Embedded finance: How it can benefit consumers, banks and businesses

Mizuho Industry Research
July 7, 2022

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With more business owners incorporating finance into their services, embedded finance is poised to transform the retail banking business model and open further opportunities for non-bank providers to enter the financial market.

The COVID-19 pandemic is a major driver of this shift and the resulting change in consumer behaviors: most notably, a pivot to e-commerce (EC) and an increased focus on user experience to create and retain “sticky” (or repeat) customers. Within this context, embedded finance is expected to help businesses (i) enable frictionless payment for their customers, (ii) obtain settlement and financial data, (iii) enhance customer engagement, and (iv) generate financial income, as well as improve overall customer experience.

On the other hand, simply incorporating finance into a service channel will produce limited improvements to customer experience. To make the most of embedded finance, business owners  must simultaneously enhance the online business-to-consumer (B2C) channel of their own services, which will create a fully-integrated customer journey. Becoming a platformer to address a range of consumer, and possibly business, needs that lie between their core services and financial services, could be one solution.

Key Highlights:

  1. The COVID-19 pandemic has significantly altered consumer behaviors: most notably a shift to EC and shopping close to home. As a result, the points of differentiation for retail businesses shifted from “location, product lineup, and price” to “customer experience,” underscored by keywords such as “frictionless” and “personalized.” Meanwhile, businesses are also facing the challenge of keeping “sticky” customers and realigning their business model toward life time value (LTV) generation.
  2. Within this context, embedded finance is expected to help businesses (i) enable frictionless payment for their customers, (ii) obtain settlement and financial data, (iii) enhance customer engagement, and (iv) generate financial income, as well as improve overall customer experience.
  3. Advances in technology, as well as deregulation in the financial industry, enabled fintech companies and non-banks to expand their share in the financial services market. Meanwhile, traditional banks have accommodated Open Application Programming Interfaces (API) to collaborate with fintech companies and develop new business models, such as Banking as a Service (Baas)* and embedded finance.
  4. Embedded finance involves three types of players: license holders, enablers, and brands. “License holders” refers to financial institutions and fintech companies with licenses to provide financial services. “Enablers” are those who develop systems to connect license holders and brands. “Brands” refers to B2C companies seeking to enhance customer engagement. Using Open APIs developed by established financial institutions, brand owners can provide financial services to their customers without obtaining a financial services license or developing a system on their own. In Japan, the license holder and enabler are the same entity in most cases.
  5. Embedded finance has the potential to change the retail banking business model from “direct financing” to “indirect financing” by decentralizing financial access to non-bank service providers. This shift saves consumers from going to a bank branch or logging into a banking application they are not familiar with, and  helps banks cut costs for maintaining their own channels and attracting customers. As such, embedded finance will benefit both consumers and banks. Moreover, it helps B2C businesses incorporate finance into their services at a significantly lower cost than establishing a financing subsidiary.
  6. Simply incorporating finance into a service channel will do little to improve customer experience. Conversely, businesses that manage to enhance online channels, and provide a fully-integrated customer journey to attract consumers and other service providers, could become game changers.
  7. Grab is a smartphone-based taxi-booking and dispatching service based in Singapore. The application provids a mobile payment option, Grab Pay, to its users. The company has expanded the scope of financing business to provide life and non-life insurance services to drivers as well as business loans to EC merchants. This strategy has established an embedded finance ecosystem that includes both B2C and business-to-business (B2B).
* Banking as a Service (BaaS): Business model wherein financial institutions provide financial services on the back of other B2C services.



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