As a quick definition, Embedded Finance would be the provision of financial services on platforms, applications, or web pages that, a priori, do not belong to the banking sector.

Later we will explain in more detail the evolution of this new term, but the digitization of all processes and, above all, how digitization has taken hold in the finance sector, has meant that companies, whose main source of business is not the finance sector, include in their portfolio, the financial options that a bank offers, but with a very relevant added value: a much more dynamic, practical and efficient platform.

Regarding this aspect, it is already said that users value much more when companies offer financial services within their portfolio as a complement to their original business. The basis of a relationship is trust, and if these companies achieve it, they cover a large market share by combining their main business model with Embedded Finance.

To understand what Embedded Finance all is about, we have to go back in time a few years. As a curious fact, back in 1926 Ford launched Ford Credit Bank, the first bank in the automotive world and the first example of what Embedded Finance could be almost 100 years ago.

The technological revolution that has taken place, especially with the entry into the 21st century onwards, has changed the entire technological landscape. Connectivity from anywhere led to a great growth of companies in a short period of time. Adding to this the digitization of these. However, it was not until, in 2015, when, by the European Union and the European Economic Commission, the Payment Services Directive 2 (PSD2) came out, which replaced the old Payment Services Directive. You can also read our extense article published a while on PSD2 here.

What influenced this new regulation? Basically, what this new regulation allowed was that, with prior consent, a third party could access the customer’s data. Being able to access customer data was called Account Information Services (AIS). This allowed, for example, access to all the client’s financial data and products such as current account positions or movements. I also regulate the Payment Initiator Services (PIS), allowing the user to transfer electronic funds without the need to access the banking interface. Therefore, with all this you can see how little by little the entire financial panorama that we have today was formed.

What PSD2 meant for banking and transactions is something very relevant in recent history. In this new scenario, the concept of Open Banking was born, which digitized massive access to customers’ bank accounts and offered a much more satisfactory and, above all, faster user experience. In the past, for them to access customer data, it was necessary for the customer to provide it. However, the process was considerably long and impractical. On the other hand, with instant access, with prior consent, the long waits are gone and the processes, as we have mentioned, are much more agile.

Already in a more digital and dynamic panorama, Open Finance came to light. What comes to be this concept is an extension of the previous concept. User information became a kind of product, since for the business model of many companies it was very important to have customer data to use it in the most strategic way possible.

It is true that the concept of Embedded Finance came before PSD2. We have the example of wallets that do not need this regulation to operate. However, it is true that PSD2 opened other doors. Some of those platforms that joined digitization at the time and grew exponentially, have now been able to offer financial services without this being their original business.

Embedded Finance can be applied in different ways. There is no single correct formula for its use. The most common uses are the following:

This use case is probably the most used or the most common. The platforms offer an integrated payment banking service and thus connect the end user without the need to go through the traditional method and platforms. what solution does this offer? A simple, pleasant, and practical user experience.

For example, Starbucks is using its platform so that customers can pay with just one click and thus be eligible for future offers and promotions.

Uber, a company born in the middle of the digital age, offers payment and collection services from its application. Thus, employees can quickly charge for services and the payment-collection process is considerably streamlined.

Embedded Lending, as the term says, embedded loan, occurs when it is marketed by a third party, normally non-financial services companies. The basis of a business is in the care of users and stakeholders. Therefore, when they need, in this case a loan, you should try to give what they need when they need it. Thus, the companies that are integrating financial services in their platforms also offer Embedded Lending. Buy Now Pay Later (BNPL) is a clear example of Embedded Lending. Normally, when the purchase to be made has a considerable cost, users tend to rethink the purchase. It is in this phase of the process where the BNPL enters, giving the option of paying in installments and without interest. With this, companies mainly achieve one thing: that users buy something that, a priori, they were not going to buy at such a high cost in just one payment, that is, increase their sales.

Thus, with Embedded Lending, users do not need to access third parties to obtain loans, that is, they never leave your ecosystem, ultimately improving the user experience. And second, by continuing to trust your platform, some very interesting links are generated.

Something similar as with Embedded Lending occurs with Embedded Insurance. Ecosystems are becoming more and more complete, and non-financial platforms integrate more and more finance-related services.

The engagement achieved by integrating the insurance offer on the platforms is abysmal. In the end, it is another piece that is added to the global service of companies, however, it is a complement that adds a lot of value. There is the example of Apple that, when you buy their products, you can not only pay with the Apple Card or Apple Pay, but they also give you the option of including insurance on your purchase. With this, they transmit total peace of mind to the user. The message is clear: if your iPhone breaks, nothing happens, you have insurance. The added value that this has is brutal, since you complement everything you are doing well with Embedded Finance and extend it to the needs of users.

To understand how Embedded Finance works, it must be clear that behind the banking service offered by companies, , there is always an entity that provides financial services. From this, the term Banking as a Service (BaaS) is created, which consists of providing financial services to a company, in these cases, not a bank. BaaS is the foundation of embedded finance, providing the infrastructure and technology to act within a context. Not all companies can provide this type of service. Depending on the type of services, there are different types of licenses. There is an EMI license that allows it to operate as an electronic money institution; Financial Credit Establishments that can only grant credits and loans, such as Cofidis; Payment entities that are authorized to make payments of all kinds: transfers, card payments, home debits, etc.

But how to interconnect banking services with the new platforms? This happens thanks to APIs (Application Programming Interface), which facilitate the connection between two software. Thus, everything is integrated into a single platform, while two are being used. However, the user is facilitated in such a way that he only has to be present in the most dynamic part of the process.

In this new ecosystem, the user no longer pays attention to traditional banking. It’s practically a thing of the past. However, banks will continue to provide the infrastructure that allows the service and the new Fintech companies will become the visible face, thus offering a much more rejuvenated image of the banking sector and much more dynamic services. Users focus on what is offered: a dynamic and agile platform. Thus, the front part becomes the most relevant while BaaS takes a back seat.

The advantages offered by Embedded Finance are enormous:

1.-Possibility of having more controlled payment processes

By having the entire financial service integrated into the platforms, tracking payment processes becomes easier.

2.-Added value for customers

As we have mentioned before, by integrating all financial processes in a single dynamic, agile and visual platform, a lot of value is added for demanding customers with the market by improving their shopping experiences.

3.-Greater efficiency

Efficiency is one of the most sought-after qualities. In the finance sector it is also a factor to consider. In the past, processes left much to be desired in terms of efficiency. The processes were physical, they took several days since different types of documents had to be obtained. Now, the processes are agile, take just a few minutes and can be done from the same place.

4.-Higher income

Income can also increase. Earlier, we discussed the complementary services of Embedded Lending and insurance. Through these, they can bill more and not for interest. Without a doubt, the key to all this is that, for example, with Embedded Lending, customers are buying something that they could not have bought without it, which directly increases sales. With the option offered to them and also with absolute flexibility, in many cases they can choose the financing period (within realistic margins).

1.-Bank dependency

The company that embeds financial services, not being banking in nature, will always depend on one that provides services (BaaS).

2.-Regulations

Current regulation and licenses are not easy to obtain as there are very strict compliance requirements. BaaS providers need licenses to offer the service so that other companies can operate. As we have mentioned before, licenses can be of different types. It will be the responsibility of the suppliers to choose where they want to enter.

3.-Constant adaptation

The finance sector is a very volatile and changing sector. Nothing is stable or very durable. Therefore, adaptation to change must be constant.

Snab is a pioneering platform in Europe as it embeds banking infrastructure within the platform, allowing customers to connect their existing banks. In addition, Snab uses wallet technology for some specific use cases, such as paying bill remittances in one click. In addition, thanks to the automation of processes, Snab avoids inserting invoice information manually in the system. Both the payment information and the payment itself is fully digitized, thus avoiding all the manual processes that were previously necessary to pay bills.