When businesses offer payments, loans, or insurance directly within their platforms, they're leveraging embedded finance. This trend is reshaping financial services, making it easier for users to access what they need without leaving their favorite apps.

A recent survey of 1,000 SMBs found that while 83% are eager to use financial services through their software platforms, only 9% currently do so. This gap highlights a significant opportunity for SaaS companies to integrate these services, opening new revenue streams and enhancing customer satisfaction.

So why is the adoption rate so low in spite of the high interest? Many SaaS platforms and marketplaces are still in the early stages of integrating these services, often facing technical and regulatory challenges. Second, there's a knowledge gap; many businesses are unaware of how to implement and benefit from embedded finance. Another likely reason is that existing financial service providers may not have the necessary APIs or partnerships in place, making integration more complex and time-consuming for companies looking to adopt these solutions.

How does embedded finance work?

Embedded finance integrates financial services directly into non-financial platforms through the use of APIs. This seamless connectivity allows users to access services like payments, lending, or insurance without leaving the platform, enhancing convenience and engagement. By leveraging user data, platforms can offer tailored financial solutions.

Partnerships with financial institutions or fintech companies provide the necessary infrastructure and regulatory compliance. This integration simplifies financial processes, adding significant value for users and creating new revenue opportunities for the platforms.

Here are examples of embedded finance in different industries:

• Financial Services: A bookkeeping software offering integrated invoicing and payments, allowing businesses to send invoices and receive payments within the same platform.
• Retail: An e-commerce platform providing instant credit options at checkout, enabling customers to finance their purchases directly through the site.
• Logistics: A shipping and delivery platform incorporating insurance for shipments, allowing users to purchase coverage and file claims without leaving the platform.
• Hospitality: A hotel booking platform offering travel insurance during the booking process, allowing customers to protect their trips directly within the app.
• Transportation: A ride-sharing app integrating payment solutions that enable riders to split fares or use digital wallets without needing third-party payment apps.
• Healthcare: A telemedicine platform incorporating patient financing options, allowing users to pay for medical services in instalments directly through the healthcare provider’s app.

Embedded Finance in Retail: Opportunities and Challenges

Embedded finance is gaining traction in the retail sector worldwide, although adoption rates vary by region. North America and Europe are at the forefront, with many retailers already integrating financial services into their platforms.

In the U.S., Amazon offers services like Amazon Pay and Amazon Lending, while in Europe, Klarna's Buy Now, Pay Later (BNPL) service is widely used. Asia-Pacific is catching up quickly, driven by tech-savvy consumers and innovative platforms. In China, Alibaba and JD.com have embedded a range of financial services, from payments to insurance. Meanwhile, Latin America and Africa show significant potential despite slower adoption, as seen with mobile money services like M-Pesa in Kenya

However, the path to widespread adoption is not without threats. Navigating the complex regulatory landscape across different regions can be daunting. Variations in data privacy, financial transactions, and consumer protection regulations pose significant compliance risks. Furthermore, integrating financial services makes retail platforms prime targets for cyber-attacks, necessitating robust cybersecurity measures to protect sensitive financial data.

As more players enter the embedded finance space, competition intensifies, making it crucial for retailers to differentiate their offerings. Building trust is also essential; convincing customers to use financial services from retail platforms instead of traditional banks requires a high level of trust. Any security breaches or service failures can severely damage reputation and trust.

On the flip side, embedded finance offers several promising opportunities. It can significantly enhance the customer experience by providing seamless access to financial services, simplifying processes like checkout, and reducing cart abandonment rates. By offering financial services, retailers can tap into new revenue streams. Services like BNPL, loyalty programs linked to financial products, and retail loans can boost profitability. Additionally, retailers can leverage financial data to gain deeper insights into customer behavior, enabling more personalized marketing and product recommendations. In emerging markets, embedded finance can promote financial inclusion by providing banking services to unbanked or underbanked populations.

Several products exemplify the potential of embedded finance in retail. Amazon Pay allows customers to use their Amazon account to make purchases on third-party sites, offering a seamless payment experience. Klarna partners with various retailers to provide BNPL services, allowing customers to pay for purchases in installments. Shopify Capital provides funding to its merchants based on their sales data, helping them grow their businesses with loans and advances. Affirm partners with retailers to offer installment loans at the point of sale, enabling customers to finance their purchases and pay over time. Square, known for its payment processing solutions, also provides business loans through Square Capital, helping small businesses access necessary funds for growth.

Embedded finance in retail is poised for significant growth, offering numerous opportunities for retailers to enhance customer experience, increase revenue, and gain valuable insights. However, navigating regulatory challenges, ensuring cybersecurity, and building customer trust are critical for successful adoption. With the right strategies, retailers can leverage embedded finance to transform their business models and meet the evolving needs of their customers.