Embedded finance: how it works & key examples

“In the not-too-distant future, I believe nearly every company will derive a significant portion of its revenue from financial services. Every company will be a fintech company”. That's how Angela Strange, partner at Andreessen Horowitz, described the major trend currently unfolding in financial services.

We’re talking about embedded finance.

It’s the third phase of the fintech disruption. In recent years, we’ve seen the unbundling of financial and banking services. Fintechs have become increasingly niche, and traditional financial institutions have largely stayed on their original paths. 

But a certain re-bundling is now underway. Companies from across the economic landscape are embedding fintech and financial services. And according to Business Insider, it will represent a $7.2 trillion opportunity by 2030.

In this article, we’ll drive you through the benefits of embedded finance, and how to choose between buying a financial service or building your own.

What is embedded finance?

In the purest sense, embedded finance is simply integrating a fintech service into an existing platform or offering. Rather than building from scratch, you plug in features and products that were developed elsewhere. It’s typically cheaper, faster, and more efficient than building these things yourself. 

While it’s currently making headlines, embedded finance isn’t new. Think about the last time you purchased a big electronic item, like a computer. Apple or Dell probably offered to add a warranty extension to your cart, and to let you pay in installments. These financial services were probably not originally developed by the computer manufacturers, but you could access them right there at the point of sale. 

The main difference is that embedded finance is now available to everyone. Where only large retailers could afford it before, today, any company can add financial services easily to its customer journey.

Who is embedded finance for?

The most common users are fintechs, marketplaces, and SaaS. But embedded finance makes sense for a wide range of companies. And you certainly don’t have to be in financial services already to benefit from it (as the Apple example demonstrates).

What type of financial services can be embedded?

People use embedded financial products every day without realizing it (that’s the point). For example, in the UK, 60 % of adults have used embedded financial services as part of their checkout process when shopping online. Features like buy now, pay later, or the ability to pay in installments are clear examples of this. 

But there are many more including virtual payment cards, instant loans, and the wide range of tailored insurance products built into travel websites. It can all be integrated directly into your SaaS, marketplace, or other business activity.

In short, just about any type of financial service can be embedded.

• ‍Want to offer a best-in-class credit journey to customers? Learn more about Defacto Core.

Embedded finance examples

How about some more embedded finance examples? Let’s go for a quick tour of companies that have integrated financial services.

Malt — get paid now

When a freelancer does a mission on Malt, they are paid right at the end of the mission instead of waiting for the traditional 60-day payment terms on the invoice. To offer this, they partner with Defacto to pay the freelancers immediately and reimburse when the buyer pays the mission (30–60 days later). This is an example of Defacto’s embedded lending in action.

Tesla — integrated insurance

When you purchase a car from Tesla, you can buy your car insurance directly from them as well. You don’t need to go to a third-party insurer anymore.

DoorDash — credit

DoorDash, the food delivery service, has partnered with Parafin to offer convenient access to capital to restaurants, with cash advances. They can check their eligibility directly on their DoorDash interface. If they can benefit from the service, they receive the money in 24 to 48 hours. Repayments depend on performance and can be customized by the restaurant.

Uber — payment cards

Uber uses embedded finance for its drivers. They have access to a payment card, offered by Uber. Instead of receiving their salary at the end of the month, they can spend their earnings on a daily basis.

Shopify — all services, under one roof

Shopify is the poster company for embedded finance. Their initial mission was to offer online store management software. They have branched into financial services: a whole embedded finance Shopify ecosystem exists now. It’s currently the main revenue driver for Shopify. 

A few examples of the services they offer:

• Shopify Capital is a lending solution for SMBs
• Shop Pay is a 1-click checkout button — meaning an embedded payment system behind it — for e-merchants to implement on their websites
• Shopify Balance is a money management account, built to ‘skip the bank’

Qonto — fast small business loans

Qonto is a small business bank, perfectly placed to help businesses grow quickly. In some cases, these small businesses need additional credit to fund working capital needs, or to manage a busy seasonal credit.

Qonto users can quickly access Defacto’s short-term financing through their Qonto accounts, which is a win/win for both parties. 

Why embedded finance may be interesting for your business

Did you know that six of the world’s top seven companies are “ecosystem companies”? They offer an end-to-end journey to their customers. Embedded finance fits neatly into this trend, matching customers’ demand for integrated experiences.

Take Louise, who’s buying furniture online for her new apartment. She visits an online homeware marketplace. She’d love to buy most of it at once, but she can’t pay for everything right now. Her options? Borrowing from her parents, taking a short loan with a bank, or making her purchases piece by piece. 

Lucky for her, she doesn’t need to wait or make any effort to find a solution. The marketplace offers a buy-now-pay-later option. She pays a quarter of the total when placing the order, and will pay in three further installments for the rest. Which means she can get all of the furniture she wants now. And she even added a piece of furniture she was hesitating over.

This example shows how embedded finance meets customers where they are, and is flexible to their specific circumstances. Louise bought everything she wanted, and ended up spending more money than she initially planned — good news for the seller. 

Crucially, Louise is likely to check this marketplace first for future home purchases.

4 added benefits of embedded finance

On top of higher direct revenues and the ability to add new products, the embedded finance examples we’ve just seen bring further positive results for businesses. 

Longer customer lifecycles

By offering more services matching customers’ needs, retention goes up. If they know they can come to you with a range of niche needs or requirements, they will indeed return frequently.

And better quality experiences also mean return customers. These boost customer loyalty and generate more lifetime value from one customer.

Higher adoption rate of existing features

Louise bought more furniture thanks to the embedded BNPL option on the marketplace. Embedded financial products increase the average basket size and boost the conversion rate. They also introduce whole new products to the potential basket, and perhaps even a range of new baskets. 

More upsell and cross-sell opportunities

You don’t have to offer the embedded financial product to every customer. It can be reserved for customers meeting specific criteria. A SaaS company, for example, could add premium finance features for higher-tier plans only.

New sources of revenue

By embedding financial services, your value chain grows. As a card issuer, for example, every transaction earns revenue — called “interchange.” You bring more value and features to your customers by embedding financial services, and keep a piece of the transaction fee in return. 

This means more differentiation, retention, and in the end, revenue. 

Build or buy: how to choose?

It used to be prohibitively expensive to build your own banking features. Now, it’s a hundredth of the cost of what it once was. And you have smart, innovative partners doing the hard work for you. 

If you’re considering adding financial services to your business, you’re probably hesitating between building your product in-house or buying an off-the-shelf solution. Here’s what you need to know to make your choice.

Build: tailored solution, huge resources needed

If you build your own financial services, you can ensure they are tailored to your company. It’s an interesting option if you want to build something that isn’t available on the market. You also have full control over the product roadmap and the feature set.

The main downside is the resources you need. Financial, but also human resources and time spent. Given that your team will need to keep your core business running, you’ll probably need to hire people. Does the ROI make sense? 

Consider also that in the long run you have a continued responsibility to update and maintain the product. Given the requirements of building your financial services from scratch, the time to market is longer.

Consider the regulatory and compliance landscape as well. Financial products come with a full set of regulations and risk assessments to handle. Your company bears the risks, in an industry you may not be familiar with.

Buy: fast deployment, product constraints

Choosing a packaged embedded product makes sense to alleviate the cost of building your own. Especially if your challenges are clear, common, and addressed by existing solutions. You will save on development and maintenance costs.

An off-the-shelf solution also allows for a fast deployment. Regulatory compliance is handled for you. You can implement and test a product much faster than on your own.

What are the limits of buying an embedded finance solution? Of course, you’ll have a recurring fee to pay to your partner. Depending on the subscription conditions, that could become burdensome. You also won’t have full control over the product, which can bring delays in some developments. That’s why choosing the right partner is key.

Embedded lending is the next fintech surge 

We’ve just seen examples and the benefits of embedded finance overall. And while BNPL and insurance are already widespread, we’re betting on embedded credit to be the next big mover. 

Per McKinsey, embedded lending will account for up to 25% of all retail and SMB lending by 2030. It’s currently around 5%. This shows the huge potential and incredible opportunity for banks, fintechs, and even non-financial institutions to embrace this new technology. 

Lending has traditionally been a tricky, and somewhat risky, proposition. Which is why most businesses don’t rush into this market. But lending-as-a-service APIs now make it easy and efficient to offer compliant, cost-effective loans. Particularly to the underserved small business market.

The opportunity is there, and the time is now. At Defacto, we offer capital by API, not paperwork. 

Want to know more? Talk to the team.