By Kirsten Wortmann, Regional Director of Sub-Saharan Africa, Paymentology
Across the globe, millions remain without access to basic financial services. Increasing financial inclusion through digital innovation is regarded as one of the best solutions to this challenge- and has been a guiding principle of the fintech sector. Now, innovators are stepping up efforts to bring the unbanked into the financial system by leveraging embedded finance, the integration of financial services into non-financial platforms.
Embedded Finance helps to reduce the barriers to financial inclusion by providing financial products to the unbanked or underbanked population, enabling non-financial businesses to increase access to vital services. In emerging markets, where the financial services gap is still wide, embedded finance is an effective tool to truly address the financially underserved.
Outlining the financial services gap
While there have been significant strides made in addressing the underbanked, certain challenges remain, particularly in emerging markets. Financial inclusion aims to close the current gap in mass access to financial services, from daily payments, savings, lending to wealth-building tools – products and services essential to personal financial growth.
Digital transformation in finance has closed the gap in many advanced economies, enabling universal access to easily accessible digital financial services. Some great examples in the UK include Pockit, Monzo, and Zopa.
However, digital transformation alone has not closed the gap in emerging economies, with many consumers still unable to access innovative financial services. This is due to several factors: limited mobile connectivity, gaps in financial education and awareness, low trust in new players, and limited access to online platforms.
Ultimately, the financial services gap is an issue which desperately needs a new approach. According to estimates by the World Bank, 1.4 billion people remain under banked.
Embedded finance is the solution
Embedded finance enables the inclusion of financial services within a non-financial customer journey. The term “embedded finance” covers a broad remit of products and services, including embedded payments, integrating digital payment infrastructure within a platform to create a seamless payment flow typically via a mobile solution.
There is also embedded credit, enabling consumers to apply for and repay loans through a non-financial business; as well as embedded insurance, enabling businesses to bundle insurance products with sales. Meanwhile, embedded investment allows platforms to integrate stock market and mutual fund investing with other relevant services. Some great examples of embedded finance include Klarna in e-commerce, point-of-sale loans in insurance and mobile money accounts provided by Telco’s.
Embedded finance has emerged as an indispensable approach to bringing financial services to the underserved populace. This group can often be sceptical of new businesses, as government protections are usually less stringent with new entrants in this space. Providing financial services under the umbrella of known and trusted businesses they already know how to interact with greatly increases adoption rates.
The growing fintech sector already reduces barriers to on boarding through digital channels, requiring less customer data entry and utilising familiar platforms to engage with the financial service. Embedded finance further enhances adoption by positioning financial services within the situations where the financial service is needed, such as offering insurance when making a large purchase. This addresses the lack of financial awareness and education in emerging markets, which often leads consumers to not seek the financial services they may need.
Reaping the benefits of embedded finance adoption
Having established the role of embedded finance in addressing financial inclusion, it’s equally crucial to understand the responsibilities and benefits embedded finance providers bring to the table.
They play a crucial role, taking on more responsibility than standard fintechs providing financial infrastructure, owing to the non-financial nature of their clients. This support can include region-specific integration and implementation expertise and full-stack infrastructure, from on boarding to fraud prevention and customer awareness and education.
It’s also important to focus on regions with supportive governments and regulators – although consumer protection regulation can be weaker in emerging markets, it’s still vital to have financial regulators on-side when launching non-traditional financial services like embedded finance.
In conclusion, directing efforts to regions with the widest financial services gap is a challenge the fintech community has grappled with for many years. Embedded finance provides a platform for exactly that, accessing consumers through businesses they trust and platforms they already interact with.
The key lies in embedded finance providers ensuring comprehensive, region-specific support while adhering to local financial regulations and global best practices to ensure safety and security and foster trust in their services. With such an approach, we can welcome an era where financial inclusion increases even more rapidly and financial empowerment truly becomes within everyone’s reach.