India’s next vehicle to drive financial inclusion
Financial services in India have witnessed impressive growth over the past few years due to growing internet penetration, government regulatory and policy support, and the introduction of India Stack, among others. The Financial Inclusion Index developed by the RBI also shows steady progress. However, compared to developed countries and some Asian counterparts, India still seems to be severely limited in access to financial services. With an insurance penetration rate of ~4.2%, a retail loan to GDP ratio of ~**13% and a total market capitalization of ~***3.21T US$ (the total market cap of US and China is around US$47.3T and around US$11.5T, respectively), India still has a long way to go.
These circumstances can be partly attributed to the way financial services were traditionally designed and delivered. With an expensive mode of distribution including multiple branches, high-contact models including call centers, relationship managers, etc., financial services have generally been top-down, meaning access has been heavily skewed in favor of the high income group. This is undoubtedly changing with several banking and neo-banking apps/fintechs disrupting the market with new distribution models and a singular focus on specific market segments that have been underserved or unserved by vendors. historical. However, the recent introduction of “integrated finance” could foster financial inclusion for millions of Indians over the next few years and create lasting value for other stakeholders.
To put it simply, Embedded Finance is a concept through which any non-financial organization of varying complexity and digital maturity (Individuals, Startups, Fintechs, Digital Companies or Large Companies) can offer financial services (cards, accounts, insurance, loans, investments) to its clients using an Embedded Finance platform. Previously, for a non-financial organization to offer financial services, it required a significant investment to build the necessary technical infrastructure and a greater investment of time/effort to obtain the necessary licenses from the authorities. Embedded funding platforms would allow organizations to bypass both steps by providing “plug-and-play” functionality using API stacks for large organizations and easier to use no-code/low-code stacks for the details. These platforms form strong partnerships with leading banks and insurers, enabling the provision of financial services.
The benefits of integrated finance are manifold and we are already seeing use cases emerging globally. Some recent notable examples are Tesla selling car insurance on the checkout page, YouTube allowing users to purchase a product directly from a live stream, and Google allowing Map users to book and pay for parking directly from the app. These examples highlight the most crucial benefit that integrated finance provides to clients: having access to the required financial service when it is needed most. From a platform perspective, Embedded Finance offers them the ability to create additional revenue streams through revenue sharing agreements for the distribution and custody of financial products. Businesses can integrate financial services into their customers’ core purchase journeys to drive engagement, loyalty, and increase customer lifetime value. From a bank or insurer’s perspective, Embedded Finance can help reduce customer acquisition and service costs. An exciting landscape is developing in India, with players taking different approaches to achieve scale in an otherwise fragmented market. Several integrated finance platforms have emerged that offer functionality for different combinations of financial products. Some focus on a diverse and comprehensive set of offerings, while others focus on specialization – providing a single product with a higher degree of customization. We are already seeing promising use cases for insurance and integrated payments. Travel industry companies such as MakeMyTrip and Ola have already rolled out contextual insurance products for their customers. E-commerce companies have started offering BNPL products to customers at the point of sale.
The opportunity offered by integrated finance is undoubtedly promising. Large customer-facing digital businesses, digital e-commerce and B2B brands are expected to be early adopters. Creators/influencers have the ability to monetize their brand using Embedded Finance (eg an influencer providing a brand card to their followers). Any institution with a critical mass of users can benefit from integrated finance if used in the right way. However, there are also challenges. To begin with, a complex product like loans cannot be offered before a thorough verification of the client. Businesses and in-vehicle platforms should figure out how to use the customer data available to them in the most useful way. Second, it remains to be seen whether revenue sharing would be possible for certain products with banks. Third, the extent of customization and personalization will ultimately depend on the capabilities of the Embedded Finance platform and the bank or insurer. It is still too early to understand all the possibilities of Embedded Finance; however, this is definitely an opportunity for businesses to explore. Chances are that a surge of new no-code/low-code enablers in the future will propel new use cases that are unimaginable in today’s scenario. Those who would leverage their data with Embedded Finance solutions to provide value-added services to their clients would naturally be winners.
The opinions expressed above are those of the author.
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