How Embedded Finance is Transforming E-Commerce and Digital Businesses?
Embedded finance is rapidly changing the landscape of e-commerce and digital businesses by integrating financial services directly into non-financial platforms. This innovative approach enhances customer experience, opens new revenue streams, and fosters greater financial inclusion.
By allowing users to access financial services within the tools they already use, embedded finance is streamlining transactions and creating new opportunities for businesses across various industries. Keep reading for a comprehensive overview!
Table of Contents
What is Embedded Finance?
Powering E-commerce & Digital Businesses
Key Benefits
Challenges & Risks
Future of Embedded Finance in E-commerce
Case Studies
Conclusion
What is Embedded Finance?
Integration of lending, payment, insurance, or any other financial services into applications, platforms, or services that are non-financial in nature is called embedded finance. This aims at simplifying financial services for customers where they don’t need to reach out to a traditional bank every time they need to make a payment.
With embedded finance, customers can avail of financial services within the platforms and applications they use every day. For example, a retailer’s app might offer a “Buy Now, Pay Later” (BNPL) option at checkout, allowing individuals to split purchases into instalments without applying for a separate loan. This seamless integration improves the customer experience and unlocks significant market opportunities for businesses.
How Embedded Finance is Powering E-Commerce & Digital Businesses?
Embedded finance is upgrading the e-commerce and digital business platforms in multiple ways. Some of them are mentioned below:
● Streamlining Payments and Checkout Processes
E-commerce businesses can avail of integrated payment solutions with embedded finance via UPI payment gateways. This allows the customers to access payment options while purchasing items from the e-commerce sites without switching to their banking or UPI apps. As a result, people can experience a convenient purchasing experience, while businesses can earn revenue seamlessly.
● Enabling Buy Now, Pay Later (BNPL) Services
Buy Now, Pay Later (BNPL) services are a prime example of embedded finance, offering invisible third-party loans at the point of sale. This allows customers to make purchases and pay for them in instalments, increasing their purchasing power without the immediate financial burden.
Such options are particularly appealing to younger consumers and those who may not have access to traditional credit lines. It can significantly boost sales and customer loyalty for e-commerce businesses.
● Embedded Lending & Credit Solutions
By adopting embedded financing options, e-commerce platforms can provide direct financing solutions and lending access to users within their ecosystem. This negates the need for customers to navigate to external financial institutions to secure necessary funds.
From short-term financing for product purchases to working capital loans for sellers, embedded finance has made everything available under one roof. It helps enhance customer retention and create more revenue for the platform through fees and interests.
● Subscription-Based Embedded Finance Models
Subscription-based embedded finance models are offering bundled financial services as part of a subscription package. Such plans have recently gained immense popularity in the e-commerce space.
For instance, a business software platform might include invoicing, payment processing, and financial reporting tools in its subscription plans. This approach provides value to customers and creates recurring revenue streams for businesses.
● Digital Wallets & Embedded Insurance
Digital wallets streamline the payment process by securely storing payment information and allowing quick transactions. Embedded insurance offers customers the ability to purchase insurance products, such as shipping protection or product warranties, directly at the point of sale.
These services enhance the overall customer experience and provide additional revenue opportunities for e-commerce businesses.
Key Benefits of Embedded Finance for Businesses
The key benefits of embedded finance for businesses are listed below:
● Digital Banking
With embedded finance, customers and businesses get better access to financial products like digital banking. One can easily set up a digital bank account, and the platform even allows non-banking customers to continue purchasing products on the e-commerce platforms.
● Competitive Advantage
Companies that adopt embedded finance technologies are able to simplify the financial journey for consumers and process transactions faster and more efficiently. This significantly adds to the customer experience, providing a significant competitive advantage to the business.
● Offers Customisation
Embedded finance allows e-commerce platforms to collect consumer data and analyse their likes and dislikes. This enables companies to personalise products as per the customer’s needs and preferences to ensure an enhanced user experience.
Challenges & Risks in Adopting Embedded Finance
Despite its multiple benefits, embedded finance does have some limitations and risks associated with its adoption. Here are some of them:
● Identity Theft
Embedded finance platforms can have certain loopholes in their algorithms and regulations, which may allow unauthorised access. This enables cybercriminals to perform identity thefts and takeover accounts using deep fakes and other advanced technologies.
● Customer Acquisition
The embedded ecosystem expands the client base by giving easy access to financial services through applications and websites. However, they cannot maintain the accuracy of information and risk profiling like financial institutions and banks.
● Data Privacy
As per records, most organisations face a data breach of nearly 15% through third-party vendors, and this has increased 68% since the previous year. Embedded finance enables the exchange of one’s financial information with various stakeholders.
Now, handling sensitive information like financial details should involve safety measures like high-grade data encryption and firewalls. However, they are usually not available on these non-financial platforms, making data privacy a major concern.
● Regulatory Compliance
Embedded finance includes a wide network of stakeholders from multiple industries. In such a scenario, it becomes challenging to navigate the regulatory compliance for each sector. Also, it involves enormous expenses to align with the changing technical capabilities and rules.
Thus, maintaining a one-stop regulatory framework for platforms operating worldwide can be challenging.
[Read About: Integrating Cloud Computing ]
The Future of Embedded Finance in E-Commerce
Embedded finance has a promising future despite its limitations. According to the experts, the demand and market share for embedded finance are expected to increase with the intervention of advanced technologies like UPI Payment APIs, Vendor Onboarding, Penny Drop Verification, etc.
With these features, both customers and e-commerce platforms can experience improved integrated financial solutions, making more companies adopt the embedded system.
New technological advancements through ML (machine learning) and AI (artificial intelligence) are also expected to upgrade embedded systems. These technologies can improve the security and efficiency of embedded finance in the upcoming years.
A collaboration between e-commerce platforms and financial institutions like banks can enhance the benefits of the embedded system. They can anticipate the market hurdles that may occur and find ways to tackle them together.
Besides, e-commerce platforms should adopt new financial technologies. This will enable them to efficiently handle higher transaction volumes and safeguard customer data and identity without any compromises.
Case Studies on E-Commerce Platforms Adopting Embedded Finance
Here are the case studies of some companies that have adopted the embedded finance system in their business:
● Amazon
Amazon, one of the global e-commerce giants, adopted embedded finance in 2007 with the launch of Amazon Pay. With this system, customers can use their Amazon account details on external websites and make purchases, strengthening the company’s revenue opportunities.
Their embedded finance offerings include BNPL (Buy Now, Pay Later), lending services, and one-click payment options. Recently, Amazon has partnered with Parafin, a fintech company, to introduce a cash advance program. It is available for selected sellers, allowing them to borrow capital without any collateral or interest.
● Shopify
In 2013, Shopify, a major Canadian e-commerce company, launched Shopify Payments with the aim of simplifying payment procedures for customers. The platform also launched a lending product in 2016 called Shopify Capital. Additionally, they developed a financial product that offers a debit card and bank account to manage the seller’s financial activities.
Thus, Shopify is not just an e-commerce platform, it is a “merchant solution” and earns maximum profit from this model. According to the company’s financial report, its financial and fulfilment services division is growing at a far higher rate than its SaaS products. The figures stand at 29% vs 8% in Q4 2022.
Conclusion
As the market continues to grow, businesses that embrace embedded finance are poised to gain a significant competitive advantage. By streamlining UPI payments, enabling BNPL services, and offering embedded lending solutions, e-commerce businesses can create more convenient, personalised, and positive customer experiences.
Thus, the future of e-commerce is undoubtedly intertwined with the continued evolution and adoption of embedded finance.
