Financial Universe

Embedded Finance: The phenomenon turning companies into ‘banks’

Published on Apr 27 2023. 18 minutes reading

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In the past few years, we’ve seen deep changes in the financial industry, while also becoming familiar with concepts and trends that are essential for that entire transformation based on decentralization, emerging new players and financial inclusion. Among those movements, we have Embedded Finance.

Explaining it in a very simple way, we can say that it is the phenomenon that transforms companies into banks. Through Embedded Finance, any business has the possibility of adding financial products and services to its portfolio, without leaving aside its core business.

If you've already used the credit cards of a store, for example, this was most likely an Embedded Finance experience. In other words, this dynamic is already part of our daily lives, making financial services easier to use, more convenient and more personal.

In order to explain in more detail what that phenomenon is and how it is revolutionizing the distribution for financial services, we talked to Bruno Diniz, expert in innovation in the industry, cofounder of Spiralem, Head of FDATA (Financial Data & Technology Association) in South America, professor at Fundação Dom Cabral and the MBA program at USP and author of the book “O Fenômeno Fintech”. Check out our talk below.

Watch the video summary and check out the interview in full!

For starters, what is Embedded Finance?

Bruno Diniz: The literal meaning of Embedded Finance is “embedded finance” or “embedded finance”. So basically this concept is about give distribution capacity financial solutions to companies that do not necessarily operate in the financial sector. The goal is to enable them to work in the segment and provide financial services and products for their user and customer base.

So Embedded Finance is connected to that transformation in the financial industry, which makes the line separating ‘traditional’ financial service providers and new providers—which are neither banks nor fintechs — increasingly blurred.

We have all types of companies, from have retail to technology and phone companies, taking part of that movement and starting to explore that field. At the same time, the technological and regulatory barrier is diminishing, and new service providers in Banking as a Service are emerging by enabling that opportunity.

What types of financial products can be embedded by those companies?

Bruno Diniz: Products like digital wallets, current accounts, digital accounts, credit, insurance plans, loans, among other services.

Also, we’ve expanded that range to a number of different solutions under the Embedded Finance umbrella—such as Embedded Fintech e Embedded Insurance.

Apart from financial gains, what are the advantages for companies embedding financial services into their ecosystem?

Bruno Diniz: Financial gains are certainly a main advantage in Embedded Finance, since you benefit from monetizing your customer as well as having ‘independence’ of banks for operations, such as paying your employees or suppliers, without having to rely on those institutions.

But not just that: another great advantage is the ability to build a robust solution ecosystem and able to keep the customer closer to you.

Let’s take a retailer as an example. By adding financial solutions, they have a great opportunity to bank their consumers. Besides, they can also partner with different companies—such as car service or delivery app—and start providing them with a wider range of solutions. That becomes attractive to clients, since they’ll find solutions for different aspects of their lives.

What are the facts enabling this emerging and evolving trend of Embedded Finance at the moment?

Bruno Diniz: There are three factors that have enabled us to achieve Embedded Finance. The first one involves an evolution of regulation. If we look at the financial market twenty years ago, we didn't have many new entrants. It was much more closed in terms of providing financial services and was limited to a few institutions. Over time, the Central Bank opened up competition and created different possibilities to, in fact, encompass these new entities.

The second one involves technologyitself, which has become increasingly accessible. Twenty years ago, a lot of resources would be necessary to design your operation, which made the required structure extremely expensive for those looking to join the game.

Finally, the third one is about emerging service providers in Banking as a Service, which master that expertise from a regulatory and technological standpoint. So they can put all that into practice in order to enable that transformation.

Therefore, today it is easier than ever to create its own digital bank or embed financial solutions into your business. However, if you try to do this with the structure you have in-house, it will be very difficult. Having the support of active companies, who know the ropes and have several cases under their belts, will make all the difference in leveraging your operation.

How does Embedded Finance help financial inclusion in Brazil and other countries in Latin America?

Bruno Diniz: For a long time, in Latin America, we had few options for financial institution and low competition, with very similar fees charged.

Now, we are seeing a massive entry of players into the financial market. This has been gradual: five or eight years ago, fintechs were beginning to emerge as competitors. However, they had to climb the ladder to become big enough to compete with the big institutions.

With Embedded Finance, now we have more momentum. Today different established companies start providing financial services in our region, which enables a wider range of alternatives.

Furthermore, this transformation brings the possibility of financial inclusion of several people who were not of commercial interest to the banks. As a result of this change, they are now able to use financial services, also because these new players have a different understanding of this consumer profile.

That’s why today the friction for someone to have their first account or start having access to products of that kind is significantly diminishing. You might not be banked, but you somehow leverage some non-financial solution offered by some company.

The entry of these new institutions from other sectors in the financial market represents a great advance in terms of inclusion and bankarization in Latin America.

What is the connection between Embedded Finance and two recent regulatory milestones in Brazil: Pix and Open Banking?

Bruno Diniz: O Pix manages to bring another layer of leveling between the institutions that participate in this market, coming as an element that helps to give more strength to this package of offers that become possible in this new reality of Embedded Finance.

Likewise, the Open Banking it's one of those layers. By making it possible for customer data to circulate among the institutions authorized to participate in this environment, he manages to unlock all this potential even more.

If you are a player outside the financial segment, a delivery app, for example, you already have a much greater reading of your target audience. Let's say you're offering financial services for restaurants. You will understand seasonality, know who has a good quota and how this would impact those who have to pay a loan.

O Open Banking concerns the empowerment of citizens in relation to their own data. It's about how I can give up my data to obtain benefits from it. This integrated environment with new agents using this to leverage opportunities is one of the best possible scenarios for inclusion and personalization of financial offers.

What countries are most advanced and have the greatest potential for Embedded Finance?

Bruno Diniz: We have very interesting cases in the United States. Looking at the ones that can make the biggest impact thanks to Embedded Finance, I can't help but mention the big techs that are adding financial services and products.

Amazon is one of them: the company is increasingly establishing itself in this market and has great potential. In its core business, which now also has an entertainment division, already offers solutions for different pains. So, before you know it, you're already totalmente immersed within the ecosystem created by Amazon.

However, I also believe that the Embedded Finance movement will help include players from very specialized niches. Here in Brazil, we already have solutions focused on waste pickers, for instance. Now we’ll start seeing more and more solutions appealing to specific niches such as self-employed professionals, truck drivers, etc. So different people will benefit from that phenomenon.

Does Embedded Finance bring any risk for companies or the financial system itself?

Bruno Diniz: I don’t think so, also because This entire movement is supported by all possible legal foundations. Therefore, if this is being made possible, the companies that provide Banking as a Service will be paying close attention. That’s why I don’t see risks or issues.

Also, I believe that is kind of a myth we need to shatter. After all, the more alternatives we have on the market, the better. And, if the market today allows us — both for technological and regulatory reasons — to have these new alternatives, this is quite healthy for us to have greater inclusion and more possibilities of choice within the market.

Land of opportunity: The numbers in Embedded Finance

After reading this interview, it is clear that Embedded Finance is advancing rapidly. The scenario presents many opportunities for companies that want to start incorporating finance into their businesses, as some projections demonstrate:

A Finnovista estimates that the global opportunity for that service mode should reach over US$ 7 trillion within ten years—a value 30x higher than the total from XNUMX major banks in the world.
For Latin America, the international research institute Research and Markets expects the revenue for the embedded finance market to grow by 27% by 2029, reaching 13,7 billion dollars by the end of that period.
According to a study conducted by Deloitte, Brazilian industries—such as retail, consumer goods and more services contributing to over 35% of the GDP—will be able to expand their financial product and service offering and capture R$ 23 billion a year within five years.

Main features of Embedded Finance

As we mentioned, Embedded Finance allows the integration of financial services into non-financial platforms, making the user experience more fluidae convenient. This approach eliminates the need to access external banks or applications, providing faster and more intuitive transactions. Check out its main features:

Financial services integration: allow that marketplaces, applications and e-commerces offer financial services, without the user needing to leave the platform.
More convenience for users: By allowing customers to access other services directly from the platform they are using, Embedded Finance makes the journey more convenient.
Connection between systems via APIs: This means the possibility of incorporating financial solutions without having to develop an infrastructure from scratch, reducing costs and accelerating implementation. APIs also allow for scalability, allowing financial services to be adjusted according to business growth and user demand.
Improved User Experience: By reducing steps and simplifying processes, Embedded Finance provides a more intuitive and cohesive experience, making financial services a natural extension of the user's digital journey.

What is the difference between Embedded Finance and BaaS?

Embedded Finance and Banking as a Service (BaaS) are interconnected, but distinct concepts and have different purposes.

O BaaS serves as the technological foundation, the infrastructure that enables Embedded Finance, allowing companies to offer financial services without needing a banking license. Embedded Finance focuses on user experience, incorporating payments, credit and insurance directly into non-financial platforms, such as marketplaces and mobility apps.

While Embedded Finance enhances the consumer journey by making financial services more accessible and intuitive, BaaS enables companies to develop tailored financial solutions. This allows businesses from different sectors to integrate banking products without major investments in infrastructure, expanding their offerings and increasing customer engagement.

How important is embedded finance for the financial services sector?

The finances on board are transforming the financial sector by allowing banking services to be integrated directly into different platforms, making transactions more fluidas and accessible.

Banks, fintechs and companies from different segments can offer personalized financial solutions without customers having to resort to other institutions, improving retention and expanding their reach.

In addition to convenience, this approach strengthens security and prevention of fraudes, ensuring greater reliability for digital transactions. Below, see how embedded finance drives innovation and benefit the financial sector as a whole.

Customer experience improvement

This results in greater satisfaction and loyalty, as the customer can access financial services directly where they already carry out other transactions, without needing to resort to another bank or platform.

New Revenue Streams

The incorporation of financial services creates new sources of revenue, as institutions can charge fees or commissions for providing solutions such as payments, loans and other financial products. It is also possible to monetize offerings through partnerships and integrations with companies in other sectors.

Expansion of distribution channels

Embedded Finance offers an effective way to expand financial services distribution channels. By partnering with companies from different segments, such as e-commerce and mobility platforms, institutions can reach new audiences and increase your reach.

Customization of services

With access to customer data, embedded finance enables institutions to personalize their products and services, offering more accurate and targeted solutions. This strengthens customer relationships as offers are more relevant, increasing the chances of conversions and improving profitability.

Innovation and agility

The adoption of embedded finance allows institutions to be more agile and innovative. They are able to launch new products and services more quickly, responding immediately to market needs and taking advantage of growth opportunities, without the limitations of traditional structures.

What main business models can work with Embedded Finance?

Various business models can benefit from Embedded Finance, making financial services more accessible and convenient for users.

E-commerces can offer integrated payments and credit options directly on the platform, while marketplaces enable safer and faster transactions between sellers and buyers. mobility platforms, such as transportation apps, can incorporate digital wallets and insurance, improving the user experience.

Sectors such as retail, tourism, education and even health can also explore Embedded Finance, offering installments, insurance and automatic payments.

It is worth remembering that, when using the Banking as a Service, companies can integrate financial solutions without the need to become banks, which provides flexibility for different segments.

Embedded Finance is part of our project for decoding the financial universe, driving businesses and transforming society

Na Dock, our goal is to decode the financial universe, boost business and transform society. The concept of Embedded Finance that we explore in this article is part of how we provide cutting-edge solutions so that players from different segments can offer financial products and services to their customers.

From retail to manufacturing, companies of a variety of industries and sizes can benefit from the Embedded Finance phenomenon. And here at Dock, we’ve supported a number of companies in driving their business and accelerating financial inclusion through embedded finance.

Discover the stories of some of our clients who are making finance organic and transforming society.

FAQ: see respostas for the main questions about Embedded Finance

What is Embedded Finance?

The expression is used when financial services are incorporated into areas that are not directly related to the financial world. In sum, it is a phenomenon turning companies into banks.

Is Embedded Finance an opportunity exclusively for retail?

Retailers across the world, especially in Latin America, already see Embedded Finance as an old acquaintance. No doubt the industry was a pioneer—and why not a visionary—in adopting embedded finance in their business model.

However, the Embedded Finance phenomenon now goes through a new moment, where More and more companies from different segments are participating in this transformation.

That’s why offering financial services and products can be a strategy adopted by companies in the B2C as well B2B industry.

What are the advantages for companies adopting Embedded Finance?

Companies that adhere to Embedded Finance can obtain benefits such as the creation of an alternative source of income, Customer Loyalty, reach new consumers, increase in ticket average and obtaining competitive advantage.

It is worth mentioning that the benefits in Embedded Finance go beyond the corporate world, positively impacting users and the means of payment and banking as well as society as a whole.

Embedded Finance: what you saw in this article

Embedded Finance enables companies (which are not traditional players in the financial industry) to work in the segment and add financial services and products to their offering portfolio.
Services that can be part of Embedded Finance include digital wallets, digital accounts, credit, loans and insurance plans.
By reducing barriers for new players to join the industry, Embedded Finance contributes to financial inclusion.
Pix and Open Banking are regulatory milestones in Brazil that build even more momentum for growing Embedded Finance in the country.
From retail to manufacturing, companies of a variety of industries and sizes can benefit from the Embedded Finance phenomenon.