Embedded Finance

Embedded Finance and What You Need to Know About It

by | Jul 29, 2022 | 0 comments

With the financial sector facing scrutiny, trust in many large financial institutions is at an all-time low. So it’s no surprise that people are looking for other ways to invest their money. Embedded finance is a growing area of investment that lets investors put their money into SMEs that they might not have been able to previously. SMEs have greatly benefitted from this new way of financing. Traditional banks lack the flexibility embedded finance provides.

What is Embedded Finance?

The seamless incorporation of financial services by non-financial businesses is referred to as embedded finance. The way we deal with money and businesses alike has been revolutionised by this merging of non-financial entities and embedded finance services. The function of conventional banking institutions has been altered by the recent expansion of embedded financing services. In the past, banks were required for many of our financial transactions, such as loans and payments. Through the use of APIs, non-finance organisations can now offer financial services to their clients by integrating banks and fintech into their platforms. This alternative form of financing lets smaller businesses access the money they need to grow without having to go through traditional banks. This can be particularly helpful for businesses in developing countries where many banks have high-interest rates and fewer lending options.

Who invests in embedded finance?

Traditional banks don’t often lend to smaller companies because the risk is too high. However, there are many investors who are willing to take on more risk and put their money into these companies. This allows more companies to access the capital that they need to grow their business. It’s also a way for investors to diversify their investment portfolio beyond stocks and bonds because you can get a piece of many different companies with one investment. As a result, it’s a good way to hedge against risk and you don’t have to put all of your eggs in one basket.

The layers in Embedded Finance

Investor

The first layer is the investors who provide their capital to be invested into the SMEs. The SMEs will receive investor capital via loans.

Fintech

The next layer is the platform layer. This is an embedded financial platform like SAPI that is typically offered as a white label solution, acting as the bridge between Investors and the embedder.

Embedder

Then there is the partner layer. The partner layer essentially “embeds” the solution into its own platform. These companies and brands need to meet their customer’s needs in a more integrated way in order to build more loyal and long-term relationships. Brands also win by expanding their portfolios, which ultimately leads to more satisfied customers.

The Merchant / Customer

The last layer is the SMEs looking for funding. Customers are becoming more and more confident and demanding an integrated experience with the services and products they are already using.

The Advantages 

Brings more capital to businesses in need of funding

It allows smaller companies to get access to funding from investors who are willing to take on more risk than a bank would. This can significantly help smaller businesses grow by providing them with capital they need to expand.

Boosts consumer satisfaction

For business owners, immediate credit application processing is a pleasant and satisfying experience, which can result in increased customer loyalty to the seller.

Additional Sources of Advanced Insights

In addition to checkout behaviour, you may also use data on non-credit billing behaviour, such as overall traffic and engagement statistics, to more accurately predict future revenues and default risk.

New, more precise risk assessment

Integrated finance providers can deliver more competitive financial transactions. This is becuase they use data that traditional financial institutions do not. This covers both internal data provided by you, the company wishing to integrate financial products and publicly available data, such as social network presence or website traffic.

Conclusion

Embedded finance is a growing area of investment for investors and a growing area for SMEs for obtaining finance. There are multiple benefits to investing through embedded finance and to receiving loans via embedded finance. Now that you know how embedded finance works, you can make informed decisions about where you want to put your money.

About the Author

Gebriel Shiferaw

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