The Embedded Finance Opportunity In Asia

Embedded finance is suddenly becoming a reality, especially in Asia where financial inclusion is a ... [+] serious issue.

As technology has improved over time, so have financial services. Embedded finance – financial services provided via non-financial platforms or apps – is another iteration of this journey, and it is playing out in real time throughout Asia's financial ecosystem.

Profitable opportunities abound for those able to capitalize on this technology. While these solutions are predominately focused on the retail market today, the overall opportunity is much larger. In the future, it could be deployed more to SME and corporate entities to integrate financial services into areas like HR processes or financing of invoices and assets.

Both financial and non-financial players are looking for ways to capitalize on the opportunities provided by embedded finance. While the nascent market offers a large pie that can be shared among banks, fintechs and non-financial firms, it will be crucial to tailor solutions to customer needs and ensure that costs are managed adroitly.

At the heart of embedded finance is developing solutions which enhance the customer experience. This can be accomplished by simplifying an existing process or by providing a service that is not available today. Further, embedded solutions can find customers at the correct time and with more appropriate context.

Speaking during a recent panel held by Kapronasia and Thought Machine, Rohit Khattri, Head of Insurance Exchange Asia at Singapore-based Bolttech, noted that Bolttech enables the Samsung care proposition, the insurtech's product device protection embedded into the purchase of Samsung flagship phones. "This enhances the value proposition for the OEM and brings protection coverage to the consumer at the time of purchase. It's embedded into the customer journey," Khattri said.

This simplification of insurance provision also benefits Samsung's proposition as it provides the company's customer an option to purchase an additional service in a seamless manner.

Sachin Sharma, Chief Product and Commercial Officer at Standard Chartered Nexus, emphasized that making a transaction easier for a client is key to successful use cases and highlighted how embedded finance can reduce traditional pain points in a sales process and facilitate a more-frictionless customer journey. Compared to the traditional loan application process, which could be slow and tedious, today, vast regulatory and infrastructure improvements allow eKYC to be done seamlessly. "There is also an immense amount of data, which is available across telcos, e-commerce, and now retail ecosystems, which helps in new/instantaneous credit decisioning," he said.

One new potential application for embedded finance is the user journey for asset and invoice finance. "So imagine as an enterprise, whether it's small or large, you have continuous inbound invoices and other requirements that can be registered and processed automatically within your ERP application. Embedded solutions can provide a solution to effectively automate this, thereby streamlining internal operating procedures," said Andreas Neidhart, Head of Sales Engineering, Asia Pacific at Thought Machine.

To be sure, traditional product distribution typically has large distribution costs, such as from agents and banker partners. When it comes to embedding products, the cost starts to fall, but there are new costs that arise tied to technology integration – API setups and product customization.

The key is to design products with commercial viability. "Technology gives us the ability to, on an ongoing basis, adjust the pricing, the economics, as the actual insurance is issued," said Mr. Khattri.

Meanwhile, it remains to be seen how banks will capitalize on the opportunities afforded by embedded finance. Said Mr. Sharma: "Embedded finance is still relatively new and many [banks] are either still understanding what it is or waiting and watching to see its adoption and success rate."

Regulation is an essential prerequisite for doing business in the financial sector. Embedded finance solutions are no less subject to regulatory requirements than traditional financial products and services. The market consensus is that regulation is critical to solve, not only for the service provider but equally to ensure that both technology and business partners are capable of meeting regulatory requirements.

Thus far, regulators in Asia have been pragmatic and open to trial embedded solutions where it can help increase financial inclusion. "Most regulators are open to innovation; they understand that customer preferences are changing," said Mr. Sharma.

He added that in the experience of Standard Chartered Nexus, when it goes to a market with a large unbanked population, regulators are amenable to an "embedded partnership" for its ability to support regulatory goals around financial inclusion. The embedded model works in these cases because banks are often unwilling to serve certain market segments due to low profitability and high barriers to entry.

Scores of market participants are deploying embedded finance across Asia. Naturally, traditional financial institutions are embedding solutions to enhance their current offerings. Meanwhile, smaller, and more nimble start-ups are looking to muscle in on the incumbents’ markets.

More recently, non-financial organizations have started to develop the ability to deliver financial services on top of their existing products in order to join the fray and capture a slice of the market.

The pie is likely big enough for everyone to share. Indeed, some fintechs will excel in the embedded finance space, and some banks will as well. At the same time, some financial institutions "will unfortunately need to take difficult decisions of exiting certain markets, certain client segments, because they did not react fast enough," said Mr. Sharma. "But overall, it's good news for the consumer to have a frictionless user journey, regardless if they will be getting it from the fintechs or from the banks."

Overall, to maximize market opportunities in embedded finance, it crucial to build the right solutions and deploy them in a profitable way. This innovation should ultimately benefit consumers and businesses such that they can more seamlessly access financial products which were previously either cumbersome to obtain or simply unavailable.

Finally, firms wanting to develop embedded finance products would do well to stay close to their clients to ensure user journeys are enhanced. At the same time, they should be pragmatic with respect to cost pressures and avoid pursuing a cash-burning, growth-first strategy lest their aspirations go up in flames.