In its simplest form, embedded finance can be considered an umbrella term for when a business integrates financial services directly into its ecosystem. It is the process of contextualized integration of financial solutions into a non-financial product or service. Crucially, these businesses do not become regulated financial institutions themselves.

The concept of embedded finance is nothing new. For years, institutions have offered financial services such as private-label credit cards at retail chains, supermarkets or airlines, while car dealerships presented auto loans. For banks, services such as these allow them to reach new customers en-masse through a variety of new partner channels.

The ubiquity of today’s digital services has acted as a catalyst for embedded finance, and the number of non-financial companies that can now offer financial products and services has grown. eCommerce merchants can offer services such as lending, while car dealerships can offer insurance instantaneously for new customers. Many consumers will already be using embedded finance, like making payments in Uber, even if they are not aware of the term. From the consumer’s point of view, embedded finance is also known as invisible finance because the integration of financial services is so natural that the underlying financial transactions are invisible, offering seamless experiences. As more businesses continue to digitise and technology continues to proliferate, embedded finance will only increasingly become part of our day-to-day lives.

While there’s often confusion about how embedded finance differs from Banking-as-a-service (BaaS), it’s important to recognise that they can coexist and don’t compete directly with one another. Also, it is worth introducing as a side note, FaaS (finance-as-a-service) which is the distribution of financial services by non-financial companies using technology-based solutions. The concept of FaaS is broader than the one of embedded finance.

In simple terms, BaaS is trying to win customers away from more traditional banks while embedded finance is seeking to keep customers using their core (non-financial) products or services by offering a more seamless transaction behind the scenes.

BaaS providers require their clients to manage the service provision by themselves. Embedded finance is doing this too, with a built-in offering including compliance and regulatory requirements. The BaaS client is onboarding the end-user, while the embedded finance clients is not (the embedded finance provider takes care of it).

Consumers leveraging an embedded finance service understand that the integrated financial service is being provided by a third party, however, with BaaS, the front-end provider manages the BaaS provider in the background, without making it explicit to the end-user when ordering products or services. So, which products and services will benefit from embedded finance specifically?

In the past, customers may have had to apply for loans or a credit card to borrow money to fund a large purchase prior to making it. These often carried high-interest rates, which could take a long time for the customer to repay.

Embedded lending, however, enables companies to offer more favourable loan rates at the checkout, offering customers the chance to decide on their terms of repayment during the purchasing process. Buy Now Pay Later (BNPL) is arguably the most common example of embedded lending and has become increasingly popular around the world over the previous decade. In Latin America, it’s expected BNPL payments will eventually account for 20% of the region’s eCommerce, should it continue its upwards trajectory.