The financial services built into everyday transactions.
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Financial services have become so intertwined with everyday transactions that they seem nearly seamless. You order a ride, pay your fare through an app, and get out of the car without reaching for your wallet. Or you shop online and choose to split the purchase into several payments without applying separately for a loan. In both cases, a financial service is built directly into something youâre already doing.
These scenarios are examples of embedded finance, which integrates payments, lending, insurance, and other financial services into a retailer or service providerâs app or website. With embedded finance, you can pay, borrow, or use other financial services without dealing directly with the company providing them. But that can make it harder to know whoâs providing the service, what information youâre sharing, and whoâs responsible if something goes wrong.
Key Points
- Embedded finance integrates financial services into apps and websites you already use.
- It can make paying, borrowing, investing, and buying insurance faster and easier.
- Convenience comes with risks, including overspending, privacy concerns, and fraud.
How embedded finance works
What happens behind the scenes
When you use an embedded financial service, the company whose app or website youâre using usually isnât providing the financial service itself. A bank or other financial provider works behind the scenes to process the payment, make the loan, or provide another service.
The systems can communicate through an application programming interface (API), which allows information to pass between them. For example, when you choose a financing option at an online checkout, the retailer can connect you with a lender without sending you to the lenderâs website. To you, the transaction may appear to take place entirely within the retailerâs site or app.
Common types of embedded finance
Embedded finance can take several forms, some of which you may use regularly:
- Embedded payments. Payment information stored in an app or website lets you complete a transaction without entering it each time. A ride-sharing app, for example, can automatically charge your stored payment method when your trip ends.
- Embedded lending. Financing is offered as part of a purchase rather than through a separate application with a lender. Buy now, pay later (BNPL) is a common example, allowing you to divide a purchase into several payments at checkout.
- Embedded insurance. Coverage is offered as part of another transaction, such as travel insurance when you book a flight or rental car coverage when you reserve a vehicle.
- Embedded investing. Investing features can be built into an app or other service, while a brokerage firm handles the transactions. These features can include buying stocks and exchange-traded funds (ETFs), including fractional shares.
BNPL allows you to pay off purchases in installments over time, but there are risks to watch out for.
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Benefits of embedded finance
The main appeal of embedded finance for consumers is that it can remove steps from everyday transactions. Financial services are integrated into the process, making routine financial tasks simpler and saving you time.
Businesses benefit, too. Making payments and other financial services easier to access can help companies complete sales that customers might otherwise abandon.
Embedded finance can also give smaller businesses access to services that once required specialized equipment or separate payment systems. A vendor at a farmers market, for example, may be able to accept contactless payments with a smartphone rather than relying on cash or a separate card terminal.
Risks of embedded finance
The ease of embedded finance can also make it easier to spend or borrow without stopping to consider the consequences. For example, a buy now, pay later offer may make a purchase seem more affordable by breaking the price into smaller payments, but youâre still taking on an obligation to repay the full purchase price.
It may also be less obvious whom youâre doing business with. The app or website youâre using may not be the company processing your payment, making your loan, or holding your investments. Before using an embedded financial service, check who is actually providing it, what fees or other terms apply, and whom to contact if something goes wrong.
Privacy and security are concerns as well. Using embedded finance may involve sharing financial and personal information with multiple companies. Check what information is being collected and how it may be shared. And because digital financial services can be targets for fraud and cyberattacks, use the same precautions you would with a banking or investment account, including strong passwords and multifactor authentication.
Embedded finance can make paying, borrowing, investing, and buying insurance feel like a natural part of something else youâre already doing. You may barely notice the financial transaction taking place, or even which bank, lender, insurer, or brokerage firm is providing the service.
Still, convenience shouldnât make the financial decision itself an afterthought. Even when the financial service fades into the background, the costs, terms, and risks still matter.
Special thanks to Rachel Koning Beals for research assistance with this article.
This article was most recently revised and updated by David ScheppThis article was most recently revised and updated by The Editors of Encyclopaedia Britannica
