What is Embedded Finance?
Embedded finance refers to the integration of financial services such as payments, lending, insurance, or investments directly into non-financial platforms or applications. In simpler terms, instead of going to a bank or a stand-alone financial app, users can access these services within an everyday product or website they already use.
For example, when you buy something online and are instantly offered “buy now, pay later,” that checkout option is a form of embedded finance. The goal is to make financial services more seamless, convenient, and contextually relevant to the task at hand. In India, as more consumers and businesses embrace digital platforms, embedded finance is increasingly becoming a way to democratize access and streamline various money-related activities.
How Does Embedded Finance Work?
At its core, embedded finance works by using application programming interfaces (APIs) and partnerships between technology providers and financial institutions. Here is a simplified workflow:
Integration through APIs: A non-financial app (for example, an e-commerce platform or a ride-hailing app) integrates APIs provided by a bank, NBFC (Non-Banking Financial Company), insurer, or payment aggregator.
Data Sharing and Consent: When a user carries out an action say, buying groceries online the platform requests permission to share limited personal and transaction data (as per regulatory guidelines in India).
Financial Service Trigger: Based on that data and user consent, the embedded finance partner assesses eligibility for a service. If the user wants a small loan for that purchase, the NBFC’s underwriting engine reviews the request in real time.
Instant Decision and Execution: Within seconds, the user sees an offer (for credit, insurance, or payment installment). Once the user accepts, the service happens immediately: digital credit is disbursed, insurance coverage is activated, or payment is routed via a UPI link.
Settlement and Reconciliation: Behind the scenes, the platform settles fees or commissions with the financial partner, and the user’s account balances or credit limits update accordingly.
Because most of this happens automatically behind the scenes powered by APIs, data analytics, and automation users never have to leave the experience they started (for example, browsing products or ordering a taxi).
Components of Embedded Finance
Embedded finance brings together several components, each playing a crucial role:
API Infrastructure: APIs act as bridges between the non-financial platform and the financial institution. In India, many banks and fintech players offer APIs for payments, KYC (Know Your Customer) verification, account opening, credit checks, and more.
Regulatory Compliance: Embedded finance must adhere to guidelines set by the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDAI), and Securities and Exchange Board of India (SEBI). These regulations cover data privacy, digital KYC, transaction limits, and fair practices.
Data Analytics and Underwriting Engines: To offer real-time credit or insurance, partners rely on data analytics engines that assess risk. They combine traditional credit scores (like those from CIBIL) with alternative data (such as digital transaction history on UPI or digital wallet usage).
User Interface/Experience (UI/UX): The non-financial platform’s app or website integrates buttons, pop-ups, or form fields where users can opt for financial services. The easier and clearer this interface, the higher the adoption.
Settlement and Reconciliation Systems: Once a financial transaction loan disbursal, insurance payment, or investment purchase occurs, settlement systems ensure money moves correctly between the user, the platform, and the financial partner. This involves accounting for commissions or interchange fees as well.
Types of Embedded Finance
Embedded finance can take various forms depending on the service offered:
Embedded Payments: The most common type is offering payment solutions inside an app or website. For instance, many Indian marketplaces let buyers pay via UPI, wallets (PhonePe, Paytm), or “buy now, pay later” (BNPL) options directly at checkout.
Embedded Lending: Here, microloans, consumer loans, or business financing options are presented within a non-financial platform. A delivery partner sign-up page might show an instant small-business loan to buy a two-wheeler. This is powered by real-time underwriting engines.
Embedded Insurance: Also known as “Insurtech.” For example, when you book a flight on an Indian travel site, you are offered travel insurance at a nominal price. Or if you buy electronics online, you see an extended warranty insurance option.
Embedded Investments: Some e-commerce or fintech apps offer direct mutual fund purchases or stock investments as part of their interface. A cafeteria operator ordering supplies might see an option to park surplus funds in ultra-short-term debt funds.
Embedded Banking (Banking-as-a-Service): In this model, non-banking platforms essentially offer banking features like savings accounts or virtual accounts through partnerships with licensed banks. For instance, a business app might allow merchants to open a virtual current account for daily collections without visiting a branch.
Features of Embedded Finance
Certain features distinguish embedded finance from traditional, standalone financial services:
- Contextual Integration: Financial services are offered in the exact context where a user needs them. For example, a customer comparing loan options on an auto-portal can finalize financing right there, without switching to a bank’s website.
- Real-Time Processing: Underwriting, risk assessment, and transaction approvals happen instantly. Many Indian fintech credit models now leverage UPI transaction histories to make a lending decision within seconds.
- Minimal User Effort: Since the platform already has user data name, address, or transaction history users rarely need to fill lengthy forms. Digital KYC solutions (Aadhaar e-KYC, DigiLocker) expedite verification.
- Modular and Scalable: With API-based architectures, businesses can pick and choose exactly which financial products they want to embed. An e-commerce site may start with payments, then layer in BNPL, and later add insurance.
- Shared Revenue or Fee Models: The non-financial platform and financial partner agree on a revenue-sharing model. Every time a user takes a loan or buys insurance, the platform earns a commission or referral fee.
Benefits of Embedded Finance
Embedded finance provides advantages both for businesses (platforms) and users (customers):
For Businesses:
- Increased Customer Retention: By offering financial services within their own apps, platforms keep customers engaged for longer. For example, an online grocery app that allows instant credit ensures customers do not need to juggle multiple apps.
- Additional Revenue Stream: Commission or fee-sharing from embedded financial products can become a reliable source of income. Indian ride-hailing firms earn part of the fees when they partner with banks to offer driver loans.
- Data-Driven Personalization: With access to transaction data, businesses can recommend tailored offers. For instance, if a user order supplies regularly, a business-lending partner can pre-approve a working capital loan.
- Enhanced Brand Loyalty: Platforms that solve multiple pain points say, ordering supplies and getting insured stocks build stronger customer loyalty.
For Users:
- Convenience: Users avoid the hassle of switching apps or visiting physical branches. If you are buying electronics online, you can get financing, insurance, and extended warranties all in one checkout flow.
- Speed: Real-time approvals mean users can get credit or insurance instantly, which is crucial during emergencies or time-sensitive purchases.
- Lower Costs: Platforms often negotiate competitive rates with banks or NBFCs due to volume, which can translate into lower interest rates or premiums for users.
- Financial Inclusion: Many Indians who lack formal bank relationships can access credit or insurance products through apps they already use be it a small retailer app or a ride-hailing platform.
Uses of Embedded Finance
Embedded finance extends across many real-world scenarios, but some notable use cases in the Indian context include:
- E-commerce Checkout: When you buy clothes or electronics online, you often see BNPL or EMI options. That “Pay in 3” or “Finance at 0% interest” is embedded finance at work.
- Onboarding Delivery Partners or Gig Workers: Ride-hailing or food-delivery apps in India may offer microloans or credit lines to delivery partners to help them buy a smartphone or two-wheeler, repaid through small deductions from their daily earnings.
- Point-of-Sale (PoS) Financing for MSMEs: A small retailer ordering inventory via a B2B marketplace can get instant short-term credit at checkout, allowing them to stock up without paying upfront.
- Embedded Insurance in Travel or Hospitality: When booking train or flight tickets on an Indian travel portal, customers see an option for travel insurance or ticket cancellation protection. Once selected, coverage starts immediately.
- SME Banking Services: Business-management software for instance, a billing or inventory app can allow merchants to open a virtual current account, issue UPI QR codes, and track cash flow without ever visiting a bank branch.
- Digital Wallet Top-Ups and Bill Payments: Apps like Paytm or PhonePe let users pay utility bills, recharge mobile numbers, or book movie tickets, all inside the same interface. Though these started as payments, they are evolving to offer credit scores, small savings tools, and more.
These use cases demonstrate how embedded finance fits naturally into everyday tasks, making financial products feel like a built-in feature rather than a separate service.
Impact of Embedded Finance
Embedded finance is reshaping India’s digital banking and finance landscape in several ways:
Boosting Financial Inclusion: Millions of Indians who might not visit a bank branch now have access to credit, insurance, and basic banking services through apps they already trust. RBI data shows that mobile banking transactions and digital payment volumes continue to grow, signaling wider access.
Accelerating Digital Transformation: Traditional banks and NBFCs are partnering with fintech platforms, marketplaces, and even government portals (like Digital Seva Kendras) to embed financial services. This speeds up adoption of digital KYC, e-signatures, and e-mandates, aligning with India’s push for a less-cash economy.
Creating New Business Models: Startups focused solely on building embedded finance APIs (often called Banking-as-a-Service providers) are emerging. They serve as the “back-end” bank for many new apps, offering modules like account creation, compliance checks, or loan underwriting. This fosters a vibrant ecosystem of fintech innovation.
Rising Competition and Collaboration: As non-financial platforms become financial gateways, banks face competition not only from each other but also from NBFCs and fintechs. At the same time, they collaborate to tap into new customer segments and expand their reach beyond traditional branches.
Elevating Customer Expectations: Indian consumers are getting used to instant approvals, frictionless experiences, and personalized offerings. This raises the bar for all financial institutions to innovate and simplify their processes.
Examples of Embedded Finance
Below are some Indian examples that illustrate how embedded finance is already part of everyday life:
Flipkart’s “Flipkart Pay Later”:
- What it does: During checkout on Flipkart, eligible customers can choose “Flipkart Pay Later” to make purchases and pay the full amount later or in monthly installments.
- Why it matters: For many Indians who lack credit cards or formal credit history, this BNPL feature gives short-term credit for online shopping. The partnership with NBFCs handles underwriting and EMI processing behind the scenes.
PhonePe’s Credit and Insurance Offers:
- What it does: In the PhonePe app widely used for UPI payments users see “Mini Credit” options (instant small loans up to a few thousand rupees) and quick digital insurance (like personal accident cover) in the “Switch” tab.
- Why it matters: PhonePe leverages transaction data and partner NBFCs to offer real-time microloans, boosting financial inclusion. Similarly, low-cost insurance covers ride-hailing or shopping journeys, all embedded without leaving the app.
Amazon Pay and EMI Solutions:
- What it does: When buying on Amazon.in, customers can link their credit cards, choose EMI plans, or use Amazon Pay Balance. Amazon also offers “Amazon Pay Later” powered by partner banks this appears as a payment method during checkout.
- Why it matters: By embedding credit and wallet services, Amazon minimizes friction and keeps users spending within its ecosystem. Banks and NBFCs handle underwriting, while Amazon promotes usage.
Razorpay’s Banking-as-a-Service (BaaS):
- What it does: Razorpay one of India’s leading payments gateways offers APIs for startups to embed current accounts, payroll disbursement, and real-time account statements in their own apps.
- Why it matters: Small businesses using bookkeeping or invoicing software can now manage their finances receivables, payables, and payroll without opening a separate bank account or switching platforms. The partnership with a regulated bank ensures compliance.
Ola Money and Driver Loans:
- What it does: Through the Ola app, drivers can receive working capital loans or vehicle maintenance loans directly to their Ola Money wallet. The offers appear in the driver’s dashboard once they sign in.
- Why it matters: This microcredit option helps drivers purchase or service their vehicles without stepping out. The embedded finance model accelerates disbursal and repayment, often deducted as a small percentage of daily earnings.
Zomato’s Food Delivery Insurance:
- What it does: When customers place food orders, Zomato provides an option to add “Order Protect” insurance. This covers issues like delayed delivery or wrong orders.
- Why it matters: Instead of seeking redressal through social media or apps, customers can instantly claim small credits under the embedded insurance policy. Zomato collaborates with an insurer to underwrite policies in real time.