By carefully decoding embedded finance, India will be able to achieve financial inclusion in 2022

By decoding embedded finance, India will be able to achieve financial inclusion

Due to increased internet penetration, government regulatory and legislative backing, and the launch of India Stack, among other things, financial services in India have seen tremendous development in recent years. The Reserve Bank of India‘s financial inclusion index also indicates consistent development.

However, India’s access to financial services appears to be severely limited when compared to wealthy countries and a few Asian rivals. India still has a long way to go, with a *4.2 per cent insurance penetration rate, a **13 per cent retail loan-to-GDP ratio, and a total market capitalization of around ***US$ 3.21 trillion (the US and China’s total market capitalizations are around US$ 47.3 trillion and US$ 11.5 trillion, respectively).

This is due in part to the way financial services have traditionally been developed and supplied. Financial services have traditionally been top-down, with a costly manner of distribution involving several branches, high-touch models involving contact centres, relationship managers, and more. As a result, access has been significantly skewed towards the wealthy.

This is unquestionably changing, with various Banking and Neo Banking apps/Fintechs challenging the industry with novel distribution strategies and a unique concentration on certain market groups that have been neglected or unserved by traditional players. However, the recent introduction of ‘Embedded Finance’ has the potential to accelerate financial inclusion for millions more Indians in the coming years while also creating long-term value for other stakeholders.

Simply said, Embedded Finance is a concept that allows any non-financial organization (Individuals, Startups, Fintechs, Digital Businesses, or Large Enterprises) to offer financial services (cards, accounts, insurance, loans, investments) to its clients via an Embedded Finance platform.

Previously, a non-financial company might offer financial services by investing heavily in technological infrastructure and devoting a substantial amount of time and effort to obtaining the appropriate licenses from authorities. Embedded Finance systems would allow enterprises to skip both processes by providing ‘plug-and-play’ capabilities for bigger organizations utilizing API stacks and easier-to-use no-code/low-code stacks for people. These platforms have solid ties with major banks and insurers, allowing them to provide financial services.

The advantages of embedded finance are numerous, and we are already seeing applications all around the world. Tesla just began selling auto insurance on its checkout page, YouTube now allows users to purchase products while watching a live video, and Google Maps now allows users to plan and pay for parking spaces directly from the app.

These examples demonstrate the most important benefit that Embedded Finance gives to customers: access to the appropriate financial service when it is most needed. Embedded Finance, from the platform’s perspective, provides a chance to generate additional income streams through revenue sharing partnerships for distributing and curating financial goods. Financial services may be integrated into customers’ primary buying journeys to boost engagement, loyalty, and lifetime customer value.

Embedded Finance can assist a bank or insurance to minimize client acquisition and servicing expenses. In India, an intriguing environment is emerging, with businesses pursuing a variety of tactics to gain scale in an otherwise fragmented industry. Embedded Finance systems have sprung up that provide capabilities for various financial product combinations.

Others focus on specialization – giving a single product with a higher degree of customisation – while others focus on having a varied and full collection of goods. Embedded insurance and payments already have several intriguing applications. Travel companies like MakeMyTrip and Ola have already started offering contextual insurance to their consumers. Customers may now purchase BNPL items directly from e-commerce companies.

Embedded finance offers unquestionably exciting possibilities. Early adopters should include large digital customer-facing firms, e-commerce, and digital B2B brands. Embedded Finance allows creators and influencers to monetise their brands (e.g., an influencer providing a branded card to its followers). If applied correctly, Embedded Finance may help any institution with a significant mass of users. There are, however, difficulties. To begin with, a complicated product such as loans cannot be supplied without a comprehensive investigation of the consumer.

Businesses and embedded platforms would need to figure out how to make the most of their customer data. Second, for certain items, it must be determined whether income sharing with banks is feasible. Finally, the capabilities of the Embedded Finance platform, as well as the bank or insurer, will define the extent of personalisation and customization.

It’s still too early to grasp all of Embedded Finance’s various potential, but it’s undeniably a business opportunity worth exploring. More no-code/low-code enablers are likely to appear in the future, opening up previously inconceivable use cases. Customers will most likely benefit from companies that integrate their data with Embedded Finance solutions to create value-added services.