Embedded Finance vs BaaS: Differences Traditional Finance Service Providers Need to Know

Embedded Finance

Digitisation has influenced industries and consumer behaviour across the board; however, its impact on the financial services sector has been exceptional.

For example, Embedded finance and Banking as a Service (BaaS) are two digital trends contributing to technology-led transformation in the banking sector.

Often BaaS and embedded finance are mistaken to be the same as both present ways of integrating financial services into digital platforms, but subtle differences set them apart.

Therefore, financial service providers must understand the differences to decide which option is best for their business. Let’s explore this in this blog post.

What Is BaaS?

Banking as a Service is a blanket term that describes the technological foundation that enables banks and fintech firms to provide digital services via sites and apps.

The model allows virtual banks or non-banks to offer users access to standard banking products and services by linking to the bank system via APIs.

Utility of BaaS

BaaS provides customers with tools and expertise that can help them simplify their operations and improve their products or services. Companies can offer financing through licensed access instead of setting up their banking operations or directing customers to a third-party financier.
With BaaS technology, banks and fintech companies can create apps and websites that let consumers access banking options otherwise possible only through brick-and-mortar banking.
Businesses can also use BaaS to provide lending services to consumers. An example of this model would be an airline offering a one-click financing option for a smooth digital experience for the user, ensuring no disruption of plans with the cost spread over time through the Buy Now Pay Later option.

What is Embedded Finance?

Embedded finance allows businesses to integrate financial services and products into existing platforms.

Companies can utilise the benefits of various financial products and services without a banking licence; it is the seamless integration of a third-party product or service into the receiving company’s offering. also, the receiving business has complete control over the offering and the customer experience.

To summarise, embedded finance simplifies customer experiences by removing extra steps to access products like loans, insurance, or investments.

Example of embedded finance

An example of the most familiar use of embedded finance in everyday life is paying for cab fares when one uses Uber or Ola. With the help of an app, a non-financial service provider connects with a financial institution, making the use of cash or a credit card unnecessary to make a payment.

Other embedded finance examples are various processes that manage money, like digital wallets, remittances, debit and credit cards and more.

Embedded Finance vs BaaS

Both embedded finance and BaaS are closely linked to the digital marketplace and streamline financial services for customers and companies. They empower almost any business across any industry to be a part of the fintech space.

Despite these similarities, they are not alike. Here are four differences that set apart BaaS and embedded finance:

1. BaaS is an Enabler for Embedded Finance

BaaS is a broader term that covers much more than embedded finance and is essential to deliver embedded finance. Every embedded finance solution is based on the latter.

Embedded finance utilises the end-to-end model of BaaS and transforms it into an integrated financing option for consumers of other products or services.

2. Front-end versus Back-end Focus

Embedded finance is the front-end part of the technology; the focus is on delivering financial solutions and improving customer experience in conjunction with buying other goods or services.

BaaS is the back-end process that lets non-banks and digital banks offer these products themselves.

Open Banking and API banking have contributed to the transformation of banks becoming BaaS providers by offering their technology and operations as a service bundle. It allows other businesses to provide financial services to their customers.

Embedded finance focuses on delivering the core value proposition to the consumer with the financial service in the background.

3. Compliance

Embedded finance allows the service provider to weave the financial service into their platform without hassle. The users do not have to bother much about compliance as the provider has built-in everything all aspects required from a regulatory and compliance point of view.

However, BaaS is a different ball game; the onus of ensuring compliance with various regulations lies with the service provider. They have to deal with aspects like contracting with third parties, introducing processes to ensure customer data safety, etc.

4. Branding

In embedded finance, users know that integrated financing solutions are from an external bank. A shopper using the BNPL option on a retail website would know it comes from an external provider, as indicated at the transaction time.

In contrast, BaaS solutions are bundled offerings, co-branded or white-labelled to carry the business’ branding instead of the financial services provider the non-bank uses to offer the service.

The Future Outlook

BaaS and embedded finance are helping users, banks and non-banks to reimagine banking.

As per reports, the transaction value of embedded finance will double and reach $7trn by 2026. There is tremendous growth in BaaS, too; Juniper Research suggests total BaaS platform revenue will exceed $38bn by 2027 compared to $11bn in 2022.

As both BaaS and embedded finance are witnessing robust growth, service providers might wonder which route to take. Understanding the differences and what is appropriate for what you offer customers can help you choose. Businesses should keep in mind their long-run goals and ensure that the solution fits into their overall strategy.

Enterprises looking at tapping the potential of BaaS and embedded to boost customer experience and growth can benefit from the solutions offered by Finezza.

Whether credit evaluation or lending lifecycle management, our solutions can help you streamline your processes and integrate these models into your business.

Talk to us now to learn more.

The Current Scenario of Banking as a Service (BaaS) in India

Updates

While the COVID-19 pandemic has dramatically impacted the traditional banking system, it also has helped digital banking to gain rapid acceptance. Meanwhile, Indian Fintechs are flourishings and touching almost every banking value proposition.

With the government’s push towards digital initiatives, there’s no doubt that we will be witnessing more digital financial products in the future. However, we have already witnessed several examples of traditional and fintech collaborations leading to many success stories like- State Bank of India partnered with Uber providing vehicle finance for drivers, Snapdeal with Yes Bank providing instant refunds, etc.

Most of these collaborations are made only possible as a result of banks allowing access to their technology and data to be used by external parties. This is what is meant to be Banking-as-a-Service (BaaS).

What is Banking-as-a-Service?

BaaS is an end-to-end process that allows fintech and other third parties to connect with the bank systems directly via APIs to facilitate specific banking options – loans, cards, deposits, insurance, payments, etc. In the financial services sector, BaaS platforms have surfaced as a key component of open banking wherein banks provide more financial transparency for the account holders.

The tech-savvy legacy banks can fend off the encroaching threat of fintech by moving into the BaaS space for sharing their data and infrastructures. Within a few years, access to this kind of information will become common for native customers, so the banks that begin now will be ahead of the curve and likely to be rewarded with high demands.

How Does Banking-as-a-Service Work?

The BaaS process starts with a fintech or other third-party provider paying a fee to access the BaaS platform. Then the financial institutions acting as the BaaS provider opens their APIs to the third-party provider. Here it grants access to the systems and information needed for building new banking products or offer white label banking services.

In addition to getting ahead in open banking, institutions that launch their own BaaS platforms will also open up new revenue streams. The two main monetisation strategies for BaaS include charging clients a monthly fee for accessing the BaaS platform or charging a fixed price for each service used.

In simple words,

Fintech company/ individual pays to use BaaS
Bank/financial institution which is a BaaS platform opens its APIs
Fintech company/individual builds innovative financial services using these APIs

Moving Forward with BaaS

While adopting the BaaS model, banks must take a personalised, in-depth look at their organisation’s strategy and future initiatives. Here we list down six crucial considerations that can facilitate successful BaaS adoption.

1. Identify Business Capabilities to Offer as a Service

In order to identify optimal business capabilities, banks need to first define their specific goal for providing BaaS, whether it enhances customer service, monetisation, and revenue growth. Based on the response the company can then develop a fitting strategy.

For instance, if the first-mover advantage is vital, banks will provision commoditised service capabilities for facilitating rapid industrialisation and ease of implementation. A large private bank in India had partnered with the fintech MatchMove, a Singapore-based company offering virtual card remittance services for tapping into the e-commerce and payments market.

2. Form Beneficial Partnerships and an Interactive Ecosystem

Despite the many BaaS benefits, adoption is still a question mark, as many banks are still unwilling to lose control of the customer. Banks face a conundrum, ie. If they don’t embrace BaaS, they lose out to competition from new technology entrants.

Banks need to ensure that the third-party partnership does not result in a fragmented customer experience. The partnership needs to be structured in a way so that APIs equally benefit the bank and fintech providers. For example, APIs provide Fintech with a broader market in which to sell their services, wherein banks benefit from the ability to cross-sell related products and services hosted elsewhere on the platforms in which they participate.

3. Consider New Pricing Models to Extract Greater Business Value

Banks will make APIs available to partners and developers creating solutions for end-user consumptions. Best-in-class monetisation practices indicate a hybrid model, in which APIs and services are individually tagged to the highest ROI method.

With this, end-users can pay transaction fees to use solutions and services, whereas the partners and banks can enter into a revenue-sharing agreement, such as pay-per-click advertisements. For instance, Nationwide in the UK has partnered with Apple Pay launching a digital wallet solution. This is built on a hybrid revenue-sharing agreement allowing users to store card information for the bank’s credit and debit cards, making contactless purchases.

4. Identify an Operating Model that Advances Business Objectives

Develop an efficient operating model that supports BaaS by constructing a dedicated channel that is actively managed and structured to align business with IT. This can be made possible through the creation of an enterprise center of excellence that mainly focuses on architecture, engineering, governance, and security management.

The lines of business will be responsible for deciding on the service catalog and associated requirements to be provisioned using BaaS. This ensures standardisation and enables effective organisational control for the service design.

The Road Ahead for BaaS in India

Technological advancements are accelerating the trend towards IT consumerisation, commoditised banking services, and higher consumer expectations for convenience and accessibility. In the last few years, India has taken monumental steps in developing a strong foundation to embrace the wave of change in the financial services industry.

Now even many banks embrace a service-oriented and componentised architectural approach that results in a massive reengineering of traditional back-end processes. Furthermore, the advent of open banking will further catalyse componentisation, which in turn will result in increased inter-bank and fintech collaborations in the future.

With the increase of consumer needs, expectations, and technology-enabled capabilities, the impact of BaaS will only grow wider. In order to stay digitally relevant, preserve market share and retain an industry presence, most banks will need to fully embrace BaaS.

Softwares like Finezza can help financial players and lenders brush up their lending process in times to come. Not only does this offer a highly digitised way to access loan products for customers, but also streamlines loan decision-making and processing easier at the end of the lender. Contact us now to know more.

Seeking a Banking-as-a-Service Partner? Understand These Risks & Complexities

Open Banking

Banking-as-a-Service (BaaS) has emerged as an innovative factor in the realm of finance. It makes it possible for non-banking enterprises, such as fintech startups, e-commerce platforms, etc., to offer banking services to their customers without establishing a conventional bank.

According to projections, the BaaS business model will generate around USD 30 billion in revenue in 2023, expanding at a CAGR of almost 16% and estimated to rise at a 16.2% CAGR between 2023 and 2033.

Although Banking-as-a-Service has many benefits, choosing the best BaaS partner requires navigating a challenging and risky environment. This blog will examine the world of BaaS and explain the risks and complexities in selecting the best partner.

Understanding Banking-as-a-Service (BaaS)

Banking-as-a-Service (BaaS) is a model that enables businesses to leverage the capabilities and infrastructure of a licensed banking institution to provide financial services to their customers.

Due to its ability to improve customer satisfaction, optimise financial operations, and stimulate revenue growth, this novel technique has become extremely popular.

BaaS essentially enables businesses to focus on their core skills while leaving the infrastructural, regulatory, and compliance responsibilities to a banking partner.

The Benefits of Banking-as-a-Service (BaaS)

Before delving into the risks and complexities, let’s first explore the compelling advantages BaaS offers:

1. Speed to Market

The quick rollout of financial services is one of the most important benefits of BaaS. Businesses can launch quickly without the time-consuming and expensive process of obtaining a banking licence.

2. Cost-Effectiveness

BaaS reduces the overhead costs of creating and maintaining a banking infrastructure. Businesses can allocate resources more wisely because of this cost-effectiveness.

3. Enhanced Customer Experience

Businesses with access to banking services can give their customers a seamless and comprehensive experience, fostering loyalty and trust.

4. Scalability

BaaS vendors frequently provide expandable solutions, allowing businesses to modify and expand their financial services as necessary without making significant investments in technology and compliance.

The Risks and Complexities of Banking-as-a-Service (BaaS)

Despite the benefits of BaaS, it’s critical to be aware of the potential risks and complexities associated with choosing the right BaaS partner:

1. Regulatory Compliance

Banking-as-a-Service (BaaS) is governed by a complex web of regulations that vary by country and location. A company’s image could be damaged if these guidelines are not followed.

Therefore, ensure the BaaS partner can adapt to changing regulatory environments and has a proven track record of navigating regulatory environments.

Therefore, choosing a BaaS partner with an in-depth understanding of compliance is crucial. Despite the constantly shifting legal landscape, they must have the know-how to guarantee that your activities fully comply with all applicable regulations.

A suitable BaaS partner must possess the necessary knowledge to ensure compliance with all applicable laws. This entails being updated on changes in the regulatory environment and swiftly adapting to be compliant. Without this knowledge, the partnership may quickly get entangled in legal issues.

2. Data Security

Handling sensitive financial data calls for the highest level of security. The loss of trust among customers may be catastrophic if a data breach occurs.

Data breaches are now the largest risk for lenders, costing an average of USD 5.85 million per incident. Data security must be prioritised since it directly impacts the reliability of the BaaS offering and the confidence of customers.

To reduce this risk, the BaaS partner must have robust safety measures in place to secure sensitive data, assuring the highest level of data protection.

These include access restrictions, intrusion detection systems, encryption, and periodic security audits. A thorough incident response strategy should also be in place at the partner’s enterprise to lessen the effects of any security breaches.

3. Limited Customisation

BaaS may have customisation restrictions while having several benefits, such as quick time to market and cost-effectiveness. In order to gain a competitive advantage, businesses may find it difficult to customise financial services to their target market.

When comparing BaaS providers, pay close attention to the level of customisation they give and how well it fits your business’s particular needs. For long-term success in the fiercely competitive financial services industry, businesses must strike the proper balance between utilizing the benefits of BaaS and maintaining the ability to cater to the unique demands of their customers.

4. Reliability

When crucial financial functions are outsourced, the business’s dependability and that of your BaaS partner are entwined. Any delays or disturbances on their end might impact your business, resulting in halted services and dissatisfied clients.

Assess the stability and uptime history of the BaaS provider carefully to ensure they meet your reliability standards. Understand their business continuity and disaster recovery processes to ensure they meet your dependability standards. In the quick-paced world of financial services, having a reliable partner is crucial for maintaining operational efficiency and fulfilling consumer expectations.

5. Exit Strategy

It’s crucial to prepare for unforeseen circumstances and have a backup plan in place if switching to BaaS providers is needed. When the business needs to be well-prepared, this procedure can be time-consuming and challenging.

The transfer of services to a new provider, contract termination, and data migration are all included in a well-thought-out exit strategy. Planning ahead provides a smoother transition and reduces possible problems during the change, protecting your reputation and company continuity in the process.

Conclusion

In conclusion, Banking-as-a-Service (BaaS) offers an exciting avenue for businesses to enter the financial services arena, promising rapid growth and enhanced customer experiences. Finding the ideal BaaS partner, meanwhile, has its complexities and risks.

Among the crucial factors that need careful consideration are regulatory compliance, data security, restricted customisation, dependability, and the significance of a clear exit strategy.

Choosing a partner that understands compliance, adheres to rigorous safety protocols, and is committed to satisfying your business needs is increasingly important as the BaaS industry expands. Businesses By deftly negotiating these issues, they may maximise the benefits of BaaS while preserving their brand and consumer confidence.

Finezza is the ultimate micro loan management software streamlining the entire process. Automate loan applications, credit assessments, and approvals, bidding farewell to manual efforts. Monitor and track loans effortlessly with its robust portfolio management features, ensuring timely repayments.

Revolutionise your microfinance operations and unleash the power of advanced technology!

Can Embedded Finance Democratise the Digital Lending Segment?

Updates

The past few years have seen the growth of financial services and digitisation via adopting newer methods for wealth management, payments, insurance, and lending.

Consequently, the digital lending sector is undergoing a similar transformation to overcome traditional banking pain points and highlight financial inclusion by offering individuals, and businesses access to financial services and products.

Therefore, businesses of different sizes and stages of development are exploring and preparing to introduce embedded financial services to serve business and consumer groups, including retailers, telecoms, huge tech and software companies, vehicle manufacturers, insurance providers, and logistics firms.

What is Embedded Finance?

Customers like the convenience: a small business can get a bank account through its accounting software, and a client can pay through the merchant.

Embedded finance brings together Banking-as-a-Service (BaaS) and Application Program Interfaces (APIs) to integrate financial services for any company. This is increasingly giving rise to financial intermediaries, basing its roots from the presentation of Angela Strange of Andreessen Horowitz, titled: Every Company will be a Fintech Company.

Also read: Banks and FinTech: Rivals or Partners?

Embedded finance combines both non-financial companies and financial institutions. This helps in market restructuring to serve business and consumer segments. This means a telecom company can also become a loan provider. For example, a clothes retailer can offer buy-now-pay-later (BNPL) financing schemes as customer preference.

The LightYear Capital investment fund estimates that embedded finance services will be worth around $230 billion in revenues, and the stock market value of the companies in the sector could reach almost $1 trillion by 2025.

Use cases of Embedded Finance

Below are some of the most widely used cases of embedded finance:

1. Retailers and Manufacturers

Embedded finance solutions give high margin revenue for these companies. In addition, retailers and manufacturers can generate new revenues from supply chain finance.

2. Bank-like Services

Retailers can offer third party banking services for purchases without customers having to leave the original website: result, faster deal-closing and qualifying sales.

3. Digital Wallets

Digital wallets use digital versions of credit/debit card versions that help with convenient payments for consumers without revealing sensitive information.

Also read: Google’s Entry in Indian Retail Banking: The Challenges & Implications

4. Healthcare Services

Healthcare services offer embedded lending to help pay medical bills with no interest, no additional fees and even EMIs in some cases.

5. Insurance

Insurers can use the model to generate revenue from new distribution channels and debit/credit services with faster payment processing and claims.

6. Ride-hailing Apps

With embedded finance in ride-sharing apps, consumers can pay at the point of purchase without having to look out for borrowing money.

How can Embedded Finance help the Digital Lending Industry Evolve?

Embedded finance is the new addressable market opportunity for a multitude of causes. Zooming in on the digital lending sector, embedded finance leads to individuals and businesses lending and borrowing between each other.

For non-financial companies, this means engagement, customer retention, and diversification of revenue. This also ensures the democratisation of services with the manifestation of:

New digital applications
Alternative processing networks
Alternative credit models
Non-traditional data sources
Lower operating costs
Customer-centric lending processes

The financial fabric is tightly woven into broader issues, and digital lending is one of the use cases, which provides ample scope for augmentation.

Companies are pushing their way into consumer lending without triggering bank-level regulations where people can seamlessly avail of personal loans or credit lines. In doing so, companies also cater to one of the biggest emerging trends – demand for integrated experiences.

Customers are flocking to multiproduct customer experiences, known as ecosystems, according to a McKinsey study. Ecosystem orchestrators, by definition, strive for maximum integration; therefore, an embedded integrated financial solution fits the concept nicely.

Also read: Instant Loans – Fintech Innovation that Customers Are Loving

Consequently, digital lending is rapidly gaining ground in India as enterprises and users continue to support lending money online across the entire value chain of lead generation, customer onboarding, underwriting, and loan disbursement.

Emerging business models in digital lending

With the current global crisis and ever-evolving digital solutions, lending has risen above brick-and-mortar business, helping individuals and businesses to stay afloat through bad times. But, unfortunately, traditional lending processes are no longer fit for current times.

With the advent of open banking and fintech marketplaces, lenders can perform risk assessment and credit scoring through the entire loan cycle. This makes use of APIs designed by third-party providers to access customer data like credit card accounts, insurance information, inventory, etc. These collaborations, along with digital lending platforms, help with faster loan disbursement, save person-hours, and increase efficiency.

Some of the innovative digital lending business models are:

- Peer to peer (P2P) lending: This business model is 100% tech-driven that connects you directly to borrowers through a P2P online platform by matching lenders with borrowers. P2P lending works best to finance entrepreneurs and start-ups. There is no involvement of any financial institution since lenders can choose the borrowers. Here, lenders can earn higher interest rates while borrowers can avail of loans at a lower interest rate.

SME lending: Access to traditional funding is a massive struggle for small- and medium-sized enterprises (SMEs). SME lending fulfils the requirements required by small businesses like marketing, new product launch, hiring new employees, etc.

Marketplace lending: This uses online platforms where borrowers can connect with investors willing to offer loans. Marketplace lending helps cut costs and streamline loan approvals. Many large financial institutions will partner, build, and buy to provide their marketplace lending products and services with time.

Fintech of the Future

The current economic crunch has wiggled its way through innovation from white-labelled credit cards to digital payment options. In the future digital lending landscape, embedded finance will make valuable ground throughout the loan lifecycle to support its growth in years to come.

Also read: Finezza Among the Key Enablers in the Novel Account Aggregator Ecosystem in India

Finezza is committed to help fintech companies meet their most pressing credit and lending challenges by providing unique digital solutions and integrations. Contact us to know more about our offerings.

How Finezza’s Comprehensive Analytics Simplifies Risk Management

Lending Lifecycle Management

India’s banking sector and NBFCs have played a pivotal role in addressing the financial needs of individuals and businesses across industries.

These institutions have adopted agile processes by developing innovative financial products that cater to niche markets and bring mainstream lending to the forefront.

Risk management, a principal factor in the financial sector, emerges as a new challenge as a result of increased global competition, more deregulation, and the introduction of novel goods and delivery channels.

The ability to assess risks and take appropriate measures is critical to success. Risk takers will thrive, effective risk managers will prosper, and risk-averse individuals will perish.

Finezza has been consistently delivering value to the financial market with its varied product suite, consisting of a chunk of credit and lending services. However, another central area that Finezza focuses on is the risk management factor for banks and NBFCs through its comprehensive Analytics feature.

So let’s learn more about how the different offerings of Finezza have been successful in simplifying risk management for these institutions.

How Finezza’s Comprehensive Analytics can Simplify Risk Management for Banks and NBFCs

Finezza’s product suite is structured to provide end-to-end lending solutions for any lender in a manner that eases financial analysis and encourages quick decision-making.

Risk is a transaction that results in a loss with a reasonable likelihood that can be predicted, measured, and mitigated.

Here are some essential and note-worthy lending solutions offered by Finezza to help mitigate the risks:

Finezza’s Comprehensive Analytics

Analytics play a crucial part in conforming to the highest standards of the decision-making process in virtually any business.

After all, analytics reports are based on analyzing myriad operational events during the entire lending lifecycle.

Finezza’s comprehensive analytics suite already contains several function-specific pieces.

It is engineered to recognize the pattern of different interactions that may take place during the entire lending tenure and enrol machine learning & big data analytics to generate meaningful reports for the organization.

Once the portal recognizes a set pattern, Finezza’s Analytics suite ensures that the quality of the information to be generated gets richer and deeper with each usage.

Along with this, users have the flexibility to create custom reports which can be accessed via the portal, email or even the in-house interactive chatbot.

This feature adds great value as the top management can glance at essential reports on the go and continue to focus on core work.

Document Identification Framework

The loan application and allotment process entail following a set procedure of norms, of which having a proper document identification framework is of utmost importance.

Documents are akin to data in the lending world and should be procured and stored safely.

Thanks to Finezza’s advanced document identification and verification features, lending institutions can rely on technology to power their lending processes.

It is possible to extract relevant information such as names, numbers, addresses, faces, transactions and much more simply from the images of verification documents.

Some of the documents that can be quickly parsed and extracted data from are Aadhar card, PAN card, Bank statement, GST Returns, Cheques, Balance sheet, electricity bills, etc.

This feature helps save precious person-hours considerably, not to mention the increased workflow speed with absolutely no chances of manual errors creeping in.

It means institutions will be able to predict or foresee both financial and non-financial risks like strategic, funding, legal, political risks and so on.

It also provides accurate tagging of all the data points, which facilitates automatic validation of documents, thus helping lending institutions to reduce their turnaround time to a great extent.

Credit Bureau Data Analytics

Finezza’s product suite is tailored to provide valuable credit appraisal services to its customers.

Its data analytics platform for credit bureaus offers a simplified view of the borrower’s credit scores based on reliable credit data sources.

The credit market is ever-expanding, and banks, NBFCs and other such financial institutions require proper controls and processes to make risk-free decisions.

Finezza’s credit bureau analysis platform has collaborated with four institutions such as CIBIL, CRIF, Experian, and Equifax to churn out reliable reports backed by factual data.

Some of the critical features of this solution include offering a deep look into the borrower’s loan history, repayment history, a summary of borrowings, access to important KYC information and much more.

Finezza’s credit bureau data analyzer is AI-powered and offers predictive analysis to lending institutions in managing their lending risks and making decisions based on pertinent credit data points.

How Finezza Helps Lenders Manage Risks

The lending landscape has expanded quickly within India, especially with awareness and financial literacy that has managed to reach every nook and corner of the country.

Digital lending has played a significant role in fanning the growth of the financial sector.

However, with more people and organizations applying for loans, lending institutions require robust business practices to lower the resulting NPAs that come with it.

In line with this, banks, NBFCs and other lending institutions are constantly looking for a partner that can help them absorb the huge credit demand and seamlessly simplify processes.

Besides the above critical solutions that aid lenders manage their risks associated with lending, Finezza facilitates its customers to conduct a deep bank statement analysis. Check out the bank statement analyser tool.

This feature can parse and process thousands of transactions within minutes, classify and analyze data, recognize fraudulent transactions and other anomalies, thus assisting lenders in managing their risks.

In the end, it also assigns an overall creditworthiness score for the applicant, based on deep ML-driven insights from a scrutiny of the borrower’s bank statements.

Not only this, Precisa flags suspicious activities, transactional patterns, circular transactions and gives out a volatility score that highlights the applicant’s behavioural patterns.

The range of risk management services offered by Finezza can be highly beneficial for banks and NBFCs in providing a complete, quick and error-free lending solution to its customers.

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What Does Embedded Finance and APIs Mean for the Lending Industry?

Lending Lifecycle Management

Never before have the times been more volatile and dynamic as now. Recession coupled with regulatory pressures, financial reforms, and the recent global pandemic has not made anything easier for the legacy lending industry. As a result, the lending industry faces several challenges while approving and disbursing loans.

Cultural Shift: Traditional lending institutions work through manual systems and processes. Even where the systems are automated, there is much manual work involved. Most of the time, the applicant must take the paperwork to the branch or office.

Rising expectations: Consumers today are savvier and more informed than before. They expect a high level of convenience and customisation from their banking experience. As per a survey, future generations will be more interested in omnichannel banking than visiting physical bank branches.

Lack of personalised experiences: Although NBFCs claim to give highly personalised services to clients due to their need to present themselves as different from traditional lenders, the execution is challenging. Customers are often dissatisfied as the loan disbursal norms are generalised packages, whereas customers have diverse needs.

Tedious lending process: The lengthy processing of documents and loan applications consumes a lot of time. Lenders also need to maintain a large workforce to manage the work, adding costs and expenses.

Technology platforms: Lending institutions are expected to provide mobile banking through internet banking and mobile apps to serve customers remotely.

Other competitors: Lending institutions such as banks and NBFCs face competition from each other and others like microfinance institutions, retail and technology firms who influence their existing customer base and financial expertise and leverage it to venture into banking, payment, and lending services.

However, operational challenges also come with additional opportunities. So how can embedded finance help?

Embedded Finance and API in the Lending Industry

As COVID-19 has impacted our lives completely, traditional lending models have been under intense pressure. The landscape for lending services is evolving fast, with the rendering of financial services no longer under the aegis of conventional financial institutions. Due to embedded finance, non-financial companies can position themselves as service providers with an array of financial products to suit the customer requirements.

Earlier, if a business wanted to offer financial services, it had to create a separate domain within the organisation. This often meant considerable expenditure and often took years to develop and turn profitable. However, the embedded finance infrastructure enables fintech experiences within the non-fintech platforms for end-users and at the point of demand.

Embedded finance is the next stage of evolution. For example, Shopify was the pioneer among e-commerce companies that enabled merchants to accept payments directly through the platform instead of going through the third-party payment gateway. (BaaS) Business as a Service is helping in further speeding up the spread of embedded finance. These platforms facilitate online merchants to plug into financial systems using APIs to integrate financial services into user experiences efficiently.

Role of Embedded Finance in Lending

As embedded finance is becoming more widespread, it has potential for growth and opportunity in the lending ecosystem. Before the arrival of embedded finance in the lending scene, there was a gap between the consumer and the company they were doing business with. The consumer needed to contact a traditional lending institution such as a bank or a lender to cover the gap. The consumer had to either take the credit card from the bank or approach a lender for a loan to finance the purchase. With embedded finance, the consumer can apply for and get a loan right at the point of purchase. For example, e-commerce giant Amazon has a “Buy now, pay later” option that splits the purchase cost into an automatic loan from the store itself rather than a third-party lender.

With embedded finance, the role of the third-party lender or the bank diminishes. It enables finance companies to close the gap between themselves and the consumer. The service offers seamless integration and uses a centric lending experience that is economical as well.

Future scope of embedded finance in the lending industry

As newer lending models appear, there is a shift in how consumers perceive and use financial products. The current tech-savvy generation prefers to open an account or seek a loan without interacting with a core financial service provider. The preference is also driven by the willingness of customers to share their data over the internet. The preference also makes the customer proactive towards a product that offers them pricing and convenience.

Several organizations are thinking of offering financial products, and with evolving technology, there are several options:

Develop their own fintech tools and start a financial product
Tie up with existing fintech majors and resell their financial products.
Offer a financial product in partnership with an embedded finance company.

Of the three ways above, embedded finance is the most promising option driving the wave of embedded lending and disrupting the fintech space.

Embedded Lending – the Next Big Thing

Embedded lending is here to stay and gathering momentum for several reasons

Rise in digitisation: Contacting a traditional lender has become a thing of the past as businesses and customers move towards digitization. With the popularity of financial services through digital channels, more aggregators and marketplaces are emerging, giving access to financial services with embedded lending.

Newer revenue channels: With increasing competition, more companies are looking for ways to monetise and develop alternative revenue channels. Offering financial products is one way, and embedded lending is one of the ways to optimise that.

Pandemic constraints: This is the ripe time for disruptions in how financial services are rendered with social distancing norms and lockdowns. Data security and trust are also an issue. Customers prefer to avail services that come in a package, which works best for non-financial service providers offering an embedded lending product.

Embedded lending has a significant role to play in the lending ecosystem. It makes more sense because financial products can be customised and more relevant with its deep and seamless integration.

Banks will partner with fintech to form lend tech: financial institutions can leverage their vast data to acquire new customers, provide better service to existing ones, customize financial products, and enable repeat transactions.

Digital platforms will play a key role in financial services distribution: embedded finance will allow digital platforms to serve their customers more efficiently and in ways that traditional lending models cannot. With changing dynamics, customers now expect the digital platforms to fulfil their needs more deeply, foster innovation and play a pivotal role in distributing financial services to customers.

Innovative financial products: Embedded finance allows lending institutions to customise financial products to suit customer needs. In addition, new data sourced from platforms will facilitate advanced underwriting and enable the approval of the customer.

Vertical SaaS growth: Embedded finance has enabled SaaS companies to provide financial services to their core software products financial services. Customised software products help save most problems of customers.

Improved financial services: More customers can be acquired efficiently and at a lesser cost while also bringing repeat customers. This improves the margins of lending institutions, implying that they can offer the same financial products to customers with optimised costs.

To Sum Up

Embedded finance is here to stay as it is the driving force behind how lending institutions will operate. Digital platforms are pivotal in creating a new generation of effective and innovative financial products. Business needs to leverage embedded finance to stay ahead of the competition. Lenders get to benefit from better margins. For this, they need to partner with digital platforms to gain access to the diverse pool of customers available to them.

To have a financial service that can match all social demographics and economics, you need the right fintech service provider. Finezza offers efficient consumer-focused LOS & LMS solutions that adhere to the highest standards. The best part is their tech-focused approach. What embedded finance solutions do you need? Let us know.

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