Should embedded finance offerings be regulated?

By Puja Sharma

Embedded finance is integrating a financial service or technology with a traditionally non-financial product. Essentially, it uses technologies to integrate payments or services into a non-financial platform such as the company’s website, or a mobile application for making payments invoices, and overall business seamless.

According to a study by KPMG about the growing FinTech trends, Embedded finance offerings will face increased regulatory scrutiny–Regulatory awareness and intervention will increase over the next 6 to 12 months due to the increase in financial products and services embedded within and delivered by non-regulated entities, as regulators seek to clarify accountability and remedies for customers.

With the increasing usage of smartphones in today’s time, it has inevitably become the new wallet. People today can get everything done with a click of a button. That said, the speed of transactions and banking has also taken a major turn. Retail lending alone represents almost a third (29%) of the embedded finance opportunity, with the digitaliSation of retail services set to drive increased adoption of digital wallets and flexible finance options, such as point of sale lending and ‘Buy Now Pay Later’ services.

Embedded finance, would allow companies to provide customers with diverse offerings and a better user experience. In a short period, these companies will start incorporating such tech-driven offerings into their system to provide an end-to-end experience to their customers. It has never been easier to enter with the advancement of technology. Consequently, financial brands are battling for market share, increasing competition. Both merchants and consumers can benefit from the competition as it drives down embedded finance costs.

As technology has helped embedded finance gain traction, the regulatory landscape has changed too. The ubiquity of smartphones and the convenience of non-banking apps to increase access to financial services for consumers helped pave the way. Because policymaking moves at a far slower speed compared to the exponential growth of technology, regulators face an uphill battle heading into a new era. Governments have been challenged to level the playing field for nonbank companies to provide financial services, According to a report by Mambu.

Antitrust laws must be enforced by regulatory bodies to prevent any embedded financial brand from gaining too much market share. In addition to increasing competition, embedded finance companies are competing to offer their customers the best terms and products. Among these diverse products are partnerships with e-commerce sites, social media, insurance, and the automotive industry

Embedded financiers can ensure compliance with existing regulations by partnering with experienced institutions. Financiers can then focus on their core competencies because most of the risk is mitigated for both parties.

Banking regulations must be followed by embedded finance companies as they have become a critical part of the banking system. Regulators must keep up with the rapid changes that are occurring in embedded finance as new products are created and the industry continues to evolve. Both embedded finance brands and consumers will benefit from this move because it will help them operate in a compliant manner and minimize any potential risks. Even entities that are outside of the regulatory perimeter can take on intermediary roles within the embedded finance space.