Embedded Finance – The Intersection of FinTech and BigTech

January 21, 2021

FinTechs are seamlessly embedding finance in technology to facilitate our day-to-day activities. However, there are new companies that do not identify as FinTechs but embed financial services in offerings to attract and retain customers. Payment solutions such as Visa, Mastercard, Klarna, Apple Pay, Google Pay, and Amazon Pay and e-marketplace service providers such as Shopify, which earns 59% of its revenue from embedded payment products, are not merely FinTech companies.

Embedded finance is estimated to offer a market opportunity of over $7 trillion by 2030. Embedded insurance is estimated to be a $3 trillion market. Embedded finance is the native integration of financial services into a traditionally non-financial service or product.

BigTechs have specialized expertise, thorough knowledge of consumer segments, and networked resources that come along with their investments. By embedding finance in their non-financial services business, they provide their customers access to financial services and payments, often in an invisible, seamless way.

Payments, the first financial service to be embedded into non-financial product experiences, has pervaded digital platforms such as Apple Pay, Afterpay, Paytm, and WeChat. Other financial services, including credit and insurance, have lagged due to their complexity but are now quickly catching up.

Diverse sets of digital platforms working in the MSME, B2C, and e-commerce segments are adopting embedded finance to provide financial services and augment their businesses. 

FinTechs are developing sophisticated embedded finance offerings. BigTechs and incumbents are integrating these offerings into new propositions and customer services. API banking and the strategic push for smart cities are creating the desired infrastructure for making embedded finance digital business models.

‘Pay later,’ cardless EMIs, and EMIs have become the preferred payment modes. According to Razorpay, a payments solution firm, these modes have registered growth of 290%, 178%, and 125%, respectively, due to stress in income across households.

BigTechs are fast embracing and successfully incorporating embedded finance in their offerings. Here are a few examples:

In 2019, Uber launched Uber Money in the US to provide debit accounts and cards, credit cards, and a digital wallet for drivers and courier delivery personnel under contracts. Eligible drivers will also find a loan section in the app, and they can apply for loans at 0% APR with no fees or credit checks. They have an option to use a percentage of earnings for repayment. The company eventually plans to offer bank accounts to drivers and courier delivery personnel.

In 2020, Amazon launched Amazon Pay Later in India, giving customers the option to obtain instant zero-interest credit on any of the products listed on Amazon India. Customers can pay in the subsequent month or EMIs over 3–12 months. To use the offer, customers need to complete a one-time setup process, which takes only a few minutes and mentions few eligibility criteria. Loans are offered through Capital Float, Amazon’s third-party lending partner, and IDFC First Bank. Since April 2020, Amazon Pay Later has offered more than 1 million loans to customers, registering four times growth compared to business as usual.

Google is embedding finance in an unlikely source. Google Maps is working on enabling users to pay for street parking through the app. In Austin, Texas, US, drivers can use the feature when driving to a location with participating parking nearby. Google partnered with Passport to integrate the latter’s payment technology into Google Maps. Passport is a FinTech company specializing in developing phone-based payment technology to simplify parking management. The final payment on the app is handled by Google Pay. Google Pay announced it would offer bank accounts and other financial management services to its users in collaboration with several banks, including BBVA.

WeChat Pay is a digital wallet service incorporated into WeChat, a social messaging app in China. All WeChat users have their WeChat Pay accounts. Users can acquire balance by linking their WeChat accounts with their debit cards. They can make peer-to-peer (P2P) payments on the app and pay online and offline merchants (through QR codes/NFC). WeChat claims to have more than 800 million monthly active WeChat Pay users.

WhatsApp, a Facebook-owned messaging app, has received approval from the National Payments Corporation of India (NPCI) to go live with its payment service in India. WhatsApp users can make P2P payments as well as payments to online and offline vendors through QR codes. WhatsApp currently has more than 400 million customers in India and is onboarding merchants of various sizes to enable listing and selling through its messaging platform.

Case in Point 1: Embedded Finance by Amazon

Amazon, the largest e-commerce company in the world, has a number of embedded finance products and services spread across its diversified portfolio. It is neither a FinTech nor has it applied to become a conventional bank. However, it has gradually built an unbundled bank with products in payments, lending, insurance, merchant services, credit/store value cards, prepaid cards, among others.

With a presence in 18 countries, Amazon formed strategic localized partnerships with FinTechs and incumbent banks alike.

Amazon has created its FinTech portfolio—a fine example of embedded finance.

Amazon strategically focuses on increasing participation in the Amazon ecosystem by increasing the number of merchants and enabling them to sell more. It aims at increasing the number of its consumers and enables them to spend more. Amazon has made significant FinTech investments. The resulting products demonstrate that it has taken the core components of a modern banking experience and created an embedded finance portfolio to suit Amazon customers—merchants and consumers.

Case in Point 2: Embedded Finance by Samsung

Samsung, a leading smartphone manufacturer with 20% of the global market and a mammoth share in the home appliances and electronics market, is stepping toward a FinTech ecosystem.

From Samsung Pay (mobile wallet) in 2015 to Samsung Money (digital banking account) in 2020, this tech giant has created an entire system of complementary platforms—financial digital security (Samsung Pass), innovative payments acceptance methods (Samsung mPOS), digital identification (Samsung Digital ID), and cryptocurrencies (Samsung Blockchain Wallet).

In terms of FinTech partnerships, Samsung had two major embedded finance rollouts in 2020. Samsung and Klarna announced a partnership to provide Samsung customers with Klarna’s ‘pay later’ (BNPL) services. Samsung also partnered with Curve, a UK-based FinTech, to power its forthcoming Samsung Pay Card (a debit card).

Samsung plans to offer future market technologies as a well-crafted portfolio of branded and white label solutions—mobile payments and money transfers as well as budgeting and digital security of financial assets. R&D at Samsung is open for partnerships with available SDKs and select APIs. Embedded finance directly aligns with Samsung’s strategic aim to provide the best technology, services, and solutions.

Embedded Finance Enjoys Investor Confidence and a Massive Future Opportunity

VCs and investors are increasingly getting drawn to FinTechs offering embedded finance solutions to BigTechs and incumbents. Affirm, a US-based next-generation BNPL player, raised $1.2 billion in its January 2020 IPO. In 2020, Square, a digital wallet (payments) company, grew 253% in the US stock market. Payment FinTech Stripe is worth $36 billion. Leading global mobile manufacturers such as Huawei, Samsung, Apple, and Xiaomi are launching next-gen smartphones with integrated financial products and infrastructure. Ultimately, financial services will disappear into the background of solutions offered to customers. Embedded finance will make technology invisible to consumers and increase per-customer revenue by 2–5 times for companies.

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