What is Embedded Finance?

Traditional financial services are no longer limited to banks. Today, you can make installments on an e-commerce site, pay via a digital wallet while ordering food, or even purchase insurance during a travel booking. Behind this transformation lies a new-generation system called “embedded finance.” By integrating financial services into digital platforms, embedded finance enhances user experience and provides businesses with new business models and revenue streams. So, what exactly is embedded finance? How does it work? In which areas is it used, and what are the advantages of embedded finance for businesses? Papel Blog answers all these questions for you!

 

What is embedded finance?

Embedded finance integrates financial services like payments or loans into non-financial digital platforms. With embedded finance, users can carry out financial transactions directly through their platforms—without switching to banking apps. For instance, being able to make installments, buy insurance, or pay using a digital wallet, all within an e-commerce site, are some conveniences enabled by embedded finance. Typically implemented via API-based integrations, embedded finance services are provided by fintech companies like Papel or banks. Digital platforms integrate these solutions to enhance user experience.

 

What are the differences between embedded finance and open banking?

While both aim to improve user experience by digitizing financial services, embedded finance, and open banking differ in several ways:

Different definitions

Embedded finance involves integrating financial services into non-financial digital platforms. Open banking, on the other hand, involves banks sharing customer data (with their consent) with third-party providers like fintech.

Different use cases

Embedded finance is commonly used in e-commerce, mobile apps, SaaS, and transportation services. Open banking is typically seen in personal finance apps, loan comparison tools, digital wallets, and fintech products.

Different technological infrastructures

Embedded finance works through Banking-as-a-Service (BaaS) models and API integrations that provide banking functionalities. Open banking relies on APIs that allow banks to share data securely and must comply with regulations like PSD2.

Different user experiences

With embedded finance, users can complete financial actions like payments, loans, or insurance without leaving their platform. Open banking allows users to transfer financial data between apps and manage multiple accounts in one place.

Different regulatory frameworks

The regulation of embedded finance depends on the service type and the country and is usually more flexible. Open banking, however, must adhere to stricter regulations—especially concerning data privacy and user consent, as seen in the EU’s PSD2 directive.

Which sectors use embedded finance applications?

Thanks to its benefits, embedded finance has been adopted in various sectors:

E-commerce platforms

E-commerce sites offer services like installment payments, shopping loans, and product insurance during the shopping process, improving customer satisfaction through seamless transactions.

Mobile apps and digital wallets

Apps can provide faster and more secure financial transactions, such as in-app purchases in games or ordering food and paying directly within the app.

Service industries

Healthcare providers, education institutions, transportation companies, travel agencies, hospitality businesses, and entertainment or sports facilities now offer more convenient payment solutions via embedded finance.

Insurance services

Thanks to embedded finance, services like travel, auto, or health insurance can be offered directly on the platforms that users are already engaging with—for instance, getting travel insurance while booking a trip.

B2B platforms

B2B platforms can offer financial services to suppliers to streamline payments and improve cash flow.

Crypto and investment apps

Users can make investments and payments on a single platform through embedded finance integrations in crypto platforms.

 

How does embedded finance affect user experience?

Embedded finance improves user experience by enabling fast and easy financial transactions within digital platforms. Users can complete payments, loan applications, or insurance purchases without leaving the platform. One-click payments reduce processing time and increase satisfaction. Personalized offers and loyalty program integrations further boost engagement and customer loyalty.

New business models introduced by embedded finance

Beyond improving users’ access to financial services, embedded finance also allows businesses to develop innovative business models. It helps digital platforms enhance performance and provides competitive advantages. One standout embedded finance solution is the “Buy Now, Pay Later” (BNPL) model offered by e-commerce platforms. BNPL increases customer loyalty and boosts sales by providing flexible payment options. Similarly, micro-credit services allow users to access small loans instantly. Insurance integrations add an extra layer of security during shopping or bookings.

APIs offered by banks and fintech allow embedded finance services to be integrated into digital platforms, which also benefits businesses. For example, accounting software can offer invoice financing or credit options, making it easier for SMEs to access capital. B2B marketplaces can provide early payment solutions to their sellers, simplifying transaction processes.

 

 

Sources: 1.

 

The information provided in this blog post is for general informational purposes only and does not constitute legal, financial, or investment advice. The content is prepared solely for informational purposes, and seeking professional advice for your specific circumstances is recommended. The statements in this article do not create any binding obligations or liabilities and solely reflect the author's opinions. All decisions and responsibilities are yours, and Papel Elektronik Para ve Ödeme Hizmetleri A.Ş. assumes no liability.