Why Embedded Finance is Financial and Commercial Growth Catalyst
Companies, both inside and outside the tech sector, are constantly looking to improve their offerings. Developing safe payment mechanisms is one of the most important changes companies can make, in our opinion. It is no longer a secret that many MSMEs (Micro, Small, and Medium-sized Enterprises) in Africa still cannot open bank accounts, one of the most basic financial services, and must instead use more ‘crude’ methods to keep their cash safe. These business owners frequently use manual bookkeeping and cash management, but the consequences of doing so are expensive.
Regrettably, traditional financial institutions and facilities continue to underserve and ignore these firms, who make up the vast majority of businesses on the continent. Fintech, please!
A variety of financial services, such as checking, loans, payments, business analytics, financial software, and more, can be offered on a single platform by utilizing embedded fintech.
Market Opportunity
The Payment Services Directive, which aimed to increase competition in the financial services industry, served as a catalyst for embedded finance. To change the way banks offer payment services, the European Union’s authorities developed the Payment Services Directive (PSD). The goal of the directive was to clarify the rights and responsibilities of payment providers, users, and non-bank participants while fostering increased competition and participation by non-banks in the payment ecosystem.
The essential enablers of commerce are financial services. The next wave of fintech innovation is anticipated to be characterized by embedded fintech, with firms in Africa and globally securing a higher percentage of investment— Financial services are integrating into the commerce flow precisely where transactions are taking place.
The Embedded Finance business was predicted to increase by 47.1% annually to reach $765.9 million in 2022, according to the Q4 2021 Embedded Finance Survey. Over the projection period, the embedded finance market is anticipated to expand gradually, with a CAGR of 29.0% between 2022 and 2029. By 2029, the country’s embedded finance revenues, which were $765.9 million in 2022, will total $3,091.1 million.
It is anticipated that fintech will continue to eat into the financial services market share and even define new sectors with so much more digitization on the horizon (especially in emerging nations).
Driving the digital Ecosystem
Fintech startups, which use disruptive business models and tactics, are currently creating goods and services that were previously developed by banks. By embedded finance, this latest wave of innovation within the financial services sector can be further used.
Embedded finance refers to the delivery of financial services through alternate, less effective processes, including integration of these services into digital channels and third-party experiences. This change has resulted in the development of digital financial services ecosystems, where fintech firms are forming alliances with other tech ecosystems as well as MSMEs and MNCs to speed up the commerce process. Marketplaces for APIs on digital platforms help to facilitate the ecosystem.
New, inventive, and disruptive business models are being tested in place of antiquated bank strategies and financial models. These approaches, which are offered by fintechs, facilitate the easier flow of consumer data, encouraging the distribution of banking services throughout the entire commercial ecosystem. More cooperation between banks, companies, and regulated third parties is promoted through embedded finance.
It’s crucial to remember that embedded finance benefits customers, banks, companies, and fintech players or services. The advantages for a company include Revenue growth and consumer data access Client loyalty, cost savings, and customer retention Hence, bringing in new user kinds speeds up user growth.
At 90% as at 2022, the growth of digital financial services has contributed to an increase in financial inclusion in South Africa. We are more aware than ever that financial inclusion is a tool to achieve a goal. It serves as a catalyst for inclusive economic growth and equitable development.