Industry post for GoCardless
What is embedded finance?
Embedded finance is a hot topic in the fintech market at the moment, with Google searches for the term skyrocketing over the past few years. Historically, it’s startups who have trailblazed embedded finance solutions, but recently big banks have started to see the value in providing third parties with embedded finance functionalities.
If, like many people, you’re asking, “what is embedded finance?” you’ve come to the right place. In this post we’ll answer this question and examine the difference between embedded finance vs banking as a service.
Embedded finance meaning
Embedded finance is, put simply, how non-financial companies embed financial services solutions into their existing offerings. When a non-financial organisation offers a customer a financial service without disrupting their buyer journey (i.e. without taking them out of their platform), this can generally be termed an embedded finance solution.
Embedded finance is closely linked to open banking, whereby big banks and financial institutions share their customers’ information with other companies (with the express permission of users). Smaller companies can then access this data, by plugging into the bank’s data feeds via an API (application programming interface).
In theory, this should allow startups to compete on a more level playing field with larger companies. It makes it easier for consumers to understand all their options too, when it comes to selecting the best financial services provider. Embedded finance things a step further, by expanding this concept not just to fintech players, but to all kinds of companies.
Embedded finance examples
- A good example of embedded finance is applied by ride-share company Uber. They have created embedded payment services solutions to connect drivers and passengers.
- Shopify uses Shopify Capital Lending to enable merchants to tap into fast funding for inventory, payroll or marketing. Shopify uses the existing data it holds on a seller to make their funding decision, so merchants don’t need to go through a lengthy application process.
- Buy now pay later (BNPL) is another example of a type of embedded finance solution.
- Another example of embedded finance is where retailers add a tick box for insurance on their purchased products, at point of sale.
Banking as a service
Banking as a service is a key element of open banking. Banking as a service (BaaS) platforms monetize open banking, by allowing third parties to build their own banking offerings using the bank’s existing infrastructure (which comes ready regulated).
Many banks have started to move into the BaaS space with fintechs, digital banks and other third parties paying a fee to access the BaaS platform. In this way third parties can build banking products or offer white label banking services.
Embedded finance vs banking as a service
These two concepts are related, since both allow all types of companies to compete in the fintech space, however there are some differences between them.
- The chief purpose of embedded finance is to streamline the customer journey by eliminating any extra steps to obtain financing.
- Banking as a service allows non-banking institutions, or virtual banks, to offer banking services, by connecting to a banking system via an API. They can offer these services without having to build their own infrastructure or have to send customers to a third party financial organisation. GoCardless is an example of a solution that’s been built off the open banking infrastructure and regulations. GoCardless uses open banking to offer Instant Bank Pay, which allows merchants to send links to customers and request one-off payments.
- Embedded finance is made possible by BaaS. Embedded finance uses the end-to-end BaaS model, and packages it as an integrated or “embedded” financing option to customers of other products and services. BaaS is, in essence, necessary, to support embedded finance’s structure.
- Embedded finance is offered by consumer-facing businesses, while BaaS allows these businesses to provide financial services. So embedded finance is more front-end, while BaaS is the back-end, in terms of providing the banking functionality.
Hopefully this post has answered the question “what is embedded finance?” and conveyed the distinction between embedded finance vs banking as a service. It’s important to get to grips with these terms, since going forward both are predicted to play an even bigger role in the business world.