Opportunities and Strategies of Embedded Financial Services in India

In recent years, a revolutionary trend has evolved in the financial services sector, transforming how individuals access and engage with financial goods and services. This practice is known as "Embedded Finance," and it is quickly gaining popularity in India. India, being a fast-rising country with a vibrant technological ecosystem, provides an ideal environment for the emergence of embedded finance. The convergence of variables such as broad smartphone usage, rising digital infrastructure, supporting government regulations, and a thriving FinTech industry has prepared the ground for financial inclusion to become a reality. The epidemic has further pushed the growth of digital transactions, prompting businesses to develop their financial products. E-commerce sites like as Flipkart, Amazon, and others have quickly implemented incorporated digital payment modalities such as EMI cards and BNPL to give buyers with simple, safe, and reasonable credit choices. In India, 60% of consumers are interested in 'embedded financing,' which allows e-commerce shoppers to convert purchases directly to EMIs. As customers embrace the concept of digital financial services or new-age banking by transitioning from physical to cashless and online financial journeys, embedded finance has a bright future. In India, the embedded finance business has expanded at a 45% CAGR and is expected to reach US$ 5 billion by 2022. Globally, embedded financial services will be a US$ 230 billion business by 2025, up from US$ 22.5 billion in revenue in 2020.

The digital development of consumer borrowing began with demonetization in 2016, and the demand to transition to a paperless economy. The first step was payment digitization, which was followed by policy initiatives by the government and the regulator to lower access barriers and increase the share of formalised credit by launching a digital public infrastructure - Unified Payments Interface (UPI) technology, which provided a strong impetus for innovation. For the first time, UPI transactions reached a volume of 800 crore (74% y-o-y growth), with a transaction value of roughly US$ 156.96 billion (Rs. 13 lakh crore) (56% y-o-y growth).

Embedded Financial Services in India

Consumer financial services have been altered because of developing technology advancements, and embedded finance is the next big thing. Embedded finance is a concept that integrates financial services or tools into the goods or services of a non-financial platform as part of the user experience. For example, while purchasing from an e-commerce business and checking out, contactless payment and discount offers on digital wallets are available, as is converting shopping bills to tiny EMIs via EMI cards. Online ridesharing businesses and their financial services, as well as ordering trip tickets through portals and having the option to purchase travel insurance, are all examples of integrated finance. The growing acceptance of open banking initiatives, as well as the rise of banking as a service (BaaS), are key facilitators of embedded finance services. Embedded finance offers a wide range of services, including embedded payments (digital wallets, net banking); embedded loans (EMI financing, BNPL); and embedded financial services (insurance, wealth management). All of these integrated financial services provide an ecosystem that enables businesses to improve consumer engagement and experience.

Digital Transformation in India

In India, the financial services industry has spent more than ten years focusing on digital transformation. By combining various infrastructural and financial rails such as Aadhaar, Unified Payments Interface (UPI), secure data access (account aggregators), as well as initiatives and open networks such as Open Credit Enablement Network (OCEN) and Open Network for Digital Commerce (ONDC), India Stack has enabled the foundational blocks to accelerate digital tech in financial services (FS). This, together with enhanced customer access, reach, and technological proliferation, has paved the way for digital innovation across the business.

While some companies developed their own digital solutions, others took advantage of the boom in FinTech and neobanking to establish collaborative digital-first value propositions. The FinTech boom also resulted in cooperation tactics, as incumbent firms recognised the reciprocal benefits of working with FinTechs (such as neobanks) to enhance and personalise product offerings and customer experience, as well as increase consumer reach in a cost-effective manner. A substantial number of players developed skills to collaborate fast and extensively by leveraging application programming interface (API) technology in conjunction with optimised procedures and policies. As financial services firms attempted to differentiate themselves through partner strategies, the emphasis shifted to integrating FS solutions into customers' day-to-day demands.

As financial services firms attempted to differentiate themselves through partner strategies, the emphasis shifted to integrating FS solutions into customers' day-to-day demands. The main transition in the paradigm for players was from a product-provisioning viewpoint to a customer-centric needs-servicing strategy, where value propositions were designed around consumers and their requirements. This marked the start of the embedded FS journey, with enterprises shifting towards cross-industry offers. Because of the early success of the super apps model in China and ASEAN, the Indian financial services sector began to investigate a marketplace approach. Although this strategy was effective in terms of client acquisition and insights, leading to company development for early adopters, it faced severe competition from leading digital commerce as well as the proliferation of imitation models. Furthermore, the recent implementation of the ONDC will significantly reduce FS players' capacity to differentiate between generic digital commerce offers. To line with the customer requirements service philosophy, FS providers will need to thoroughly incorporate FS products into personalised customer journeys around individual needs. Furthermore, these products will need to shift away from markets and ecosystems that are still focused on product supply rather than becoming a phygital concierge for customer-needs servicing.

Core Elements

• Contextually relevant propositions

When integrating FS within a wider customer experience or workflow, it is critical that the offering is contextually appropriate - for example, embedding might be based on the context of the use case, quantum/value, or communication language. Furthermore, in order to secure client uptake, FS products should be near frictionless inside the overall journey, reducing the possibilities of dropoff. Overall, the solution must be created from a customer-needs serving viewpoint rather than a standard product provisioning approach.

• Digital core and human touch

Because embedded FS are related to the context of the wider customer journey, the associated services of the partner and FS player(s) (e.g. supported service delivery mechanisms like contact centres) must also be matched with the offerings of both players to maintain brand and experience continuity. This digital concierge strategy of contextual assistance with consistency and convenience will facilitate and meet client expectations of seamless and multichannel experiences. Furthermore, while these associated services might be given through identical delivery channels as the core journey (in which the FS offering is built), there is a requirement for organisational capabilities to create a physical experience for increased customer engagement and stickiness.

• Integrated analytics: Embedding

FS allows users to have access to fresh datasets through partners. Financial services firms could take advantage of this by implementing focused analytics techniques to further tailor and contextualise product offerings and control risks.

• Bidirectional ecosystem integration

The nature of an integrated FS product indicates that the customer journey may begin with the partner or FS player. Thus, ecosystem partners should take advantage of bidirectional interconnection to optimise customer entrance opportunities.

Types of Embedded Finance

• Embedded Payments

Online payment alternatives such as credit card, debit card, united payments interface (UPI), and others are available at the checkout of every shopping website/app.

• Embedded Insurance

When purchasing airline tickets, you can purchase travel insurance or phone breakage insurance.

• Embedded Credit/Lending

At the checkout of any purchasing website/app, you can select the buy now, pay later (BNPL) or equated monthly instalments (EMI) option.

Major Stakeholders

• Consumer

This is the individual who purchases the non-financial product and so becomes a prospective customer for the embedded financial offering. However, owing to delay, one may not be able to expressly identify themselves as a client in some circumstances.

• Business

The business that is selling you a non-financial product or service.

• Financial Institution (banks, non-banking financial companies or NBFCs, fintechs, etc)

Companies/institutions which sell or support embedded financial products. These enterprises sell the financial products through the businesses rather than directly to consumers.

Strategies of Embedded Financial Services

• Participatory embedding

This technique entails ensuring that the FS is incorporated into the customer journey/workflow being handled or hosted by the partner. To achieve this, the FS player must address two important drivers: client adoption and interaction point coverage.

• Customer adoption
  • In order for the client to be interested, the FS solution must be contextual to the point at which it is embedded and personalised based on the requirements and data available in real time.
  • The FS player must therefore design its product offering to be relevant to the specific flow and provide flexibility to adjust to the real-time demand based on the available data (e.g. data connected to the point of flow, other transactional data, customer type, etc.).
• Interaction point coverage
  • FS providers must guarantee that their offerings are entrenched at high-volume and high-interaction locations.
  • In addition to optimised partner onboarding procedures and standards, an ecosystem team focused on discovering use cases and potential partners is crucial.
  • Strong API technical capabilities are also essential for facilitating quick and easy integrations with potential partners.
• Proactive orchestration

In this strategy, FS players create their own digital platforms that can house both FS and non-FS services, combining them into a composite value offer that draws multiple customer ecosystems. The financial services providers then integrate their contextual FS at various places on the platform where non-FS solutions are consumed. While more demanding in terms of investment, this technique has certain advantages over the participatory embedding strategy.

• Customer and data ownership

Ownership and control over the customer journeys on the platform, as well as the data created by customers, is provided by owning and managing the digital platform. A method like this might provide access to behavioural and transactional data that could be used to get further analytical insights and help in product design, resulting in increased customer click-through, adoption, and ticket size

• Holistic value proposition alignment

A composite value proposition strategy corresponds with contemporary customer expectations. Customers today demand a customised concierge service with a seamless experience and little back and forth between numerous service providers to satisfy their needs.

• Flexibility in customising the offering

A platform strategy enables value offering flexibility by swiftly integrating alternative partners/service providers, hence supporting changing customer ecosystem demands.

• More uses cases or interaction points

A platform strategy broadens the sorts of use cases or interface points in which FS solutions may be implemented.

• Customer acquisition gains

The platform play combines the combined brand pull and sales efforts of all partners engaged, therefore increasing customer acquisition potential and lowering customer acquisition expenses.

• Alternate revenue streams

FS players hosting such digital platforms and cooperating with other FS providers may also consider referral fee income streams from passing on leads for non-conventional consumer categories that are not typically catered to by them.

Opportunity in Embedded Finance

Embedded finance potential is already generating considerable interest in India, and the embedded finance market is estimated to reach US$ 4.8 trillion by the end of 2022.

• As stakeholders within and outside the FS ecosystem begin to shift from a product-provisioning strategy to a customer-needs serving approach, possibilities for contextual integrated FS solutions emerge.
• To increase the acceptance of beyond-FS products, enterprises will need to create customer journeys around the primary demands of the customers and seamlessly connect FS offerings.
• The customer experience must be tangible (both assisted and self-service) and consistent across all media.
• As companies integrate FS offers into bigger non-FS journeys with significantly longer time horizons, there will be a requirement for various entrance and exit points across the journey for customers to have simple access to services and recall value of the offerings.
• Data from the ecosystem must be efficiently leveraged for hyper-personalisation and risk management for embedded experiences to be engaging, relevant, and sticky.
• Organisations that select a proactive coordinated strategy will benefit from customer journey ownership and data access, resulting in a lasting competitive advantage.

Road Ahead

Embedded finance is one of the fastest growing subsectors in the fintech industry. The potential for growth is extensive in a country like India, which has a large young population that use the internet. With time, it is expected to anticipate more and more innovation and distinctive services in this space for all sorts of people and enterprises. Due to the global pandemic in 2020, all industries underwent a digital transition since it was no longer practical to do business in person. From onboarding hesitant or first-time digital payment customers to pressuring established banks and NBFCs to adapt and embrace new-age digital banking, the financial services sector experienced digitalisation of a scale that it could have otherwise achieved in five years. There is space for new businesses with a few early organisations studying embedded investment and consulting services. As more and more super applications are developed, there is a lot of untapped potential in this industry for investing and consulting firms. Firms must evaluate the opportunities and constraints that a non-traditional environment brings to the traditional financial services ecosystem, and design strategies to capitalise on this trend. Firms that embrace this change and capitalise on opportunities now will find huge upside in terms of higher market penetration, particularly among mass-market clients, leading to enhanced corporate growth.