Embedded finance: What is it and why is it revolutionizing the financial industry?

If you were told that offering your own credit card, digital account, or other financial service is easy and that companies from any sector or industry can do it in a matter of weeks, you probably wouldn't believe it. After all, this has always been one of the most bureaucratic sectors to enter.

For a long time, this was the scenario: only banks and highly regulated institutions could do it. Today, fortunately, much has changed, largely thanks to embedded finance solutions.

Simply and directly, embedded finance is a model of solutions that precisely solves the previous problem and gives various companies the opportunity to launch their own financial products. But it doesn't end there!

To definitively understand what embedded finance is, know what companies that adopt it gain, and how they can do it, keep reading this post.

What is embedded finance?

Historically, launching a bank has always been a slow, bureaucratic, and costly process. The stages to establish and operate it on your own include obtaining regional licenses, creating proprietary systems and a payment system, fraud recognition processes, and regulatory processes as well. And, since we are in times where digitalization is essential, the entire user interface, of course.

Embedded finance emerged as a solution not only to the aforementioned problem, as all these stages mentioned are covered for companies that adopt the model, but also for the following points:

• Allow companies from any segment to expand their portfolio of products and services by launching financial products. Even (and especially) if their core business has little or no proximity or affinity with the financial sector;
• Improve the banking system and promote the inclusion of more people, offering services with different conditions that cater to audiences not always served by more traditional players;
• And increase the digitization of the financial sector, we will talk about this later!

But, how does this work in practice? Simple: through software and APIs that, integrated with the technology of the company in question, allow the rapid, less bureaucratic, and less costly launch of these financial products.

Beyond the possibility of entering a new market niche and offering more products, the advantage of embedded finance for the company is to offer a better experience for its users and customers, and even build loyalty with complementary solutions to those they already offer.

For example, an airline, by offering its own credit service for ticket purchases or issuing travel insurance, adds a source of income to the business and encourages the customer to purchase a second product out of convenience. In the end, it also enhances the user experience, which consolidates the purchase of the three products from the same provider and in a digital way.

What opportunities does it offer companies?

The first answer we already gave: allowing companies from any sector or industry to also become part of the financial and technology sector, expanding their range of products without losing focus on their core business.

Secondly, we know that people's consumption habits are changing: they choose simpler, faster processes and always a better product experience. In this regard, the solution of embedded finance is a good opportunity and tool for companies to have these competitive advantages, differentiate themselves from the competition, and be part of this technological revolution.

In addition, it gives them the opportunity to offer agile online shopping processes. No consumer is willing to continue with purchase processes that complicate and hinder the transaction.

Proof of this is a survey conducted by the Baymard Institute, which shows that more than 50% of users who abandon a shopping cart did so due to complicated payment processes and the forced creation of accounts to complete the purchase.

In addition to the points already presented up to this point, another advantage offered by integrated solutions through embedded finance is the acquisition of user and customer behavior data. This is possible thanks to the information that a business's own service can provide, with control executed in its own dashboard where it is possible to work with the data in any desired manner. With an abundance of data at hand, companies receive a tool to improve and customize purchasing processes, thereby enhancing (even further) the user experience.

In summary...

There are several advantages that the embedded finance model brings to companies:

• Increase the range of your products and incorporate a new source of income. Have customer information to personalize your offer.
• Have more customer information to personalize their offer.
• Offer greater information security and reliable processes to your customers, as all processes occur within the same environment.
• And, of course, meet the financial needs of current customers and be more attractive to new ones.

But how are embedded finance solutions implemented?

We have already anticipated that it is not necessary to belong to the finance or technology sector to adopt embedded finance. So, following the previous example, how can an airline offer products as complex as financial ones that are not part of its core business?

This whole process is possible thanks to the use of open and modern technology, such as APIs, the application programming interfaces that can be found in the market. In general, depending on the chosen technology provider, they are easy to integrate with the company's technology. Therefore, this development model accelerates the process of creating the desired product and, consequently, also accelerates its launch.

In addition to the technology itself, these providers can also offer support in other stages of launching these services, such as obtaining regulatory licenses and even expanding to other locations.