For MSMEs to grow, they must find creative ways to improve customer satisfaction. Embedded finance provides a unique opportunity for businesses to do so. 

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Embedded finance is often confused with Banking-as-a-Service. But in this blog post, we’ll refer to both as embedded finance.

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While embedded finance is still in the early stages in Africa, the growth is increasing. Revenue projections from Nigeria say it’ll reach $1.34 billion in 2024 and $4.2 billion in 2029. 

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What is embedded finance?

Embedded finance refers to the integration of core financial services directly into a non-financial company's products or services. This integration enables these companies to offer their customers financial solutions such as payments, lending, or insurance within their existing platforms as an add-on to their primary offerings.

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Benefits of embedded finance for businesses in Africa

Embedded finance lowers the cost of operations 

Using embedded finance can lower business-building costs. Building a financial infrastructure is expensive. For starters, getting the required licenses and talent can cost thousands of dollars.

With embedded finance, business owners can build on existing infrastructure and channel their resources into other business needs.

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Better customer experience and retention

Embedding payments into your platform can create a smooth customer experience and help retain customers.

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This is because they can complete the entire experience, from buying to payment, on your platform without interruption. Your platform’s user experience guarantees satisfaction and turns them into repeat customers. 

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Businesses like supermarkets can also use embedded finance to boost loyalty by creating customer loyalty cmards. Programs like that reward customers and keep them coming back. 

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More revenue opportunities 

With embedded finance, businesses can generate revenue directly by providing financial services as a value-add.

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You can generate revenue from the interest you get from offering credit to your customers, transaction fees, and commissions.

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For example, buy now, pay later platforms have wallet systems that help consumers store value. Depending on the agreement with the payment gateway, processor and card networks, they can sometimes earn money from the interchange fees charged when customers use their credit or debit cards to make payments. 

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You have a competitive advantage 

Since embedded finance helps you generate revenue and increase your customer base, it can give you an edge over competitors who do not embed financial services in their products.

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Access to data

Most embedded finance solutions provide clear access to financial and customer data. Customer data can provide insights into behaviour and how they interact with your product. These insights can further help you make revenue projections, build better products to serve your customers and ultimately make decisions that boost business growth. 

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While managing customer data is risky, the benefits of embedding finance in your product outweigh the risks.

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Expanded market reach

Embedded finance solutions like cross-border payment gateways help businesses expand their market beyond their country of origin– for example, a business can expand from Nigeria to Kenya. 

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Consumers in Kenya use shillings and mostly mobile money, and with a cross-border payment gateway, they can easily embed payment collection on their website to accept Kenyan shillings. 

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Faster time to market

With embedded finance solutions, you can shorten time to launch since you don’t have to build from scratch. 

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A typical example is bill payment apps and logistic companies that build their solutions using virtual account APIs from financial institutions. 

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Typical applications of embedded finance solutions for African businesses

Payments

Payments is one of the most common applications of embedded finance for businesses across Africa. A frictionless payment experience for customers can guarantee loyalty to brands. 

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Implementing payments could be as simple as a payment gateway to accept card payments, bank transfers and mobile money. It can be as complicated as setting up a wallets to store value, like in the case of JumiaPay and BNPL platforms like LipaLater in Kenya. 

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Banking 

While licenced commercial and digital banks are the only entities that can provide the full banking suite and experience with embedded finance, financial and non-financial companies can offer some banking services to their customers. 

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An embedded finance solution, such as virtual bank accounts, can be part of the infrastructure for creating savings solutions like a Piggyvest in Nigeria. 

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Another use case for embedded banking is people and HR management startups like NotchHR, PaidHR and Earnipay. These startups help businesses manage people operations, performance and human resources as their core service. But by embedding banking features like bulk transaction processing, savings, and lending, these startups can provide custom banking services to their customers.

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Lending services

Traditionally, lending is a core banking product. However, with embedded lending, non-financial entities now offer loan products to their customers. However, a use case for embedded lending is BNPL platforms like CDCare and CredPal that give customers credit.

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Another use case is the partnership between CredPal and ride-hailing companies like Bolt to provide their customers with ride-now, pay-later services. This allows riders to access financial services from one platform without switching to another, which is the ultimate aim of embedded finance.

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A multilayered scenario of embedded lending is lending infrastructure companies that provide APIs to other businesses so they can build their loan products. Oystr Finance and Lendsqr are examples of these products.

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Another Kenyan startup, Pezesha, lends to businesses and provides credit-scoring APIs for companies in Kenya, Uganda, and Ghana. 

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Card Issuing and Wallets

While this is an extension of banking, specific use cases are beyond the scope of core banking services. 

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Embedded cards and wallets are ubiquitous with businesses that need to pay for tools and have separate accounts for different business functions. Kora offers this service, where companies can issue dedicated virtual cards and accounts for their employees. 

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A use case for digital wallets is logistic companies like GIGL, which use a wallet system for customer payments. These wallets are not deposit accounts but only act as channels to make payments more seamless. 

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Contactless payments are also another application of wallets, with startups like Vezopay allowing you to link a wearable, fashionable ring to your debit card to make payments using NFC.

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Insurance

This use case is not very popular among African businesses because insurance penetration in Africa is very low. As of 2022, South Africa had the highest, with 11.3%, and Nigeria with only 0.4%. 

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While these numbers are low, companies like Turaco, Octamile, Curacel, and My Cover AI are driving the growth of embedded insurance by partnering with companies in logistics, e-commerce, and lending.

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Investments

This use case is in two categories. 

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The first are investment companies that provide APIs for other businesses to launch their investment products, like Cowrywise, and create investment products for their customers.

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The second is for entities that provide investments as an add-on to their core offerings. 

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An example is integrating investments, such as buying stocks, into banking, as Kuda Bank does. 

Customers can diversify their financial portfolios without switching platforms. It adds a layer of customer interaction—engagement and retention on steroids.

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With embedded investment, businesses generate revenue from transactions, brokering fees, and revenue from their core business. 

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Common challenges with implementing embedded finance

It puts you in the regulator’s crosshairs

Providing financial services can put you on the regulator's radar. That means you must comply with and follow regulations, and Africa's constantly changing regulatory landscape can make this problematic for small businesses. 

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Services that provide core financial services might face more scrutiny than those that offer financial services as an add-on.

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Data privacy and security

Embedded finance gives you access to customer’s KYC information and other sensitive data. You’re also handling their funds. A leak or a security breach can lead to fraud and devastate your brand's reputation. 

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So, build strong cybersecurity measures to minimise fraud and follow data protection and security standards.

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If you want to build on another financial institution’s infrastructure, confirm that they have the proper licence certifications and follow standards like PCI DSS and ISO. 

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It can be expensive and difficult to set up

To embed finance in your product, you need the financial resources to afford it and the technical talent to implement and manage it, depending on the level of sophistication.

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Financial institutions that provide these infrastructures should have clear API documentation and other resources to ease implementation. 

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Embedded finance solutions are numerous. So, businesses can find the solution that matches their budget and needs.

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In addition, embedded finance solutions like payment links require low-code or no-code. Nontechnical companies and business owners can still embed finance in their products.

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The future of embedded finance

With the current outlook, Africa is still in the early stages of embedded finance. 

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That’s because digital payments and technology penetration are still low. 

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There’s a huge gap to fill, and banks, fintechs, MSMEs, and other players must collaborate.

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