Top 3 use cases of blockchain in embedded finance

Businesses and corporations are demanding more from banks as they struggle to obtain real-time banking services. As a result, they are looking for a partner who can help them simplify the complexities of running and growing a business while also providing the timely intelligence required to make better financial decisions.

Customers are already accustomed to the native payment features in everyday apps in the age of digitization. Therefore, banks can improve customer journeys by integrating additional banking features. Customers can get specialised banking services that are seamlessly integrated into their customer journeys rather than dealing with different banking providers. Embedded finance is a one-stop solution that can help banks retain customers and increase revenue streams.

The term "Embedded Finance" (or "EmFi") refers to a concept that typically enables non-financial entities to incorporate financial services and products into their own platforms through the use of APIs (Application Programming Interfaces)

According to a forecast by Lightyear Capital, the embedded finance market size is estimated to grow more than tenfold from approximately $22.5 billion in 2020 to around $230 billion by 2025.

Embedded Finance Revenues

As user expectations for digital payments continue to rise, so do expectations for embedded finance covering additional financial products such as insurance, contactless payments, lending, and investments are increasingly being integrated into native applications as an added service to improve the customer experience.

Alternatively, blockchain technology provides a quick and low-cost method of sending payments that eliminates third-party verification and outperforms the processing times for conventional bank transfers. Moreover, it is secured through multiple mechanisms such as cryptographic techniques.

Blockchain enables the use of embedded finance applications in a wide range of decentralised services, from gaming Dapps and staking pools to metaverses. Furthermore, the use of embedded finance in blockchain can increase trust among the users to share their personal information with the third party because of its immutable feature.

PayPal's acceptance of Bitcoin as a form of payment is a prime example of the convergence of DeFi and embedded finance in the traditional economy. Furthermore, the increasing adoption of blockchain-based services is accelerating the integration of embedded finance since the technology enables users and businesses to streamline financial operations.

Use cases of embedded finance services :

BNPL: Buy now, pay later (BNPL) can tap into the current banking systems and step into reinventing their current models. Banks can offer BNPL embedded services to the customers at a more affordable cost that helps banks acquire customers at a low acquisition cost.
For example, AtPay (@Pay) is one of the early adopters of DeFi (decentralised finance) in the BNPL space. AtPay combines blockchain and crypto technologies with the BNPL concept to give consumers access to various payment methods and, eventually, lower fees in both online and offline stores.

Insurance services: According to data from a Pymnts survey commissioned by Cover Genius, 70% of digital banking customers are extremely receptive to receiving bank-embedded offers. Customers are willing to get the most appropriate insurance products which meet their needs and requirements. Banks can occupy a unique position by offering embedded services directly to their customers in both the insurance niches: major- health and life insurance; and minor - travel insurance. For example: In 2019, Tesla became one of the first automakers to adopt the idea of embedded insurance, allowing customers to acquire auto insurance at the point of sale through collaboration with State National. When offered via Blockchain technology, insurance services can aid in real-time usage-based insurance while maintaining the entire transaction history. It will help lower operational costs, improve risk assessment, enhance client onboarding and maintain transaction history for future reference.

Savings & Investments: The next wave of adoption of peer-to-peer P2P lending and crowdfunding will be led by self-executing smart contracts which will enable trustless transactions eliminating the need for intermediaries. Embedding these products within easy-to-use digital wallets e.g., MPESA will enable true financial inclusion. Using stable coins for transactions will also enable cross border transactions at much lower cost for micro savings and loans.

Embedded financial services simplify transactions, create new revenue streams, and allow banks to deepen existing customer relationships. Embedded payment systems can contribute to a quicker and more seamless user experience from traditional to online commerce.
By removing third-party influence, blockchain has the potential to boost financial security and transparency.

One of the main risks of embedded finance is undoubtedly the danger of data breaches and security issues. The fusion of embedded finance & blockchain technology can help mitigate the risks and would increase the trust among participants since blockchain inherently ensures security (immutable) and can thus speed up transactions.