How Small Businesses Can Harness the Power of Embedded Finance

One trend that the events of 2020 accelerated was the rapid digitization of finance and how consumers rapidly embraced a world of frictionless finance, a world in which financial services are at consumers’ fingertips. Embedded finance is something entrepreneurs from all industries should fully embrace as soon as possible and it presents aspiring fintech founders with opportunities to innovate beyond what we are already accustomed to. This article explains what embedded finance is and how both founders and non-financial services SMMEs can embrace it to deliver innovative solutions to consumers’ problems.

What is Embedded Finance?

Embedded finance is when ‘non-financial’ businesses such as fashion retailers, car dealerships, online marketplaces or social media apps, integrate fintech solutions into their online platforms or product/service offerings. For example, when you use Uber for a ride and pay via the Uber app you are using embedded finance.

How Does It Work?

Typically, the non-financial business will partner with a fintech provider that allows the business to integrate the API into its digital platform (either an app, website, or online store). This API serves as a medium through which customers can access financial services or perform financial transactions. The fintech provider connects with traditional banks to offer such solutions thus serving as a frictionless middleman so that customers do not have to deal directly with their banks, they can complete transactions seamlessly through the digital interface of their favourite brands. For example, when your customers have finished shopping online they simply have to select checkout and the payment is processed without them leaving the app.

The Different Types of Embedded Finance

There are several different types of embedded finance you can incorporate into your business. Some of them are currently more prevalent than others therefore there is still room for growth.

1. Embedded Payments: This is certainly the most common type of embedded finance in the business world. It involves businesses embedding payment gateways such as Ozow Pay, yoco or PayPal into their digital platforms to allow customers to complete payments on their platforms.

2. Embedded Lending: This refers to businesses extending loans to customers to help them buy goods and services on their platform. For retailers, this is facilitated via Buy Now Pay Later (BNPL) providers such as Payflex or Klarna. These solutions enable customers to get the product immediately while paying via instalments (typically four equal interest-free instalments within a specified period). In this scenario, the retailer usually gets paid immediately by the fintech provider.

3. Embedded Insurance: This form of embedded finance is popular among travel agencies or booking platforms. Such platforms integrate solutions that allow customers to insure their valuables without engaging directly with an insurance company.

4. Embedded Investing: This is one application that we think will gain traction in the near future. Businesses can now embed investment services or options in their digital platforms that allow clients to invest their money and potentially make significant returns.

How Valuable is Embedded Finance?

According to Ernst & Young, the global embedded finance market is anticipated to be worth US$606 billion by 2025. Furthermore, payments conducted through embedded channels was US$2.5 trillion in 2021, with expectations of reaching US$6.5 trillion by 2025. The growth is attributed to the increase in digital wallet users: the number of digital wallets is forecasted to surpass 5.2 billion worldwide by 2026, up from 3.4 billion in 2022, driven by diverse offerings like loyalty programs, enhanced security measures, and an open-loop payments system [Ernst & Young].

SMMEs are not being left behind either. According to research by Plaid, embedded finance stands to capture a significant share of the global SME market, potentially reaching 26% by 2025, translating to a value of $124 billion. Traditional industry players who overlook or fail to adapt to the rise of embedded finance risk losing up to 8% of their revenue streams.

How Can SMMEs Embrace Embedded Finance?

Given this information, we recommend SMMEs to adopt the following strategy to incorporate embedded finance into their operations.

1. Identify Consumers’ Preferences & Needs: Before you incorporate embedded finance into your operations, it is important to determine what your customers want and expect from embedded finance solutions. Ask your most loyal customers whether they want payments, lending, insurance, or investing embedded solutions across your digital platforms. We recommend implementing embedded payments first, if you haven’t done so already as it is the most common solution. However, by surveying your customers you will get a deeper understanding of what they want and you can identify avenues for future growth.

2. Brainstorm Ideas for Solutions: Gather your team and brainstorm solutions based on which type of embedded finance is aligned with your core business and customers’ needs. For instance, if your customers are young people with limited income or if your products & services are extremely expensive, brainstorm what embedded lending solutions will be the most beneficial to your customers.

3. Pick a Fintech Provider: In South Africa, you can pick from Ozow, Yoco, Payflex, Apple Pay, and other fintech providers. Based on the needs of your customers, you can decide which solutions align with their needs as well as your business needs. You can also decide if you want to build an in-house solution, although that may require more investment.

4. Test The Solution: Before rolling out the solution to all your customers, conduct a pilot test to identify any issues and also to gather feedback from early users. This will help your business launch a better version of the solution.

How can we help you?

Market Insyte offers personalised market research services tailored to entrepreneurs' needs.

If you would like to schedule a business model consultation, feel free to book a session here

If you would like us to conduct a personalised market research study, feel free to schedule a complimentary discovery call 

Browse our public market research library