What Can We Expect from Embedded Finance in 2023? Trends and Predictions

Embedded finance has been gaining traction in the past few years, and many predictions suggest that it will revolutionize the financial services industry in the years to come. Things are moving remarkably fast. By 2023, we can expect a more mature embedded finance system that will be more efficient, secure, and accessible for consumers and businesses alike. Embedded finance will likely continue to improve the customer experience and provide new opportunities for businesses to offer innovative financial products and services.

As more companies embrace embedded finance and the technology continues to evolve, this could lead to more collaboration between traditional financial institutions and FinTech startups. New technologies such as blockchain and artificial intelligence will also become a far more significant force in the industry.

So, let’s look at some of the trends and predictions for embedded finance in 2023 and how it will shape the future of financial services — and just how we got here to begin with.

What is embedded finance?

Embedded finance is a form of financing that is embedded into a product or service, as opposed to financing via traditional financial products directly from financial institutions. This can mean offering financing as part of a product’s purchase price, using equity financing to fund a business acquisition, or using financing as a tool for risk management. Embedded finance is generated when a company designs its product or service in a way that facilitates a financing arrangement. If you were to explain it to a stranger on the street, you could simply explain it as digital payment. 

Let’s step back for a moment, though. Embedded finance is an old practice that’s just getting a fresh new look because of all the technology evolving around it. It’s as simple as a car loan: Auto dealers aren’t financial institutions, but they still provide credit to their customers. Customers that buy a car via a loan are using embedded finance, even though they may not be familiar with the term.

There’s no shortage of new examples, either. If you’ve ever paid for an Uber or food delivery via their app, used an airline or store credit card, sent money on Venmo, or bought something on Amazon, congratulations — you have used embedded finance.

In technical terms, embedded finance is the practice of offering a financial service or product as part of a non-financially related product or service. This differs from traditional financial services, where customers interact directly with financial institutions, which can be time-consuming and a bit arcane for the average person. When a company offers an embedded financial service or product, it can promote more efficient, cost-effective, and transparent financing options for customers.

What are the benefits of embedded finance?

Embedded finance has the potential to improve transparency in the financial services industry, provide more value to customers, and reduce costs for businesses. In short, it makes the customer’s decision to spend money with a company far easier than if they had to go through a third party first while keeping everyone a bit safer.

Consider transparency for a moment. When a customer makes a purchase on Amazon, for example, the price is clear, there’s an emailed receipt, and records are kept. This prevents any potential abuse and helps the customer feel secure in their purchase. After all, customers making a purchase is what keeps businesses alive, so any institution worth its salt will want to make sure its customers feel good about how they’re paying.

So, embedded financing also makes life easier for customers. Many consumers avoid applying for additional credit with traditional financing due to the complex and often frustrating application process. This can lead to missed opportunities for consumers who need financing to make important purchases. Embedded financing, for example providing automated credit via AI algorithms, makes life faster and simpler.

Furthermore, by integrating financial services into their products and services, companies can provide additional value to their customers. This includes the elimination of upfront fees that are often associated with financing, such as application and processing fees.

It’s not just customers who get a good deal out of the situation, though. Embedded finance can help businesses reduce their overall costs by eliminating the need to maintain a separate financing division — which could, in turn, potentially lead to lower prices for customers. See? Everyone wins.

Key trends and predictions for embedded finance in 2023

So, what trends do we envision for embedded finance in 2023? Four stand out at the moment. Let’s dive in.. 

Increased collaboration between traditional finance and FinTech startups

More traditional financial institutions are partnering with FinTech startups to offer more innovative financial products and services. In return, these startups bring technical expertise, such as artificial intelligence and other advanced technologies, to the table. These collaborations could lead to more innovative financial products and services, such as loan portfolios that are tailored to specific customers.

Adoption of blockchain and artificial intelligence in embedded finance 

Blockchain has been primarily used for cryptocurrency, but it is now being implemented in other industries, such as financial services. Blockchain is essentially a decentralized ledger where all transactions are verified and recorded. The technology is expected to be adopted by financial institutions to track loans, manage risk, and increase transparency. Artificial intelligence, or AI, is increasingly being incorporated into embedded finance solutions as well. AI can help optimize operations, provide customized credit analysis, and improve customer experience. 

New technologies such as AI and blockchain will make it easier for financial institutions to onboard new customers, collect data, and enhance customer experience. AI can be used to analyze data to determine customer creditworthiness, which is a major pain point in the financial services industry. This will provide a more streamlined customer onboarding experience and eliminate the need for manual credit analysis.

Higher Adoption Rates and More Innovative Products

As embedded finance continues to grow, businesses will have more opportunities to offer innovative financial products and services. This could lead to a boost in adoption rates and a rise in demand for these products. Certainly, people are more comfortable than ever with making payments in a variety of ways, with transfer companies like Stripe, Venmo, CashApp, and many more becoming household names. 

Increased security and efficiency

New technologies implemented in embedded finance solutions make them more secure and efficient. With blockchain, all transactions are verified and recorded, which makes it harder to falsify information — and easier to verify transactions retrospectively in the case of fraud or other digital crime. Check out our article on blockchain in digital forensics, where we take a deep dive into this topic. .

Challenges for embedded finance in 2023

Of course, every innovation comes with its challenges, and we’d be remiss to not discuss them. Chief among these challenges is the simple newness of the technology and the potential lack of institutional wisdom that goes with it. 

Sure, FinTech startups are revolutionizing the financial services industry by offering innovative financial products and services. However, some of these startups lack the experience and resources to successfully grow and scale their operations. This could result in significant operational and financial risks for customers. 

On the other hand, traditional financial institutions naturally have the resources and expertise to scale their operations and grow successfully. However, some financial institutions are resistant to implementing innovative FinTech solutions. This could create an inefficient financial services industry that has difficulty adapting to change.

Embedded finance with SmartDev

Embedded finance has the potential to revolutionize the financial services industry by providing more value to customers, increasing transparency, and reducing costs for businesses. New technologies, such as AI and blockchain, are making it easier for financial institutions to provide customers with innovative financial products and services while improving their customer experience. These innovations could help reduce the friction involved in financing products and services and make it easier for customers to get the financing they need. In the years to come, we can expect embedded finance to improve significantly and transform the financial services industry.

If you’re considering using embedded financing products or are looking to learn more about how they can work with your business, we’d love to talk to you. We’ve helped companies develop world-class FinTech services and are at the cutting edge of the industry. So, reach out to us to get the discussion started and we’ll be happy to give you a free quote for a tailor-made embedded finance service. It may be just the feather in your cap you need to take your company to the next level.