Article 9 Summary: Embedded Finance_Whitepaper by PWC

Article by PWC

Number of Pages: 28

Summary

The document examines the concept of embedded finance (EmFi) and its integration into non-financial offerings in order to meet customer demands for convenience and accessibility. It discusses the impact, benefits, opportunities, and challenges of EmFi in different contexts, such as in India. The document emphasizes the need for collaboration, user experience, data security, regulatory compliance, and customer trust in the successful implementation of EmFi.

It also highlights the stakeholders involved in EmFi, the benefits of collaboration among them, and the revenue streams they can tap into. Regulatory considerations and the potential of EmFi in various sectors are also discussed, with a focus on data protection, risk management, fair competition, and financial inclusion. The document concludes by emphasizing the opportunities and benefits of EmFi in the digital economy and financial innovation.

Let’s deep dive a lil…

Embedded finance trends

Embedded Finance (EmFi) has gained increasing adoption, involving the integration of financial services into non-financial service providers’ platforms and customer transaction journeys. This shift has transformed traditional customer acquisition and distribution methods for financial institutions. EmFi leverages APIs to offer services like payments, lending, banking, investment, and insurance, driving the expansion of both financial and non-financial platforms.

EmFi offers opportunities to enhance financial inclusion, user experience, revenue diversification, reduces customer acquisition costs for financial service providers and enhances customer experience and loyalty for non-financial providers, enabling revenue growth. EmFi simplifies end-user access to financial services on a single platform, eliminating the need to navigate multiple platforms and service providers.

The EmFi market, valued at USD 66.8 billion in 2022, is projected to grow at a CAGR of 25.4% from 2023 to 2032. The United States leads in EmFi revenues, followed by the UK, Germany, and Canada. EmFi use cases are prevalent in sectors such as consumer platforms, e-tailers, lifestyle products, and services, with emerging applications in food delivery, travel booking, ride-hailing platforms, supply chain management, payroll, and employee benefits management.

Buy Now, Pay Later (BNPL) is a significant EmFi trend, enhancing transaction ease and convenience, boosting high-ticket purchases, and increasing product manufacturer sales. The global BNPL market, estimated at USD 4.2 billion in 2022, is expected to grow at a CAGR of 30.4% from 2023 to 2032. Point of Sale (PoS) lending serves as an alternative, catering to larger purchases, offering credit at checkout points, and attractive interest rates like zero EMI products.

Banking as a Service (BaaS) supports non-banks, challenger banks, and neo-banks in implementing Embedded Finance (EmFi) solutions by providing white-labeled or co-branded solutions and services through API integration with licensed banking partners. Open banking enhances contextual and tailored banking services for non-banks by enabling access to customer financial data held by FIs.

EmFi opportunities and challenges and EmFi business models

Indian Outlook-

• Over the past decade, India has experienced a significant digital transformation, largely driven by the rapid digitization of financial services (FS). This transformation was made possible by foundational elements like UPI, Aadhaar, e-sign, account aggregator frameworks, ONDC, and OCEN, collectively known as India Stack.
• Embedded Finance (EmFi) represents the next step in this evolution, allowing customers to access various financial products seamlessly as part of their digital transactions, with minimal interaction with the service providers.
• The Indian EmFi ecosystem is expected to grow at a CAGR of 30.4% over the period of 2022–29, thereby increasing its revenues generated through EmFi propositions from USD 4.8 billion in 2022 to USD 21.12 billion in 2029.

Opportunities: The most prevalent use cases of EmFi in the FS landscape in India include: ? embedded payments (online payment options at points of consumption) ? embedded insurance (real-time bundling of insurance at points of consumption) ? embedded investments (API-based integrations into investment and/or brokerage platforms) ? embedded cards (cards-as-a-service offering) ? embedded lending (BNPL at points of consumption).

Challenges:

1. Data Privacy and Security: EmFi involves the exchange of sensitive financial data among multiple stakeholders, necessitating robust cybersecurity measures to protect against data breaches and cyber threats.
2. Digital Divide: Despite digital growth, a digital divide still exists in India, particularly in rural areas and underserved communities. Addressing infrastructure gaps, enhancing digital literacy, and improving internet connectivity in these regions are vital for equitable EmFi access.
3. Regulatory Environment: Embedding financial services requires navigating complex regulatory frameworks and ensuring compliance with financial and data privacy regulations.

Various EmFi business models include:

1. B2B Models:

• Supply chain financing: Access working capital, enable invoice financing, manage cash flow and improve supplier relationships.
• Trade finance: Streamline trade finance processes, such as letters of credit, and import/export financing.
• Payment gateway solutions: Embedded payment gateways within B2B platforms enable secure and efficient transactions between businesses.
• Embedded insurance solutions: Examples of such offerings could be renter’s insurance on commercial property management platforms and logistics insurance for cargo protection.

1. B2C Models:

• E-commerce financing: Enabling consumers to access installment-based financing / BNPL platforms. EmFi also enables seamless credit evaluations, instant loan approvals and flexible repayment options, driving higher conversion rates and boosting sales for businesses.
• Wallet service: Integrating digital wallets within B2C platforms allows users to make seamless payments, store value and access various FS like fund transfers and bill payments.
• Embedded insurance: Insurance products like purchase protection on e-commerce platforms, travel insurance and subscription-based insurance on fitness apps.
• Investment management: Helps individuals to track expenses, manage investments and gain insights into their financial health. This allows for value propositions like automated loose change savings and investments into liquid funds and gold instruments through rule-based rounding up of financial transactions.

1. C2C Models:

• P2P lending: Connecting borrowers and lenders directly, with embedded risk assessment and loan management features.
• Payments: Enables users to securely transfer funds, split bills and make payments to other individuals, promoting P2P transactions.
• Savings and investment platforms: Offerings like social media platforms and online trading communities with embedded investment tools to take inputs and advices from others on the platform.
• Digital wallets: Enables users to store funds, make payments and perform financial transactions with other users across multiple C2C platforms. Users can link their bank accounts or cards to the digital wallets for easier access to funds.

1. G2C Models: G2C platforms serve as intermediaries between Government entities and citizens, delivering public services and benefits.

• Tax and utility payments: By embedding payment gateways, G2C platforms can enable citizens to conveniently pay taxes, utility bills and Government fees within the platform, streamlining the overall process.
• Financial inclusion initiatives: G2C platforms such as the National Government Services portal and Mudra in India could integrate EmFi services, providing access to basic banking services, microloans and sachetised insurance products to the underserved segment.

EmFi stakeholders and collaboration opportunities.

The various stakeholders in the EmFi ecosystem are:

• Embedders: Players or platforms that provide non FS services and integrate financial products or services from providers. These can be e-commerce platforms, mobile applications, social media networks, platforms for gig workers, etc
• Providers: Providers are FIs, FinTech firms or other companies that provide financial products and services like banking, payments, lending, insurance or investing. The licences and regulatory permission required to provide these offerings are typically held by the providers. Providers in the EmFi space make their APIs available to facilitate integration with third-party platforms and applications.
• Enablers, which are companies that provide infrastructure and support for the interaction between embedders and providers. Enablers offer APIs and services such as data connectivity, compliance, and data security. Therefore, these firms are required to maintain robust security measures and seamless operability.
• Consumers: The end users of the EmFi services.

There are various benefits of collaboration in the EmFi space, such as improved customer loyalty, new revenue streams, and enhanced user experiences. The revenue streams for different stakeholders in the EmFi ecosystem are:

• transaction fees
• interest/fees on loans and credit
• licensing fees
• revenue sharing
• commission/referral fees
• premium services, upgrades, and data monetization.

From a technological standpoint, the document emphasizes the importance of:

• API integration
• Security and compliance
• Scalability
• Omnichannel experiences
• Rsk management
• Real-time data analytics
• Customer support in implementing EmFi solutions.

Regulatory considerations for EmFi are also mentioned, with examples from different regions such as the EU, the US, China, Brazil, Australia, India, and Nigeria. There is a need for regulations to protect consumer data, ensure financial stability, and create a level playing field for all stakeholders. It suggests that regulators should consider granting EmFi players access to data from central databases to offer credit-like products.

The document discusses various aspects of regulating embedded finance (EmFi). It highlights the importance of data protection and privacy regulations, fraud and security measures, risk management, fair competition, interoperability and standards, cross-border regulations, and consumer education and grievance redressal. The document also mentions the potential opportunities in sectors such as retail and e-commerce, healthcare, education, and telecom. It emphasizes the role of EmFi in bridging the gap for underserved populations and promoting financial inclusion. The section concludes by stating that embracing EmFi can lead to thriving in the digital economy and staying at the forefront of financial innovation.

In case you wanna read the detailed PDF, same is attached below:

https://fintrest.substack.com/p/article-9-summary-embedded-finance_whitepaper

• [Pages 1—10]: Embedded finance trends
• [Pages 11—16]: EmFi opportunities and challenges.
• [Pages 17—21]: EmFi stakeholders and collaboration opportunities.
• [Pages 22—28]: Regulating embedded finance.