. Stripe’s collaboration with Fifth Third Bank enables merchants to offer a wider range of embedded financial products, further promoting the development of embedded payments.
Embedded lending allows non-financial companies to collaborate with banks or other lending institutions through APIs to provide loan services to employees and customers. Among these, the “Buy Now Pay Later” (BNPL) model offers consumers greater flexibility and convenience. In the first four months of 2024, US BNPL platforms helped e-commerce spending reach a historic high of $25.9 billion, a year-on-year increase of 11.8%2. Companies like Klarna provide online loan services, allowing consumers to purchase items online and defer payments, thereby increasing sales and customer loyalty. Shopify Balance allows merchants to manage funds, pay bills, and track expenses on the platform, while Housecall Pro helps home service professionals receive payments and loans more quickly.
Embedded insurance refers to the provision of insurance services within e-commerce websites, applications, or online marketplaces. This model simplifies the insurance purchasing process, allowing users to easily add desired insurance products, such as travel insurance or product-related insurance, at checkout. AirBnB’s AirCover provides liability and property damage insurance for hosts, demonstrating how companies can integrate insurance into their core products, streamline processes, and enhance customer loyalty. Additionally, Expedia and Booking.com offer travel insurance options during user bookings, with insurance services directly embedded in the booking process; Fitbit provides personalized health insurance products based on user activity data.
Embedded investment allows users to invest in stocks and bonds on non-financial platforms. This model connects users to market investment functions of major stock exchanges through APIs, enabling them to perform investment operations on familiar platforms. For instance, some fintech companies have developed digital wallets and personalized financial tools to facilitate investment management for users.
First, Embedded Finance faces the issue of ambiguous responsibility in practice, as complex business relationships increase the complexity of determining responsibility and handling complaints. For example, when non-financial companies provide bank loans through their platforms, banks cannot directly contact borrowers, making loan recovery difficult. In such cases, there is a lack of direct contact between banks and end customers, while consumers interact with two different organizations for products or services, complicating the assignment of responsibility and handling complaints. It needs to be clarified whether financial institutions, API developers, API providers, or non-financial companies should bear responsibility, or whether all parties involved in the Embedded Finance arrangements should be jointly sanctioned.
Second, data security and privacy protection are key issues in the regulation of Embedded Finance. For example, e-commerce platforms, ride-hailing applications, and healthcare providers make financial services more convenient and seamless. However, this also brings challenges related to data security and privacy protection. Companies must comply with relevant regulations, such as the EU’s General Data Protection Regulation (GDPR), to safeguard customer privacy. Moreover, data security and consumer protection are important topics in the regulatory environment of Embedded Finance, requiring companies to follow strict security protocols and industry standards to ensure fairness and transparency in services.
Third, the technological dependence and implementation complexity of Embedded Finance services are significant issues. This technological dependence mainly manifests in the reliance on third-party financial suppliers. Many companies may rely on third-party financial providers to meet their financial service needs, which can compromise product reliability and performance, especially when providers encounter issues. Additionally, the implementation complexity of Embedded Finance is a major concern, particularly for small companies or startups that may lack sufficient resources and technical capabilities to address the complex integration and data processing requirements.
Embedded Finance, as an emerging financial service model, is changing the way we access and use financial services. In terms of market size, Embedded Finance is rapidly growing globally. It is expected that by 2029, the Asia-Pacific region will achieve nearly 25% annual growth, becoming a leading provider of embedded lending.3 In terms of application areas, with continuous technological advancements, the application scope of Embedded Finance will become even broader, integrating deeply with various industries from home and transportation to manufacturing, as well as smart cities and smart agriculture, enabling intelligent financial services. At the same time, by integrating artificial intelligence and big data analysis, Embedded Finance can enhance data analysis and risk control capabilities, better understand customer needs and risk situations, and further improve the personalization and customization of financial services.
However, the development of Embedded Finance also faces several challenges. Issues such as regulatory uncertainty, technological challenges, and market saturation need to be addressed seriously. To tackle these challenges, industry players need to actively monitor regulatory policy changes and strengthen market research to formulate appropriate development strategies for high-quality business growth.
1. Data Source: Bain Capital, Embedded Finance: The Winning Path in the New Value Chain. A large international consulting firm engaged in strategy, operations, technology, organization, and mergers and acquisitions.
2. Data Source: Adobe Analytics
3. Data Source: Role of embedded finance in increasing financial inclusion
Sun Lixin Engineer at the Cloud Computing and Big Data Research Institute of the China Academy of Information and Communications Technology, engaged in research, standard development, consulting, and evaluation services in the field of industrial digital finance.
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