Closing the Gap: How Embedded Finance Can Bridge the Financial Inclusion Divide
BFSI Industry News

Closing the Gap: How Embedded Finance Can Bridge the Financial Inclusion Divide

By Priyobroto March 12, 2024 - 77 views

Financial inclusion is one of the most pressing issues today for the world at large, not to mention Governments and banking and financial services companies. While several measures have been adopted over the last decade or more to enhance the inclusion quotient, embedded finance promises to be a cutting-edge option to bridge the divide like never before.

What is Embedded Finance?

Embedded finance is a unique integration of various financial products and services into platforms of a non-financial nature. Daily products and services such as booking or e-commerce apps can be transformed into potent financial tools with this strategy. People can thus get access to insurance, lending, banking, and other services within their commonly-used applications and platforms. This does away with the need for conventional brick-and-mortar banking or financial services outlets/branches. Embedded finance taps into technology for filling up the gap between the industry and underserved populations, thereby unlocking newer growth opportunities, empowering more customers, and fostering overall economic growth alongside.

Financial inclusion matters immensely, since it is one of the core catalysts of economic progress and growth. Embedded finance in the form of a service has already transformed into a robust tool for widening inclusion throughout India, with its market size estimated at more than USD$5 billion. Fintech is already taking this route with a view towards boosting access to financial solutions for those living in remote or underserved areas, particularly the rural regions of the country.

Advantages Offered by Embedded Finance

Here are some of the biggest benefits that embedded finance can bring to the table in this case.

  1. Higher access- Embedded finance-as-a-service will automatically open up financial solutions and services to more underserved communities and populations through tapping existing user bases of non-financial applications/platforms. Through the integration of banking and financial services in these platforms, customers can easily access payments, banking, loans, investments, insurance, and more. Hence, newer value chains will be built and economic growth will be fostered owing to democratization of financial and banking services. For example, Bajaj Finance took steps to accomplish this when it enabled its customers buying consumer appliances and durables to get credit at their purchase points, which was a new concept back then.
  2. More personalization- Through integrating financial services into other platforms, personalized solutions can be built more conveniently. Through the analysis of transaction patterns and behavioral preferences of users, embedded finance entities will enable insurance products, investment recommendations, credit scoring models, and other aspects which target particular individual needs.
  3. Innovation in partnerships- The entire embedded finance ecosystem will foster higher collaboration between banks, fintechs, non-financial applications/platforms, and other stakeholders in the industry. This will lead to more in innovation and newer opportunities for growth.
  4. Supply chain finance- Supply chain finance will be enabled with smoother disbursal of credit and easier transactions within the segment. Fintech entities who tie up with e-commerce players can, for instance, offer working capital for smaller suppliers/businesses, thereby helping them grow further. This is just one example.
  5. More platforms for retail investments- Embedded finance has already led to a transformation of retail investment opportunities. For example, Groww, Zerodha and others are already offering access to stocks and mutual funds, helping people take part in the capital markets under other platforms.
  6. Technology service providers and neo banks to come up- Technology service providers and neo banking entities will eventually come up more, offering valuable taxation, book-keeping, and more services for customer records and other solutions.
  7. Improved underwriting- Rural borrowers may not always have conventional data points required for credit scoring. Embedded finance can enable alternative underwriting models which evaluate borrowers with their actual data, including device location, apps, texts, contacts, call logs, and more (if mobile device data is taken into consideration). There are more such data categories that may be taken into consideration in this case.
  8. Better user experiences- Embedded finance enables higher customization of loan applications within customer-oriented non-finance platforms. This will help banks understand customers better, enabling a simplified system for both parties.
  9. Sachetized loan models- There is a pressing requirement for smaller and sachetized loans in India. Based on reports by CIBIL and Google, there was growth of 23x between 2017 and 2020 in terms of loans with ticket sizes of INR 25,000 and 71% of those new to credit were from non-Tier 1 cities. Hence, embedded finance can tap into customer data from other platforms and evaluate the same to offer smaller loans at better tears to rural and other borrowers.

Newer value chains are increasingly being created throughout the industry. For example, PhonePe, Paytm, Google Pay and other fintechs have integrated with numerous merchants while also providing digital wallets. Users can now easily pay for their transactions while some fintechs also offer loans to customers backed by data embedded into their platforms. Embedded finance as a service will broaden the scope of financial inclusion in India while unlocking newer opportunities for growth and value chains simultaneously. There will be no more geographical or physical divides, with easily accessible financial services and credit facilities even for those without credit histories or collateral.

If you just consider WhatsApp in this case, consider how it has become a financial solution with a customer base exceeding 487 million people in India alone. WhatsApp now enables sending money to others, turning into a payment platform as a result. This is one of the examples how embedded finance can be versatile in terms of diversifying financial service access. The IRCTC (Indian Railway Catering and Tourism Corporation) application is another example. It does not only enable train ticket bookings, but also provides insurance and credit choices, making it a financial option for several travellers. Even e-commerce platforms like Flipkart and Amazon have also transformed into financial platforms for several customers. They now offer provisions for installments while paying for products, or even loans for purchases. If you look at it from all sides of the coin, embedded finance has not just been filling up gaps in terms of financial inclusion, but also positively impacting the lives of innumerable people in India.


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How does embedded finance leverage technology to reach underserved populations?

Embedded finance integrates financial transactions and tools into non-financial ecosystems/platforms. This helps users easily access financial services without engaging with dedicated financial entities. Existing channels can thus be tapped for reaching out to underserved populations.  

Can embedded finance contribute to building credit histories for those without traditional banking relationships?

Embedded finance can contribute towards building credit histories for those who do not have conventional banking relationships. It can do this by gathering and evaluating data and basing credit disbursal decisions on alternative underwriting parameters like mobile device data and usage patterns, as just one example.

How can embedded finance contribute to bridging the financial inclusion gap?

Embedded finance can contribute immensely towards bridging gaps in financial inclusion. It can open up financial solutions for underserved populations across non-financial platforms/applications without them having to engage with financial services institutions. They do not have to worry about lack of physical access and geographical divides with regard to accessing loans, payments, investments, and other services.

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