This article discusses embedding finance into business services.
Siddhant Agarwal is the developer relations lead for Open Financial Technologies at Zwitch.io.
We are talking about the age of digital banking, and everyone wants to be a Fintech, from instant loans, buy now pay later, and new age credit cards. One is spoilt for choices, Swiggy offers small ticket loans to its delivery partners, and Tesla sells auto insurance to its customers. Every non-financial company is a mere step away from offering financial products to its existing or potential customers. This is made possible due to embedded finance infrastructure providers or enablers. They work as an interface between banks, NBFCs, and digital platforms or businesses to help the latter offer financial products and services alongside the core offerings via APIs.
What is API economy?
API economy refers to the exchange of value between consumers and providers with the help of APIs. It denotes how APIs help achieve positive profitability for businesses. Companies can use APIs to create new avenues by transforming existing products or services to accomplish this. APIs have killed the wait time that goes into building these products or services from scratch.
Let’s understand this better from an example of a cab aggregator like Uber or the Indian counterpart, Ola. These apps have disrupted the entire transportation industry without creating a large part of the underlying infrastructure or technology powering these apps, which is your Google Maps. They have enabled consumers to book a cab easily in just a few smartphone tabs without having to build its mapping system by combining Google Maps API with their proprietary product. You can check the vehicle availability, confirm booking, make payments using a credit card or receive notifications of vehicle arrival. All the credit goes to the APIs at work over here.
APIs have been here for decades. And you must be wondering why suddenly there’s a growing interest in APIs. Why is everyone talking about APIs? The primary reason for this increased interest is the stellar growth in cloud computing. The advancements and adoption of cloud computing have empowered companies to quickly and easily integrate APIs into their products and services. Over the past decade, the innovative power of APIs has led to the realization that APIs can be a critical component of enterprise solutions. It can impact your business’s bottom line growth and innovation.
How do APIs power the financial services industry?
Banking transformation is driven by API these days. So, rather than reinventing the wheel, open APIs enable third-party organizations, technology service providers, and developers to build apps and services around financial institutions that exceed existing infrastructure or architecture.
Today’s agile environment focuses on providing solutions directly to consumers through innovation and better user experience. Earlier, traditional banking infrastructure used to be a closed ecosystem.
Later, banks started to adopt an app strategy to access banking services via websites or apps. But now, the API-driven economy has transitioned traditional banks from just financial product builders to financial solutions orchestrators. They have adapted to a customer-centric world by modernizing the core banking systems and Fintech organizations. By embedding financial services, both banks and the companies deploying them learn valuable information from the users, making lending and integrating insurance riding more efficient while enabling providers to offer more targeted services. The more data there is, the more efficiently this process works. So this means that in the future, we will likely see a redefinition of how merchants interact with customers, offering more personalized banking services. It is a win-win for everyone involved. Banks benefit by white labeling their services. Consumers benefit because purchasing is a lot more seamless and convenient. The merchants benefit because conversions increase, and costs are often cheaper.
APIs have enabled banks to become data-driven institutions that provide a broader range of products directly to consumers from the platform of their choice rather than restricting it to them.
APIs have tied banks and FinTech companies together by allowing banks to exchange data with API banking service providers. In this way, FinTech companies can support their existing products and develop modern solutions on traditional banking infrastructure. These products and solutions can be seamlessly integrated with other organizations using APIs.
Banks will develop APIs for their products or service and externalize them so that a partner or an ADA can use those APIs. Through APIs, banks govern the product. Embedded finance (third-party) can consume those APIs and launch products.
Tech enablers take care of the entire backend part, including integration of customers, banking applications, banking APIs, banking partnerships, compliance, security, and so on, and even co-create products. As a result, financial products and services that took over 18 months to launch in the past can now be up and running in a matter of weeks for a fraction of the cost. That’s the main value.
Embedded finance Infra Provider versus in-house development
These enablers bringing in businesses looking to embed financial services in the platform have two options. You can partner with a bank directly or trade and sell the service in-house. Ola has done this in-house for Ola Money, while Swiggy decided to partner with ICICI for Swiggy Money.
If a merchant integrates the bank API directly, efforts will increase if the merchant wants to add in multiple banks. Alternatively, a merchant can use a payment aggregator or technology service provider’s API, which would integrate with multiple banks.
These are two different stories and it is yet to be established which one will be more successful. A partnership is a win-win for both, as platforms can continue to focus on the main offering while the embedded finance infrastructure provider takes care of the entire pack and chain and sets up the finance layer.
Uses of embedded finance
There are four major use cases of embedded finance for a digital platform.
- Payments – e-wallets or instant payment.
- Lending – BNPL EMI options, digital credit cards.
Benefits of banking and financial APIs
Integrating these banking and financial APIs and offering these services as part of your core offering can help organizations improve customer experience, innovate continuously, and launch products to market faster. You realize new revenue opportunities more quickly with very less cost.
Embedded finance is not a new concept. It has been in existence for many years now. All the big tech companies are in finance – for example, Apple Credit Card, Google Pay, and Amazon Pay.
However, the momentum of embedded finance among digital platforms has only started to gain traction recently in India, as they look to offer services beyond just wallets. They can lock in the users and bring them deeper into the respective ecosystem by offering financial services besides adding new income streams.
Using Zwitch.io to start
Zwitch.io helps businesses build their banking services by embedding financial products like UPI, insurance, headline, etc., in the user journey. Transforming into the embedded finance model will enable your business to give your customers a wide range of banking options, making the product stickier. Hence, customers interact a lot with the product and do business through it. It will help your business earn more than just the platform fee from your customers.
The future of Fintech
Now while the embedded finance trend is just getting started in India, it is touted as the next big wave in FinTech in the developing world. It has the potential to be much more disruptive and life-changing. The ultimate goal of API economy in financial services is to meet business challenges. It facilitates the creation of user-focused apps that support line of business goals and improve the flow of data and information across operations. The emergence of a pedal-driven platform economy will drive significant change across the financial services industry, and no one can afford a standstill. API will become tools that will allow FinTech companies to enable connectivity between traditional banks and consumers while inspiring innovative developers to create new products, improve existing services and work more efficiently.