What is Embedded Finance?
Embedded finance is the integration of financial products or services into a non-financial customer experience, journey, or platform. For example, an e-commerce platform that allows customers to buy products and pay for them with a single click, or a software platform that offers customers a point-of-service insurance for their goods. Embedded finance aims to streamline financial processes for consumers and businesses, making it easier for them to access the services they need when they need them.
Why is Embedded Finance Important?
Embedded finance is important because it can offer several benefits for both customers and providers of financial services. Some of these benefits are:
- Increased convenience: Customers can benefit from faster transactions, more accessible interfaces, and seamless integration of financial services into their daily activities. This can improve customer satisfaction, loyalty, and retention. satisfaction, loyalty, and retention.
- Lower costs: Providers can reduce the costs of acquiring, servicing, and managing customers by offering them financial services directly through their non-financial platforms. This can also increase customer lifetime value and reduce churn.
- Improved financial literacy: Customers can learn more about financial products and services by using non-financial platforms that provide clear explanations, comparisons, and recommendations. This can enhance customer financial literacy and education.
- More customized and tailored: Providers can offer more customized and tailored financial solutions to customers by using data analytics, artificial intelligence, and machine learning to understand their needs, preferences, and behaviours. This can improve customer experience and satisfaction.
- Enhanced security: Providers can enhance the security of financial transactions by using encryption, authentication, verification, and fraud prevention technologies. This can protect customers from identity theft, fraud, and cyberattacks.
How is Embedded Finance Used in Trade Finance?
Trade finance is the process of facilitating international trade by providing financing solutions to buyers and sellers of goods and services across borders. Trade finance typically involves multiple parties such as banks, exporters/importers, logistics providers, customs brokers, insurers, etc.
Embedded finance can be used in trade finance by integrating financial products or services into the trade process or the trade platforms. For example:
- Bundled services in trade, or ‘embedded trade’, could include integrating the physical and financial supply chain, digitising paper documents such as bills of lading, streamlining the financing process, providing risk management solutions, offering insurance coverage, etc.
- Embedded payment solutions could include integrating payment methods such as credit cards, digital wallets, cryptocurrencies, etc., into the trade platforms or workflows.
- Embedded lending solutions could include offering loans, guarantees, letters of credit, etc., to buyers or sellers of goods or services.
- Embedded insurance solutions could include offering insurance policies such as cargo insurance, liability insurance, credit insurance, etc., to buyers or sellers of goods or services.
What are the Advantages of Embedded Finance in Trade Finance?
Some of the advantages of embedded finance in trade finance are:
- Improved efficiency: Embedded finance can improve the efficiency of trade processes by reducing manual workloads, paper-based documentation, transaction costs, delays, errors, etc.
- Increased transparency: Embedded finance can increase the transparency of trade processes by providing real-time information, visibility, traceability, auditability, etc.
- Enhanced collaboration: Embedded finance can enhance the collaboration among trade participants by facilitating communication, coordination, cooperation, trust, etc.
- Increased innovation: Embedded finance can increase the innovation potential of trade processes by enabling new business models, value propositions, revenue streams, competitive advantages, etc.
Embedded finance is a new form of partnership between banks, technology providers, distributors of financial products via nonfinancial platforms underpins what has been hailed as the embedded-finance revolution. It offers several benefits for both customers and providers of financial services by integrating them into nonfinancial customer experiences or journeys or platforms. Embedded finance is especially important in trade finance by integrating financial products or services into the trade process or the trade platforms. And finally, embedded finance can improve efficiency, transparency, collaboration and innovation in trade processes.