Clipped from: https://www.businesstoday.in/opinion/columns/story/embedded-finance-the-next-big-disruptor-in-consumer-financial-services-378761-2023-04-25
Embedded finance as a concept integrates financial service or tool within the products or services of a non-financial platform as part of user experience.
Embedded finance: The next big disruptor in consumer financial services
Last few years have seen an upsurge of digital wave in consumer credit in India, marked by a journey from digitisation of payments to financial services and lending. Consumer lending has undergone a remarkable shift from filling-up loan application forms and waiting for that loan approval, to present day, when getting a consumer loan is a matter of few clicks and the loan amount comes into account almost instantly or maximum within a day.
This has put consumers in the driver seat, and now they can determine from whom and when they want to take loan without worrying about cumbersome paperwork. This transition also reflects on our changing society where earlier loan was considered a taboo and today, people are open to taking credit. The new-age consumer is not averse to going for loan or credit especially small-ticket size such as for buying a smartphone or taking a small cash loan to fulfill needs or aspirations and live life to fullest.
The exponential growth of digital lending in the country shows the fast-changing mindset. According to media reports, the digital lending market is projected to grow from a $100 billion in 2019 to well over $350 billion in 2023.
The changing consumer sentiments towards credit supported by digital are also reflected in the How India Borrows Study 2022, an annual survey by Home Credit India. The study stated that nearly three-fourth borrowers led by Tier 1 & 2 cities and Gen Z/Millennials are optimistic and buoyant about digital lending services, owing to rising popularity of online loans, convenience experienced, and faster adoption of digital lending.
The digital evolution of consumer borrowing kicked off with demonetization in 2016, and the clarion call for moving towards cashless economy. Digitization of payments being the first step, followed by policy initiatives by government and the regulator to reduce access barriers and grow the share of formalised credit by launching a digital public infrastructure – Unified Payments Interface (UPI) technology provided a strong innovation impetus.
According to the latest National Payments Corporation of India (NPCI) report, in January 2023, UPI transactions have crossed 800 crore (74 per cent y-o-y rise) in volume for the first time, with a transaction value of nearly Rs 13 lakh crore (56 per cent y-o-y rise).
The global pandemic in 2020, brought in digital transformation across board, as it was no longer feasible to transact in-person. Be it onboarding reluctant or first-time digital payment users to pushing the traditional banks and NBFCs to adopt & embrace new-age digital banking, the financial services industry witnessed digitalisation of a scale that it could have otherwise achieved in five years.
The Next Disruption
Consumer financial services have transformed owing to emerging technological innovations and the next big thing is embedded finance. Embedded finance as a concept integrates financial service or tool within the products or services of a non-financial platform as part of user experience. For example, when shopping from e-commerce store and while checking out contactless payment and getting discount offering on digital wallets or converting shopping bills to small EMIs through EMI cards. Online ridesharing companies and their financial services or booking travel tickets from portals and getting option for travel insurance are all forms of embedded finance.
Growing adoption of open banking initiatives and the emergence of banking as a service (BaaS) are major enablers for embedded finance services.
Embedded finance provides a bouquet of services such as embedded payments – digital wallets, net banking; embedded lending such as EMI finance, BNPL; embedded financial services like insurance, wealth management. All these embedded financial services create an ecosystem, which help business strengthen customer engagement and experience.
Along with fast growth in Internet penetration and rising smartphone usage, consumers in big and small cities have become digitally savvy with online shopping and being comfortable with digital payments in post-Covid India, has been a major contributor to the popularity of embedded payments and finance.
E-commerce platforms like Flipkart, Amazon and others have fast adopted to embedded digital payment modes like EMI cards, BNPL to provide easy, secure, and affordable credit options to shoppers. Citing industry estimates, recent media stories have claimed that smartphone financing will be on a rise in 2023 with ASP levels increasing and 60-70 per cent people are preferring to buy smartphones on EMIs versus 30-40 per cent, since pandemic.
According to How India Borrows study, 60 per cent consumers in India have shown interest for ‘embedded finance’ where e-commerce shoppers can convert purchases directly to EMIs. Owing to buoyant sentiments, more than 50 per cent borrowers showed preference for EMI-Cards when it came to shopping or taking credit, followed by credit cards (25 per cent), with new-age lending platforms including ‘Buy Now, Pay Later’ evidently losing out with less than 10 per cent in favour. Borrowers viewed EMI Cards as trustworthy, with timely approvals & quick disbursals.
As consumers embrace the idea of digital financial services or new-age banking by moving away from physical to cashless & online financial journey, embedded finance has a promising future. In India, the embedded finance industry has grown significantly by 45 per cent CAGR to reach approximately $5 billion in 2022, as per a report by Research and Markets. Globally, embedded financial services will be a $230Bn industry by 2025—a 10-fold increase over the $22.5 billion in revenues in 2020.
Views are personal. The author is , Chief Marketing Officer, Home Credit India