What is embedded finance and how can it help businesses?

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Are you looking for ways to grow your business, create new revenue streams, or enable seamless user journeys for your customers?

Embedded finance, one of the hottest emerging technologies in fintech, could be the solution to all of these challenges and more.

In this introductory guide, we’ll cover everything there is to know about embedded finance—providing a strong foundation for any future business case—and explain exactly how to get started delivering personal credit solutions to your customers 24-7.

What is embedded finance?

Embedded finance is the practice of inserting third-party financial technology, capabilities, and services directly into a platform or customer experience.

Essentially, it allows businesses to offer customers products and services—that they don’t normally provide—at the exact point in the user journey where it provides value to them.

Let’s say your business offers car insurance, for example. With an embedded and car finance solution, you can offer customers bespoke loan and finance options to get a new car at the point of insurance renewal. By doing this, you’re able to appeal to a customer at the point in their journey where they are most likely to be open to replacing their tired old motor with a fresh set of wheels.

Embedded finance is also an efficient way for businesses to save time and investment, allowing them to add finance capabilities, without needing to set up the infrastructure or certify with regulatory bodies.

Embedded finance examples

There are a range of ways embedded finance can be used to provide a tangible business benefit, reflecting the wide variety of financial services that are out there. Here are a few examples to demonstrate the breadth of the opportunity.

1. Retailers offering bespoke lending to loyalty customers

A supermarket chain with a robust loyalty scheme system, for example, could connect this data set with an embedded lending solution—allowing them to seamlessly offer customers tailored finance options within their own logged in environment. By pre-populating data fields with information they already know about the customer, it creates a smooth end-to-end journey.

This would enable the retailer to unlock a new revenue stream without the need to invest in setting up the infrastructure themselves.

2. Retailer websites offering product insurance at the online POS

Another classic example of embedded finance, this time from the insurance industry, is the process of retailers offering white label insurance at the point of sale.

The insurance is set up and managed through a third-party but, from the consumer’s perspective, it’s all coming from the retailer of their product. In fact, global homeware giants IKEA have just launched the aptly-named HEMSÄKER, an insurance solution branded in their own classic style, but fulfilled entirely by an embedded insurance provider.

3. Buy Now Pay Later (BNPL) on retail websites

Whether you love them or hate them, Buy Now Pay Later (BNPL) services have cemented their place in retail consumer journeys—and their impact on conversion is undeniable.

So, it’s unsurprising that this embedded finance capability has been rapidly adopted by a number of retailers, giving their customers more ways to pay and the freedom of choice.

4. Expanding services beyond an existing balance sheet

Another common use of embedded finance is for existing finance companies to use an embedded finance solution to offer finance products outside of their own offering. This could be in terms of a new product, such as adding a loans proposition alongside their current credit card options, or more of the same product to help customers that aren’t eligible for their own services. This would allow them to say yes to more customers, more of the time, boost brand satisfaction, and deliver good customer outcomes to those using their services.

How does embedded finance work?

Without getting too technical at this stage, embedded finance is effectively embedded technology. This means that it will typically use an API to connect to the systems of the embedded finance provider.

The exact mechanics will vary depending on the finance product being embedded and the type of business making use of it, but this generally involves plugging additional services into an existing customer experience, like a website or customer portal.

If a customer then interacts with the embedded finance solution, their request, application, or any other relevant information will be sent to the provider via the API and processed. From the customer’s perspective, the entire experience can happen on the website where they started their journey.

Types of embedded finance

While we’ve already covered some simple examples of what the umbrella term of “embedded finance” means, it’s worth digging a little deeper into the different types of embedded service on offer across the industry.

Embedded banking

Embedded banking specifically relates to the integration of traditional banking services, like checking accounts and debit cards, within a non-banking environment like a retailer or any other marketplace.

Embedded banking is also often referred to as Banking as a Service (BaaS).

Embedded payments

Embedded payments form part of a wider shift towards single-click checkout processes and a more seamless checkout experience for users.

Pioneered by industry giants like Amazon and embedded solutions like Stripe or Shop Pay, consumers have become increasingly comfortable with using a one-click “Buy Now” button in familiar, trustworthy environments.

In addition to storing customer details for swift checkout, embedded payments solutions also include financing and Buy Now Pay Later (BNPL) services, giving customers more ways to pay at the point of sale.

Embedded lending

Embedded lending enables businesses without a lending solution of their own to offer customers loans, credit cards, or other forms of finance. Not only does it remove the need to set up this infrastructure internally, but it also facilitates responsible lending by providing additional risk and compliance support.

This is particularly beneficial for financial institutions like banks and retailers, which don’t currently have a lending capability of their own. By incorporating an embedded lending solution, these businesses can access new revenue streams from a previously unreachable area of the market.

Other types of embedded finance solution

While the examples above represent the most prominent types of embedded finance, there is a near-endless scope for the financial systems that could be embedded, or the potential use cases. Here are some additional ways that financial services can be embedded:

  • Branded payment cards – whether a retailer offering store cards, or an embedded banking customer offering debit accounts, branded payment cards are possible with an embedded finance solution
  • Embedded investment – with investment rapidly growing in popularity amongst the general public, it’s no surprise that an embedded investment solution is becoming increasingly appealing for many businesses
  • Embedded insurance – for retailers, the ability to offer insurance on products at the point of sale presents a huge upselling opportunity

With so many types of embedded finance out there, finding a partner that suits your needs can be tough. That’s why it’s important to know what services you’re looking for and find a partner that offers those.

If you’re looking for embedded lending, credit card, or car finance solutions for example, our embedded finance offering might be exactly what you’re after.

Introducing Aro’s embedded finance solution

Our embedded finance proposition enables businesses to provide their customers with access to the largest digital borrowing marketplace in the UK and seamlessly deliver personal credit solutions to their customers 24-7.

Why does the size of the marketplace matter? With such breadth and depth of panel, we can offer your customers a huge amount of choice, as well as tailored solutions for most credit profiles. There’s also the ability to configure lending panels to cater for your customer and business needs. Our expansive panel makes it the most scalable and futureproof in the current climate.

It isn’t just about access to a wider array of products either, but also providing your business with speed and scalability to bring new revenue streams to market, fast.

Through the use of APIs, we can easily integrate our enhanced decisioning platform into your online journey, creating a seamless experience for your customers. In some instances where a customer has already provided you with their personal details, we can pre-populate these into our application form, saving your customers time and providing a better overall experience, and even return the finance offers in your own environment. What’s more, if all the customer’s required details are captured in your platform, APIs allow us to drop them straight into a results environment.

In other words, by embedding the services that customers can access by coming directly to Aro, you can offer a more rounded experience and range of products to your clients, all within your own ecosystem and customer journeys.

There’s also the added benefit of the vast amount of data and insight we’ll be able to share with you about your customers. We capture data on all those who use our platform and can pinpoint the source in which it came from. This means we can provide additional insights into your customers’ demographics, financial health and interests.

Embedded finance use cases

You’ve heard a lot about the prospects for embedded finance, but what can your business actually do with it?

Well, the potential applications for embedded finance are vast, but here are some common, tangible examples of the ways that our technology can be used by businesses, both within and outside of the financial services sector.

Finance company: Offer additional financial services

A finance company that doesn’t currently offer a loan facility or credit cards to their customers could use our platform to provide these products to their customers. For instance, a bank that doesn’t currently offer loans could refer their customers to a provider of these services, like Aro, to offer these products to their customers and earn a commission. Alternatively, they can embed the full process into their website or app—allowing customers to take a loan from their brand, using the embedded finance provider’s platform.

Non-finance company: Offer additional financial services

A non-finance company, such as a retail brand, can embed our credit broker service into their online platform to easily offer their customers a product—like loans, credit cards, or car finance – that they wouldn’t otherwise cater for.

Finance company: Decline referrals

If a financial services business, such as a bank or retail finance provider, doesn’t have a product for a customer on their balance sheet, they don’t need to reject the application. Instead, they can refer the customer to a trusted partner that has a wider lending panel and earn a commission from the referral.

Finance company: Accept referrals

On the other hand, if a financial services company—like an in-store furniture finance provider—accepts a customer for finance, they could then offer them additional financial products that their business doesn’t offer, like loans or credit cards, alongside their own products.

Who can benefit from embedded finance solutions?

Almost every industry has something to gain from embedding a new financial capability or service, as a way to generate new revenue streams or additional customer data.

Just a few examples of industries set to benefit from the embedded finance boom include:

  • Lenders – offering additional lending options to customers that don’t fit the current approval criteria
  • Retail finance – accessing new revenue streams, such as lending or credit services, without needing to invest in the infrastructure to do so
  • Banking – helping more customers, more of the time by offering finance products not currently on their balance sheet
  • Price comparison – opportunities to cross-sell lending or personal finance products to customers looking to renew a financial product
  • Insurance – offering car finance to customers looking to renew their car insurance on a particularly old car, for example, giving them the option to get a new car in the process

What are the advantages of embedded finance?

There are many benefits to incorporating an embedded finance solution, but to outline the basics, here are some of the top ways embedded finance can help businesses:

  • Help more customers by providing a broader, more rounded service—leading to increased customer satisfaction
  • Bring requested services to market faster, thanks to API technology
  • Innovate without the risk of investing in tech from scratch
  • Benefit from continuous improvement and investment in technology from technology partners
  • Unlock new revenue streams by expanding your capabilities and reaching new areas of the market
  • Gain access to richer customer data, allowing you to build out a more complete understanding of your audience

A look to the future: Where is embedded finance headed?

Across industries, embedded finance is expected to become a major player in the coming years.

A recent study from Accenture, for example, found that “embedded banking for SMEs could capture up to 26% of global SME banking revenue by 2025.”

As the use of embedded finance solutions becomes increasingly common, we can expect to see providers become increasingly focused on investing in their tech. This is great for businesses, as it means financial technologies will become easier to integrate, with many fintech innovations being designed with embedded finance in mind as a use case.

Bringing things back to present day, embedded finance is still very much in its early stages, which means there’s been a lot of talk and a lot of excitement across the industry, but the “action” is only just starting to emerge.

The good news underpinning this is that early adopters have an opportunity to get ahead of the competition. The question then becomes, how do you get started?

How to select an embedded finance platform

It’s crucial to find a partner that will meet your needs and enable your business to grow, here are five things to look out for in an embedded finance partner:

  1. Find a partner with suitable credit coverage—a partner that has lending capabilities for a variety of credit scores, not simply those with strong credit. A partner with a more established lending product will be able to offer loans to a wider range of customers.
  2. Pricing—established partners will have more accurate risk models and can offer better rates, newer platforms may charge higher fees to account for an initial credit risk learning curve/fluctuations.
  3. Scalability—you want a partner with the ability to serve your credit needs, if you’re growing customers and your partner doesn’t have the capital to fulfil all of your credit needs, you may have outgrown the partner.
  4. Innovation and introducing new features—you want a partner that is continuously developing new features, and equally one that makes it easy to introduce these to your offering.
  5. Culture fit—one of the most important parts of any business partnership, it needs to feel right—does the partner have a proven track record, how do they approach late repayments and other inevitable circumstances, do they have strong customer satisfaction scores?

Elevate your offering, with Aro

With access to the largest digital borrowing marketplace in the UK, Aro is the ideal partner to help your business benefit from an embedded finance solution.

Aro can support your business using our experience and expertise in the financial services industry, whether it be help marketing financial products or support with risk and compliance. The level of support can be tailored to your business requirements, and we can also provide additional insights into your customers that come through our platform.

Here at Aro, we already have longstanding, successful embedded finance partnerships with businesses from a whole range of industries, including banking, retail, and eCommerce. We are experienced in partnering with businesses from both finance and non-finance industries, making us best placed to offer you guidance on what integration might work most effectively for your business proposition.

Ready to get started? Reach out to our sales team and they’ll be happy to help build a business case, or start setting up your new embedded offering.

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