Embedded Finance: The Next Big Opportunity

Financial services providers are constantly looking for new ways to improve their service delivery to existing and prospective clients. Leveraging technology has become indispensable for companies. One key advancement paving the way is embedded finance, the seamless integration of financial services into non-financial platforms.

Embedded finance is the seamless integration of core financial services into a non-financial company’s products or services ^[1] . This integration enables companies to offer customers financial solutions such as payments, lending, or insurance within their existing platforms as an add-on to their primary offerings.

For example, companies are integrating financial services such as lending, insurance, and investment services through APIs (application programming interfaces) outside of the finance industry ^[2] . Considering these developments, Africa has certainly been impacted.

Embedded Finance in Africa

The embedded finance industry in Africa is growing 45.3% annually, making $10.3 billion, and is expected to reach $39.8 billion by 2029 ^[3] . This is not a surprise considering the huge benefits it offers to the continent and the mass potential it garners. Embedded finance integrates everyday needs into digital payments, making payments, credits, and financial services within applications easily and without disruption.

This is beneficial because it reaches underserved communities who may not have access to traditional financial services such as insurance or investments, to encounter new financial products and services. Embedded finance allows them to utilize systems that they are already familiar with on an accessible interface. The fintech boom in Africa offers new solutions for the financially underserved, and the next step for the fintech industry is to ensure that the digital transformation of the financial sector reaches every corner of the continent and shrinks the size of the underbanked population.

Challenges in Utilizing Embedded Finance

Although embedded finance comes with its benefits, there are equally challenges one should be aware of to get a holistic picture of its benefits. A key issue is data privacy and protection. Services that provide core financial services might face more scrutiny than those that offer financial services as an add-on ^[4] .

Embedded finance gives you access to customers’ KYC information and other sensitive data. For its growth to be sustained, sufficient measures must be in place to guarantee that customers’ data are not easily privy to data leaks and exposure.

Another major challenge with embedded finance is that it is expensive and difficult to set up. Though it has the added benefit of reaching unserved communities, there are cost implications. For an organization to embed finance into its product, it must have the financial resources to afford it and the technical talent to implement and manage it ^[5] .

Opportunities with Embedded Finance

Nonetheless, the future of embedded finance is promising as Africa is getting more digitized with high mobile phone penetration and a strong demand for financial inclusion services. For those who lack access to traditional banking, embedded finance helps to integrate financial services through ride-hailing apps, social media, making financial services more seamless and inclusive for users. Mobile platforms such as M-Pesa and Telebirr have already begun to transform the financial landscape in Africa ^[6] .

Embedded finance is expected to continue building on this foundation by integrating payment solutions into everyday digital platforms, further reducing the reliance on cash and expanding financial access across various sectors, including retail and logistics. For embedded finance to continue to grow, regulatory support and partnerships are needed to nurture its potential.

Embedded finance offers new opportunities, buy now pay later and micro-finance lending, especially within e-commerce and agricultural technology. For continued expansion, regulatory support and partnerships with traditional banks are essential for embedded finance to continue to expand. It is also expected that support for embedded finance will grow, considering its benefits across the African continent.

Conclusion

To conclude, embedded finance holds vast potential. From reaching underserved communities to accessing financial services in an efficient manner, embedded finance is truly shaping the future of payments. Though challenges lie in managing data privacy and the costs of using embedded finance, more opportunities abound in utilizing embedded finance.

Reference

[1] https://www.korahq.com/blog/introduction-to-embedded-finance-and-banking-as-a-service

[2] https://www.investopedia.com/what-is-embedded-finance-8417153#:~:text=Embedded%20finance%20refers%20to%20the,are%20linked%20to%20financial%20partners

[3] https://www.finextra.com/the-long-read/1142/embedded-finance-encouraging-african-financial-inclusion

[4] https://www.korahq.com/blog/introduction-to-embedded-finance-and-banking-as-a-service

[5] https://www.korahq.com/blog/introduction-to-embedded-finance-and-banking-as-a-service

[6] https://360mozambique.com/world/africa/the-future-of-embedded-finance-in-africa/