What is driving growth in embedded finance?

Barely half a century ago, your finances, your business, and your everyday life were managed in distinct ways. You withdrew cash to pay for groceries, paid your supplier with a check, and getting a line of credit could be difficult if you weren’t a large corporation or wealthy individual.

• This article is taken from Romania's Fintech Map by Future Banking. The report is available for download here.
• Author: Cătălin Crețu, General Manager @ VISA (Romania, Bulgaria, Croatia and Slovenia).

But today, thanks to embedded finance, the ability to do all these things, and more, is woven into the fabric of websites, apps and marketplaces. These experiences have become so seamless, you probably don’t think much about the role embedded finance plays in your everyday life.

Hopping in a rideshare? It’s not a new concept, but have you thought about what’s happening behind the scenes? The fare is charged automatically when you arrive at your destination – and from there, the driver can get paid instantly to a virtual card. That’s embedded finance. Need to send your cousin who lives halfway across the world a wedding gift? Using your mobile banking app, you can push funds directly to their debit card or a virtual card in seconds.

These experiences are so seamless and contextually relevant that you may not even pause to consider that a transaction has taken place. This is the core of “embedded finance,” and it’s been quietly transforming the way in which financial services are built, distributed and accessed.

How embedded finance eased its way in

Through embedded finance, brands and non-financial businesses are integrating financial products or services – like payments, banking, lending or insurance – that ease and enhance the user experience within their platform. Customer-facing brands of all stripes could risk obsolescence if they don’t offer or at least explore an embedded finance strategy.

But how have embedded finance use cases entered the mainstream? One critical element is improved infrastructure, which has made it easier to integrate these features. Better payments infrastructure has allowed new capabilities and eliminated previously cumbersome processes.

Think small businesses. Previously, processing invoices took time, multiple steps, and often multiple software applications. Now, small business owners can do this right within their accounting or operating platform with a virtual card, allowing them to get to the rest of their to-do list.

Improved infrastructure has also enabled non-financial companies, like retailers or sports franchises, to offer banking services like debit cards and rewards. Today you might pay for dinner with a card that earns you rewards and special access from your favorite sports team. That team didn’t have to develop the capabilities to get you that card — they likely tapped a Banking-as-a-Service (BaaS) platform to develop the product for them on the backend.

The fintechs offering these specialized infrastructure services are typically focusing on a specific area of expertise and on doing it really well, instead of building the entire banking stack themselves. This crop of fintech enablers – or “fintech fabric” players, as some have described—are making it easier, faster and less costly to embed financial tools into platforms that did not historically focus on financial services.

The growth platform for Fintech stars

The Visa Innovation Program is helping to raise those fintech enablers to spur innovation within the financial and payment industry. The collaborative platform connects emerging fintech companies in Europe and Visa’s vast network of global clients and partners, including neobanks, banks, merchants, governments, and other high-profile organisations. Romanian PayByFace, Finqware and PrimeDash are among the fintechs that were selected in the program. The Program leverages resources such as design thinking, fintech know-how, mentorship, market access, and a network of fintech experts.

More than 219 companies from 28 countries have applied for this year’s challenges: Empowering SME's, unlocking new payment flows, designing next-gen payments experience and building smarter cities.

So, who benefits and why?

There is a “zero-sum” quality to a lot of articles written about fintechs and embedded finance. It is assumed that traditional financial services organizations will suffer at the hands of more nimble and innovative technology companies.

Visa’s perspective is that all parties – not just fintechs – can win when it comes to embracing and investing in embedded finance.

For non-financial organizations, embedding financial features into their platform can increase spending and brand loyalty. According to a recent study by Bond and Cornerstone], consumers who access financial services directly from brands say that they now spend more money with the brand than they did before (32%) and that they regularly choose that brand over their competitors (30%). For the brands that get embedded finance right, their ability to serve as an all-in-one platform could grow significantly.

Financial institutions can benefit by partnering with brands and fintechs on a range of products and services (e.g., payments, lending, investments, banking) to help power new solutions and working with emerging tech companies to better understand their customers’ needs.

For fintechs the future is bright. Financial technology companies have, in many ways, led the way in embedded finance. According to an Accenture survey, 84% of U.S. companies said financial services are critical to their future success, although fewer than half have made the necessary investments to activate these services.

For consumers, there is an inherent convenience of accessing financial services in the digital spaces that already have their time and attention and that know their preferences. This includes getting paid immediately, qualifying for a credit card with rewards and accessing insurance disbursements in real time instead of waiting on a check. We’ve seen how ride sharing apps remove the “action” from transaction by storing payment methods and seamlessly charging riders within the app. Consumers have proven more than comfortable storing their payment details with third parties if the end result is a simpler, faster and more seamless experience.

Seamless, second nature and good for everyone

The prevalence of embedded finance is symptomatic of massive shifts in business needs and consumer expectations baked into today’s financial services experience. Businesses want to grow their offerings and increase engagement. And consumers’ want products and services that are fair, easy to understand and interact with, and that seamlessly fit into their daily lives – the good news is, more of this is on the way.

16 fintechs, including Romanian Prime Dash, were selected to join the 4th cohort of the Visa Innovation Program this year and entered the tailored Program curriculum, with custom made design sprints and workshops, aiming at propelling their growth. The teams will collaborate with a large pool of mentors and advisors from Visa and its partners in the area of payments, open banking, crypto and blockchain, security, and sustainability to gather industry insights and level up their value propositions.

They will also be presented to a network of proof-of-concept partners – banks, merchants, and other high profile organisations – to test and validate their propositions and reach the commercialization stage faster. The Program is run in partnership with Eleven Ventures, early stage venture capital fund (Bulgaria), Crowdpolicy, open innovation integrator (Greece), and Hackquarters, accelerator (Turkey).

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