In terms of purchasing power parity, India is the world's third largest economy. However, World Bank data shows that India’s per capita income in 2019, is a fifth of China’s and one-thirtieth of the US. India’s GDP per capita is one-fourth of its BRICS counterparts.
One of the reasons for this paradox is severe under penetration of financial services and products. According to a report authored by Dr. Soumya Ghosh, Group Chief Economic Adviser, State Bank of India, India’s household debt to GDP ratio rose to 37.3 percent in 2020-2021. A 4.2 percent insurance penetration rate and a total value of financial assets at Rs 263 trillion displays that access to financial services has been severely restricted.
Financial services have always been designed top-down, beginning from the wealthy. Post Covid-19 however, digital adoption of financial services has accelerated and penetrated beyond the upper strata, leading to changing service and distribution architecture. A higher cost of servicing because of high-touch models, relationship managers and call centres and more, make up the service architecture while the distribution architecture is made of an expensive mode of distribution with branches and service centres. As digital penetration goes further, with apps and the internet replacing both managers and branches, the infrastructure will undergo a major transformation than it already has today. However, the fundamental idea would be around the product and service design, thus, the distribution architecture for this would have to be embedded finance.
What is embedded finance?
The integration of financial services into marketplaces and services especially by non-bank providers has seen a significant jump over the past few years. The emergence of embedded finance has created a market opportunity driven by the rise of non-bank technology companies, which is estimated to be $7 trillion globally by 2030. Embedded finance via BaaS (Bank-as-as-Service) allows a company or online retailer to incorporate banking software directly into their websites or mobile apps. This incorporation of BaaS while being part of a range of services does not require users to be redirected to third-party websites. Thus, buyers can experience ease of transactions as they wouldn’t have to enter their card details for each transaction because a company integrates payments on its website. It is because of embedded finance that the option of payment by instalments for online purchases, offering insurance or issuing credit cards have become a day-to-day phenomenon.
Every financial product is becoming an API or going through an API-fication of financial products and services on both public and private infrastructure layers. OCEN (Open Credit Enablement Network) is the next big disruption in lending.
The core idea of OCEN is to put in place a framework and protocols that can enable the democratisation of credit for segments that need it the most. For payments, UPI, making payments with the touch of a button leads to faster checkout and settlement processes, offering a great payment experience. There are multiple instruments that use the internet to distribute financial services like BSE StAR MF platform, India’s largest online distribution platform that can be accessed anytime and anywhere, supporting all types of investors like NRIs, minors and corporates. Then there’s fixed Deposit APIs, that is APIs that facilitate creation, servicing, and closure of fixed accounts as well as status checks. InsureTech platforms like Riskcovry’s APIs can automate omni-channel insurance distribution. Still others like smallcase Gateway help users transact stocks, ETFs and smallcases in-app or website.
Beneficiaries of embedded finance
Today, companies across industries, verticals and services are considering and getting ready to launch embedded financial services to serve business and consumer segments better. The availability of such varied instruments makes it affordable for manufacturers as they can tap into a larger base with API-based distribution while also allowing them to access a financial product or service when they need it. The appeal for business lies in its monetisation opportunity for apps and distributors who can now engage their customers and add a new business line to their offerings.
We have seen the advantages of embedded finance play out in front of us. The National Payments Corporation of India (NPCI) announced that in September 2021, 3.65 billion transactions worth Rs 6,54,351 crore were recorded. While most transactions on the UPI platform – almost 81 percent – are peer-to-peer, suggesting UPI is replacing cash in the payment ecosystem and consequently leading to more digitisation of the economy, around 19 percent of the transactions are peer-to-merchant, accounting for nearly Rs 9.96 trillion, surpassing both credit and debit card point-of-sale transaction values.
Merchant acceptance has also been a major reason behind the adoption of UPIs as it increases credit eligibility for small merchants, given all transactions are recorded for lenders. There are channels such as Tala loans in the global scenario which aim to offer immediate access to credit and quick loans to meet the needs of consumers and small businesses.
Embedded finance will be instrumental in getting the next 500 million Indians into mainstream finance across savings, credit and cover products.
There is a gap between financial services and end consumers, however technology can be the best driver to bridge it. Fast and hassle-free access to financial services is made possible easily by embedded finance thus improving customer satisfaction. As the number of non-traditional players entering the fintech segment steadily increases, we can expect to see a significant growth in the number of direct-to-consumer companies adopting embedded finance.
The writer is founder & CEO of smallcase.
The thoughts and opinions shared here are of the author.
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