The Buzz Around "Embedded Finance"​ is Real

28th August 2020

There's a new kid in the town. The buzz word that's capturing the attention of VCs and PEs. It is called Embedded Finance, deemed to be the Future of the Economy! In this quick writeup below let us see why this is real and the hype is justified especially in India, and also see what are the factors that are accelerating its growth. Also, let's take a sneak peek into some of the aids available to accelerate the growth in this sector.

So, what is this Embedded Finance?!

Well, it is a term for non-financial companies like e-commerce, social media, cab aggregators, or others who make significant changes to their value proposition by embedding financial products into their existing core offerings. Here, financial products could be as simple as UPI Payment handle or even a loan offers or even Personal financial management solutions. With an idea to either increase the traction to their existing products or ultimately make this financial product itself as their star offering!

It may sound trivial, but I see this as that "future-tech" which, all of us who were born in the 70s or 80s thought that we could see in the 21st century!

From an opportunity size perspective, a Lightyear report estimates that embedded finance will grow to nearly $230 billion (in revenue) by 2025, up from $22.5 billion this year.

To give you a glimpse of the possibility, imagine a person who consulted a doctor in a clinic just walks out, takes a cab, and on the way picks up some grocery and enters her home (I know, you'll say, post COVID this is all digital, no problem it still applies:). If you notice the narration, not a single place did I mention that she stood and paid for anything! neither through cash nor through the phone.

Well, this is the idea. People in their regular life want to eat, travel, want to buy stuff, want to consult someone but not be bogged down by standing in queues, calculating the cash in hand, or even worry about a loan to be taken!

Yes, Embedded finance is that dream where financial transactions like Payments, getting a loan to purchase something, how to maximize savings etc. would no longer be a separate step in a user journey. It could be internally taken care of by the ecosystem in a secure way and money could be automatically debited or credited in a fair and derisked fashion to/from the customer's bank account.

This is what embedded finance could enable and this is why embedded finance will be the next big wave in the financial sector.

We have seen that banks had already strategized to tackle or counter this forthcoming perceived threat to their business by preparing for it early, by building what they called the Super-App! The likes of SBI YONO or a Kotak-811 were some of the early movers where the banking apps themselves are enabling other non-financial use cases right from purchase of Pencils and Rubberbanks to purchasing health insurance and Mutual Funds while also catering to money management and loan applications and instant disbursals all within the Banks App.

But the latest trend of embedded finance is exactly the opposite of that! This targets the removal of Banking transactions from any user journey to make it as seamless and frictionless as possible. Unlike the Banking Super Apps, Banking functions are now moving into other non-banking apps, be in a cab aggregator or e-commerce app, or even a social media app. The intention remains the same but the implementation is at the point where the action really takes place.

Some of the early movers we see in this space are the usual suspects like...

  • Google: Pay/Bank
  • Amazon: Pay/Seller Loan
  • Ola: Money
  • Whatsapp: Pay
  • Jio: Everything!

Btw.. the complete journeys are still not there, but the lego bricks are slowly getting built with different players at different levels of maturity. The trends in the market are clearly indicating this type of journey to be made available to the public very soon. Eg. With Jio moving into e-commerce, brick and mortar stores, pharmacy, banking, and whatnot, a unified embedded journey is only a couple of steps away. It does help to have to own all the pieces of the puzzle, which means that they don't need to get involved in the hassles of partnership negotiations, pricing clashes etc. So its much easier for them.

But you may also wonder, this is not rocket science, why were such products not already made available?

Well, it's about lining up of the multiple factors that have all finally come together now to enable such journeys. Some of these factors we're witnessing lately are things like...

  1. Customer Centricity: Competition is forcing institutions to focus more on customer-centricity and ensuring that there is no break in the user journey and help give a seamless customer experience.
  2. Financial Benefit: People have started to realize that there is indeed big money in Finance. This could be the next big revenue generator for these players! It could go on to become a primary revenue stream as well.
  3. Ecosystem Support: The likes of UPI, Sahamati, etc. in India is enabling simplified journeys for customers. Now, add OCEN, KYC Setu and Kashi to the mix, and the game is on!!
  4. SaaS offerings by Fintechs: The likes of Perfios offering instant access to customer consented financial data for informed credit decisions and other players enabling instant access to enabling payments, collections etc. have opened the doors for Innovation.
  5. Data: For big techs, rich data set about their customers and their behaviour enables them to better assess the customer and their financial statuses and cater better to their needs.
  6. Tech powerhouse: Powered by an army of young developers having no baggage of restricted thinking of the financial world combined with ready libraries and ready skillsets in advanced data science and AI gives these players an upper hand.
  7. Huge reach: Customer acquisition is usually never a problem for the existing big techs. They have ready access to a huge customer pool for experimenting with new features and AB testing different variants and propositions.

The other big question, is What does it mean to the Banks and NBFCs? Is it a game of 'you v/s me' played between the Banks and embedded finance players?

In my opinion, it is not really a 'you v/s me' game, but it is, in fact, the game of survival of the fittest and the winner I'm sure is not the one trying to compete, but the one trying to co-operate and partner with the leading players. The customer engagement channels will now change from a bank offered channel to something that's part of any other customer life journey and Banks with a good partnership with such ecosystem players will emerge victoriously.

Coming to the final question, what is needed for embedded finance players to win?

The answers depend on 2 things. What is the current level of maturity of that organization and what is the level of maturity they would want to achieve? It's a tough decision and not a very easy journey. Big guns like Uber have very recently retracted from their financial journey. But it could be made easy with the help of a spread of buffet services that are all out there for players to pick and choose from.

Being part of the Perfios, let me restrict myself to the 5-star buffet spread from the Perfios Family.

  1. Digital Identity Verification - Enabling you to instantly and digitally verify the customer before you onboard them.
  2. Customer KYC - Use Video KYC solution using online or offline modes of verification for a fully compliant account creation within minutes
  3. Customer engagement using Bots, WhatsApp, Alexa, etc. - Go live within days with one of the most advanced NLP and AI-based bots specifically designed for the Financial sector.
  4. Customer financial insight (net income, expenses, spend analysis, cashflows) - Fully consented and compliant way of retrieving customer's financial data from any financial institution.
  5. A single view of customer's financial status - Enable your customer to view all of their accounts right from Insurance to Mutual Funds to securities to Credit Cards to Wallets to Salary slips to Bank accounts to GST ITR to what not in a single page!

These are some select list of services that can be availed as APIs by anyone, to offer as part of their user journey. Apart from all that is written above, the creation and growth of an Open Banking ecosystem will be the next big thing for the Indian financial sector and will play another huge role in the way all of the customer journeys would finally converge.

I'm hoping to next write a detailed paper on the status of Open Banking ecosystem in India along with the market potential and the different use cases that it could open up.

Do feel free to message me on LinkedIn to know more or if you'd like to discuss further on this topic.

Author: Sandesh Jayarama

Vice President - New Business Initiatives at Perfios Software Solutions Pvt. Ltd.

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