How does embedded finance work in practise?
Embedded finance is used by:
- non-financial corporations (e.g. consumer brands, retailers, telcos, large techs and software companies, car manufacturers, airlines, insurance providers etc)
- financial institutions (e.g. banks, fintech, financial services providers, remittance companies and more)
This is how a Telco becomes a loan provider and an airline becomes a neobank. McKinsey emphasizes the relevance of embedded financial services in March, 2021:
“Today, companies of all types and levels of maturity—including retailers, telcos, big techs and software companies, car manufacturers, insurance providers, and logistics firms —are considering and preparing to launch embedded financial services to serve business and consumer segments.”
This means: Today, the handling of financial products and services no longer needs to be done through banks. It is not necessary to have a full banking license to provide financial services (such as issuing payment cards, loans or digital wallets). Businesses do not need to build their own bank to gain control of financial services and increase margins.
Setting up an internal bank, digital wallet or payment scheme is a process that can be very complicated, costly and time consuming. Embedded finance represents the best of all worlds: It is the middle way to give companies control over financial products and services and increase margins, without having to make significant investments and operational risks.
- Telcos offer loans directly to their customers.
- Banks are digitizing their services by adding digital wallets and cards to the offer; FinTechs enhancing their infrastructure to enable scaling and rollout of their services.
- Car manufacturers offer credit lines and leasing products to finance their cars.
- Airlines offer loans for financing a vacation.
- Clothes retailers offer consumer financing through buy-now-pay-later schemes.
- Remittance companies offer shared family accounts to their users, making international money transfer cheaper and faster.
- IT companies that add plug & play digital wallets to the offer or services to niched target groups (e.g. parents who give pocket money to their children);
- SMEs offer payment cards to millennials and students.
- Ride-sharing company that enables instant payment of the drivers via debit cards.
The uses and possibilities are endless. Our team at Vopy can help you in understand the dynamics and opportunities that lie within the field of embedded finance and how embedded finance can be used in your specific context.