Embedded finance has exploded across Australia’s fintech scene at an unprecedented pace. It sits at the heart of Banking as a Service, whereby businesses and consumers alike have become accustomed to the ease and convenience of modular banking stacks where they can simply ‘plug in and play’. It allows companies to lower costs, deliver a  better customer experience and drive new revenue models.

Set to become the future of financial services, embedded finance makes finance both more human and accessible. But how did we get here, how is it going to disrupt banking as we know it and what does this mean for the retail sector?

The explosion of embedded finance 

Driven by consumer-led demand for a ‘one-stop-shop’ of products and services, we’re seeing a seismic shift in focus as businesses bundle a collection of financial products and tools within a single platform. A simple example is a Buy Now Pay Later (BNPL) service, providing consumers access to faster, more convenient and cheaper finance products. 

The pandemic has only intensified this with accelerated digital transformation priorities. As Australians were forced to use digital-only services, businesses had to pivot fast. Those that did this well found themselves with a captive audience in their hands! 

Levelling the playing field

Embedded finance means consumers have more finance options at their fingertips. Companies with loyal customer bases are offering the likes of embedded card payments, lending services, insurance and investments – driving convenience and competition. This is levelling the playing field as Australia’s growing fintech scene keeps larger, legacy players on their toes. 

Businesses leading the charge

For Australian businesses owners, financial controllers and accountants have typically used multiple tools to manage their finances.  However, in the same way consumers now have increased expectations from seamless product experiences, so have business owners who want a single tool to manage all aspects of their finances. 

Australian spend management solution, DiviPay is currently front-running this innovation.  DiviPay unifies card issuance, payment capabilities, receipt and expense management capabilities so workplaces don’t have to rely on archaic physical corporate credit cards, sharing credit card details or manually inputting paperwork to manage their team expenses.

The modular composition of these solutions also allows for best of breed businesses to partner.  Slyp, another Sydney based start up, has eliminate the need for paper receipts by delivering digital copies straight to a consumer’s mobile banking app. DiviPay has leveraged this innovation by automatically attaching receipts to workplace expense reports as the payment is made, solving the long time problem of “I lost/ forgot the receipt”. 

Other Australian businesses leading the charge include realestate.com.au, integrating mortgage providers into its suite of services so that the customer can now get a home loan directly from the website. It eradicates the need for consumers to engage with multiple brands, saving time and often money as it tends to cost less than a policy from a third-party provider.

Likewise, as we watch the creator economy phenomena flourish, businesses such as Linktree partnering with Shopify to create a store and sell products directly to customers is another great example. Or, Kogan, an electronic retailer, offering a BNPL option. All of these examples place the consumer’s best interest at heart – providing fast, frictionless services bundled together. 

Turbo-charging the banking evolution 

Embedded finance is increasing consumer expectations at every touchpoint of the financial services journey and will upturn the traditional banking sector. As consumers experience the ease of payments and other financial services embedded within their brand experiences, they’ll wonder why some banks make transactions so hard in comparison. And, with consumers already accustomed to using non-financial apps to make payments, this shift to embedded finance will feel like a no-brainer for our tech-savvy nation. 

However, that’s not to say we’ll be done with banks – they’ll always have some form of dominance. As well as having funds guaranteed by the government, the traditional banking ecosystem has access to licensing that fintechs don’t. In order for embedded finance to work optimally, there needs to be cross-pollination from the big banks and smaller, more agile fintechs, in the form of partnerships that will benefit both parties. 

Are there any drawbacks? 

As a rapidly growing offering of the fintech industry, embedded finance still has room for improvement.  An inherent risk is consumers taking out too many micro-loans, particularly when taking advantage of BNPL credit offerings where often there are limited credit checks. This makes it easy for consumers to find themselves in financial hardship.  

Personally, I think BNPL is one of our best modern retail innovations but I wouldn’t be surprised if in the near future the sector faces increased regulation and a crackdown on stringent credit checks. We need to balance tech, policy and autonomy whilst being careful not to stifle innovation. 

Coming up next

As Open Banking begins to take hold in Australia, we’ll only see embedded finance grow more. What we’re starting to see is the financial services ecosystem opening up as banks and non-bank third parties vie to create optimal customer experiences.

This will lead to more partnerships as banks and fintechs work symbiotically. Retail institutions can capitalise on this by using fintech for the UX (user experience) as the face of financial servicing, with banks continuing to safeguard funds. It’ll be a force to be reckoned with and businesses will be wise to tap into this trend sooner rather than later.

Daniel Kniaz is co-founder and CEO of DiviPay.