By Mimi Joy, Director
The use of embedded financial products, the offering of financial services products by nonbanks, increased dramatically during the pandemic. Often seen as a strong customer retention tool, and fueled by an explosion in digital commerce, the integration of payments, credit, and insurance products into digital platforms was a natural for a stay-at-home world. But looking ahead, financial service providers have the opportunity to ensure these embedded products are of high quality by embracing inclusion to expand access while building trust and promoting the financial success of consumers.
Perhaps one of the best-known examples of embedded finance is Buy Now Pay Later (BNPL), which grew over 200% in the U.S. market in 2020 while increasing average transaction values for merchants by making it easier to spend more. The wider market for embedded finance is expected to grow as well, with a recent report estimating a tenfold increase from $22.5 billion in 2020 to $230 billion in 2025.
When well-designed, these solutions have the potential to be beneficial, providing customers with transparent pricing and terms at a time and place that is convenient to them. However, many solutions target more affluent customer segments and may exclude lower-income or rural households. Even when unintentional, exclusion can occur because higher-income consumers may be more familiar with digital platforms or have greater access to the internet and smartphones.
Financial service providers should ensure these embedded solutions are both inclusive and visible. For consumers engaging with these solutions for the first time, providers should also explain how to use them and the impact of using them so consumers can quickly assess the costs, terms, and the data being used, even in the middle of a transaction or inquiry. The novelty and potential complexity of these embedded financial products require designers to pay extra attention to the end-user experience through thoughtful user design
Several embedded finance products and approaches appear promising in the way they support positive financial health outcomes:
- Klarna, a Swedish fintech company that provides online financial services, such as payments for online storefronts, direct payments, and post-purchase payments, has added friction to the checkout process in the U.K. to help ensure customers are being mindful of their purchases. Dubbed KlarnaSense, the feature prompts customers by asking: 1. Do I love it? 2. Do I need it? 3. Is it worth it?
- Tesla and other car dealers offer embedded insurance products, allowing car buyers to purchase insurance alongside a vehicle. This can be less expensive than purchasing insurance from a third-party insurer.
- Lyft offers embedded banking services for drivers, enabling them to be paid instantly with a debit card from Lyft. This helps drivers access their wages on demand while smoothing cash flow.
As 2021 unfolds, the Financial Health Network will continue to monitor new solutions and organizations – including those focused on embedded finance and best practices that enable financial health – to help consumers navigate the financial impact of the economic crisis. Read the Compass Principles to learn more about our guidelines for excellence in the design and delivery of financial tools that help people to better manage their daily financial lives. You can also visit our website to learn more about measuring financial health and incorporating those results into your organization’s strategic priorities.