Embedded finance

Embedded finance means a payment, a loan or an insurance policy that is sold inside another company's product, at the moment you need it. You do not visit a bank or open a separate app. The financial product appears as one more option on a screen you are already using.

Three companies are involved. The company that owns the app has the customers, and it shows them the offer. A licensed lender or insurer carries the risk and follows the RBI or IRDAI rules. A technology company connects the two through APIs. An API is a way for one company's software to use another company's software. When the customer ticks the box, the app calls the lender's or the insurer's API, and the loan or the policy is issued in seconds.

Take, for example, a shopper buying a laptop on a shopping app. The payment page offers to split the price into monthly EMIs through buy now, pay later, and a lender approves the loan without the shopper leaving the app.

Consider a new phone bought online. A tick-box adds cover for screen damage, an embedded insurance policy that an insurer issues in a second.

Say a small restaurant runs its billing on a restaurant POS. The same system can offer the owner a loan, and with revenue-based financing the repayments are deducted from each day's card sales.

Why does it work? The company whose app the customer is already using knows that customer, and it can offer the loan or policy at the exact moment of need. Lenders can also judge risk better, because they can see the business's real sales. This judgement is called underwriting.

How is embedded finance different from banking as a service? Embedded finance is what the customer sees: a loan, a policy or a payment inside another company's app. Banking as a service is the arrangement underneath, in which a licensed bank lets other companies use its licence and its systems, for a fee.