Apps may be the engines driving businesses in the digital economy, but these engines would be powerless without the ability for payment and other financial transactions.
Andreessen Horowitz’s Angela Strange once said that in the future “every company will be a fintech company”, referring to the mass amalgamation of financial services into the business world.
Take for instance loyalty apps, Amazon swipe-to-pays, GrabPay and more.
Globally, Banking-as-a-Service (BaaS) and embedded financing has been making waves in the fintech space and beyond. In Asia Pacific, embedded financing is projected to grow at a CAGR of 24.4% from 2022 to 2029, reaching a total revenue size of US$358 billion.
From APAC’s young demographic to the exponential rise in Internet users in the fast-developing parts of Asia and a landscape primed for fintech innovation, embedded financing is growing in the region for several reasons.
Essentially, non-financial companies find business value in using fintech-backed infrastructure to conduct financial services such as payment, transaction, conversion and money management, creating a collaborative fintech ecosystem that’s fast, scalable, and with a global impact.
DigiconAsia discussed the rise of embedded financing with Rohit Narang, Managing Director, APAC, Currencycloud, a company that has processed more than $100 billion in over 180 countries since 2012, working with banks, financial institutions and fintechs around the world.
What is embedded financing? How does it work?
Rohit Narang (RN): Embedded financing is the integration of financial services or tools into other environments that are not traditionally considered to be part of the financial services ecosystem.
Embedded financing can also be seen in our daily lives, from paying for your morning coffee with your phone to making a bank transaction by scanning a QR code on your friend’s phone, to not even thinking about the payment for your Grab journey home. Or maybe, you purchased a flight online that comes along with automatic travel insurance. There is no cash involved in all these interactions. These are just some examples of how prevalent embedded financing is in our lives and how reliant consumers are on this business model.
Through BaaS or APIs by fintechs, non-traditional finance businesses can take on the role of a financial platform to facilitate the movement of money – from lending, payment, management and more.
In short, banks, fintechs, and other financial providers supply their proprietary infrastructure for a dedicated set of services so that these companies can then provide an array of integrated financial services and acquire new customers, generate new revenue streams, and deliver a slicker customer experience.
The most common examples of embedded finance offerings come in payment-focused functions: automatic payments, digital wallets, brand cards/digital wallets, and QR code-based purchases.
What are the drivers for embedded finance, specifically in APAC?
RN: Because embedded finance encompasses such a vast range of services, from payments to lending to insurance and investment, there is no one critical driver to its growth in APAC but a multitude of factors driving this change.
Firstly, there are millions of people with little or no access to banks in APAC, so the underbanked and unbanked demographic holds huge potential for growth. By giving them access to an alternative route to financial services, they only need mobile phone to participate in financial activities like making digital payments, park their savings, and gain access to services like insurance.
Secondly, Singapore, and selected countries in APAC, have strong governmental support when it comes to digitalization of almost any industry. In finance and banking, we see regulatory change to support fintech growth, while initiatives from the government and its statutory boards support by accelerating the process. Such cohesive play makes it easier for these countries to partner and collaborate strategically and tactically. For example, Singapore’s PayNow will be soon linked to Malaysia’s Duitnow, as the two nations’ mobile payment methods combine to make real-time cross border payments between the two markets possible.
The third key factor is of course, the pandemic, which has accelerated the need for embedded finance in tandem with APAC’s burgeoning e-commerce industry. As the world ‘normalizes’ in today’s post-pandemic climate, business activities are picking up rapidly. The fact that embedded finance can bring substantial value to businesses and their customers is not information that could stay hidden for long, and hence, creates an expected escalation of demand.
There will definitely be a new wave of entrants in the solutions space, which will vie for customers in companies that do not have the resources to develop such financial services and payment capabilities in-house. Just getting licenses in different countries and keeping tabs on evolving compliance demands alone would make it incredibly cost-prohibitive, while the threading of all the elements of a solution together can be equally daunting.
To this end, Currencycloud has created an ecosystem of partners, called FUSE, which provides a collective of expertise to help businesses attain the flexible, end-to-end solution that these digital businesses desire.
Alternatively, there is also the option of deploying dedicated services from actual financial services providers, lenders, and even banks, to shorten the implementation cycle, allowing them to penetrate new markets and lower their customer acquisition cost.
How does embedded financing meet market needs in a globalized digital economy?
RN: The APAC region provides an eager market of businesses ready to explore embedded financing, whether B2B or B2C. From the traditional banks and financial institutions to the newer neobanks, remittance companies, wealthtech, lendtech and insurtech firms, as well as super apps and general services platforms, there is accelerated demand for cost-efficient and frictionless intra-regional and global monetary flow.
Currencycloud simplifies the movement of money around the world through a suite of easy to integrate APIs that gives them access to a regulated, compliant global infrastructure, whether for payment, collection, conversion or more.
Being a SaaS offering, businesses can tap into the platform with very little fuss, to either offer the services as their own customer offerings or implement the payment platform as a standard for their ecosystem.
It is important to have specialized support, in addition to a proven platform, to take care of complex backend work. This would speed up the implementation, help reduce capital investment, and provide greater peace of mind, allowing the businesses to focus on what matters the most, which is to enhance the customer experience.
Do you see a significant opportunity for APAC to be the hub for embedded payments? Why?
RN: Absolutely. The region’s potential for digital payment is immense. In our Global State of Embedded Finance Study, we found that when it comes to advancement and financial maturity in the Asia-Pacific region, it varies significantly among developing Asia, newly industrialized countries and developed nations.
What is happening here is that financial infrastructure, from payments to greater functions, is diverse, and the way that some nations manage and conduct payments will differ greatly from their counterparts in the region. Herein lies the opportunity to create synergy in the region to rip out the old and drive the adoption of real-time solutions and technologies for moving money around the world.
We want to tap the region’s potential for money movement by enabling financial institutions and fintechs with simplified tools and complementary services while facilitating non-traditional financial services companies to enable digital payment, collection and conversion for themselves and their customers. Currencycloud is preparing for this increased demand by establishing our regional headquarters in Singapore, another office in Australia and plans to expand further across the region.
Collectively, these organizations can potentially expand the East-West money movement conduit while stabilizing it with universal best practices and processes, much like how the Suez Canal is widened to future proof against escalating demands. Previously, when we were operating in the West, we could only facilitate West to East flows. Setting up shop would mean that we can now operate two-way flows whether it’s from East to West or West to East, enabling a more inclusive and robust payments ecosystem.