The demand for embedded finance is unlikely to be affected by the rise of digital-only/neo-banking, and they can beautifully co-exist, according to Rajat Deshpande, Co-Founder and CEO of Indian embedded finance startup Finbox.
“Neo-banking may transform banking in terms of convenience and experience. However, the fact remains that financial transactions are an intrinsic part of commerce. Therefore, the demand for embedded finance on commerce platforms is unlikely to be affected by the rise of digital-only banking,” he said.
The effect can indeed be the exact opposite; legacy banks may see embedded finance as a potent channel to grow their loan book and go to market quickly with personalised credit products. They may do it with a vengeance to catch up with challenger (digital-only) banks.
“Convenience and security are the future, whether embedded finance or neo-banking. Any player that can deliver secure services seamlessly has a world of opportunity awaiting them,” he explained.
FinBox was started in Bengaluru in 2017 by Deshpande, Anant Deshpande, Srijan Nagar, and Nikhil Bhawsinka. Its technology enables any digital platform (both fintech and non-fintech) to launch digital credit products, such as BNPL (buy now, pay later), personal loans, working capital loans, and invoice financing. It also provides credit risk intelligence to over 25 banks, NBFCs, fintech firms, and credit marketplaces.
Last year, the firm expanded into Southeast Asia following a US$15 million Series A round from 91 Partners, Aditya Birla Ventures and Flipkart Ventures in June 2022. It began with pilots with several renowned financial institutions in Vietnam and the Philippines. The plan is to take its entire bouquet of offerings, from credit infrastructure to risk intelligence, to these two countries and simultaneously develop its reach in other countries, such as Indonesia, Singapore, and Thailand.
“Southeast Asia’s digital lending landscape (barring Singapore) is far behind developed countries thanks to low banking penetration, and it is a significant challenge for digital lending players,” Deshpande pointed out. “But the good news is that smartphone penetration is growing much faster than banking. This makes room for strategic players like us who can help formal financial institutions with alternate data-based underwriting to give credit to customers with little-to-no credit history at scale.”
Embedded finance market: India vs SEA
The global embedded finance market was valued at US$54.3 billion in 2022 and is expected to reach US$248.4 billion by 2032. The major factor driving the growth is digital transformation across industries.
But unlike in the US, Europe and Japan, where a credit card is the simplest way to pay online, the Southeast Asian market operates quite differently. Only three in 100 people in this region own credit cards, which is why embedded finance revenues are forecast to reach US$140.8 billion by 2025.
This trend is very similar to India. “We have seen many takers for BNPL products in India, especially those deprived of credit card access. BNPL makes for good credit card substitutes and assures its growth in markets such as India and Southeast Asia,” Deshpande said.
However, there exists a key difference between India’s and Southeast Asia’s embedded finance industry: the prevalence and dominance of super apps. The super app economy in India is still fledgling and has yet to take off. On the other hand, it is easier to embed financial services in SEA alongside a large basket of products and services in these super app ecosystems.
“SEA is perhaps more ready as there’s a burgeoning young and tech-savvy population, low financial penetration, a booming fintech industry, and considerable opportunity for growth,” he concluded.
He also dismissed the idea that the growth and emergence of fintech will sound the death knell for traditional banks. “The fact that banks will need to adapt for the future is beyond question. But to think that they will fall off the map is wishful thinking. Both banks and technology players have certain comparative advantages. There is enough opportunity for both to play to their strengths while collaborating. There is more merit in cooperation than competition,” Deshpande concluded.
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