Embedded Finance: a new business model for Bangladesh

Embedded Finance is the seamless and complete integration of financial product or services (e.g. lending, insurance and payments) with nonfinancial services (e.g. logistics, procurement). Embedded finance incorporates various types of financial products such as loans, insurance, debit cards, savings and investment instruments on the platform of a non-finance company, organisation or institution. As a very popular business model in the world, embedded finance is accepted by several giant companies. Bangladesh also has a wide scope of embedded finance in various sectors. The broad scope of the embedded finance market in Bangladesh encompasses contributions from various important sectors, including telecommunications, manufacturing, consumer health, retail and logistics etc. The embedded finance industry in Bangladesh is set for extraordinary growth. A global leader in market research- 'Research and Markets' has projected annual increase of 28.5 per cent leading to a market size of US$817.10 million by 2024.The industry is predicted to maintain a compounded annual growth rate (CAGR) of 48.0 per cent from 2024 to 2029 and the expansion is forecast to be worth US$5.80 billion by the end of the forecast period.

Embedded lending platform of Embedded Finance (EF) takes place when non-financial companies make partnership with a bank or other lenders to offer loans to customers through APIs (Application Programming Interfaces). Embedded lending contains one or more loan products of partner banks into their platform of non-financial company. Embedded lending allows non-finance companies to easily access loans to meet employee payroll needs and personal needs as well as to meet the needs of customers to complete a purchase even though they don't currently have enough money to pay for it. Secondly, embedded insurance is another application of Embedded Finance where customer can also insure the products at the time of purchase from non-financial companies. The customer does not have to approach the insurance provider for this service.  Embedded insurance is an innovative approach to reduce the cost of purchasing and distributing insurance. Thirdly, another important application of EF is embedded payments where banks are seen to be very closely involved. Non-financial companies can execute bank-to-bank direct transfers through embedded payments. This not only saves the customer transaction cost but also reduces the transaction related inconvenience.

One of the advantages of Embedded Finance is new source creation of increasing revenue for all parties involved in the system. By incorporating the financial services segment into the business platform, the business revenue can be increased for both parties (i.e. financial institutions and customers). Embedded finance helps underserved users gain access to formal financial services. By doing this, underserved users can avoid complex processes of financial institutions to access financial services.

Embedded Finance platform has immense potential for the MSME sector as well. MSMEs currently account for 90 per cent of global business, 60 to 70 per cent of employment and 50 per cent of GDP worldwide. Accenture (a global multinational professional services company that specialised in IT services and consulting) conducted a survey of more than 2,500 SME business leaders in 10 countries (Australia, Brazil, Canada, France, Germany, Italy, Singapore, Spain, United Kingdom and the United States) in 2021.The main objective of the study was to examine the use of digital services by SMEs, their willingness to purchase financial services products from digital platform companies, and forecast additional revenue from using embedded platforms and more. Accenture found in their research that embedded finance is forecast to expand the overall SME banking market to $92 billion by 2025, and the total embedded finance market for SMEs could reach $124 billion by 2025. Embedded banking for SMEs could capture up to 26 per cent of global SME banking revenue by 2025. So, it can be said that embedded finance in the SME sector will capture a large market share in the future. Between 2022 and 2023, global embedded finance revenue increased by 25 per cent and embedded payments gross transaction value also increased by 17 per cent. From this it is evident that the embedded finance market is on a fast growth trajectory. Embedded finance is a modern digital business model. Considering the developing economic structure of Bangladesh, this model can be an opportunity to revolutionise business by incorporating in different sectors through digital financial systems.

A. S. M. Ahsan Habib is a Banker and Certified Digital Finance Practitioner (CDFP).
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