In recent years digital technologies have disrupted shopping experiences and electronic transactions between enterprises and their retail customers. Specifically, customers can nowadays purchase virtually every good and service on-line. At the same time, merchants and other on-line service providers offer personalized shopping experiences through their web sites and fulfill customer requests regardless of time and location. Contracts, payments, and other financial transactions are integral elements of such shopping experiences, which leads many services providers in integrating financial transactions in their offerings. This integration is commonly known as embedded finance or embedded banking. Likewise, the companies that enable this integration are usually characterized as embedded finance companies.
Embedded finance enhances non-finance services with full-fledged digital finance functionalities. Most incarnations of embedded finance services are integrated within customer-facing services i.e., services involving interactions with the end-consumer. As a prominent example, embedded payment services enable consumers to make payments whenever they make a purchase. In recent years, the interest on embedded finance is skyrocketing, which has led to a proliferation of companies that integrate banking and payment functionalities into electronic products and services. For instance, the popular Buy Now, Pay Later (BNPL) service enables on-line enterprises to integrate short-term financing functionalities with their products. Leveraging these functionalities companies can pay for goods and services at a future date.
The interest in embedded finance is due to various factors, including recent technological and regulatory developments. In particular, service providers and product vendors are increasingly embedding finance functionalities in their products for one or more of the following reasons:
Embedded finance enhances on-line products and services in different ways. A list of popular use cases follows:
The above-listed use cases provide a glimpse on the disruptive potential of embedded finance projects. They also explain why research firms anticipate a significant growth of the embedded finance movement, which is likely to exceed $100 billion by 2026. These are good reasons for on-line service providers to keep a close eye on embedded financial tools and to gradually develop their own embedded finance strategy.
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