Embedded finance refers to non-financial companies offering customers access to financial services through a tech platform. For instance, if you’ve ever bought groceries on a website or through an app and paid through electronic means, that was made possible by an embedded finance provider.
The sector ballooned in 2021, and its global aggregate revenue is set to increase to USD 230 billion by 2025, up 922% than 2021’s USD 22.5 billion, according to data from US-headquartered private equity firm Lightyear Capital. This massive growth is taking place on the back of payments, insurance, lending, and a host of other financial services integrating with other commercial channels.
In the Asia Pacific, 18 of the region’s 46 largest banks have launched their own venture funds to invest in early-stage fintech startups. Most of these funds began making investments in 2016, per research by S&P Global. This mirrors broader developments around the world. As of September 2021, investors have channeled USD 4.25 billion into embedded finance startups globally, a nearly 300% increase from 2020, according to data provided to Reuters by PitchBook.
One company operating in embedded finance is Payoneer, a New York-headquartered company that gained a ticker symbol on the Nasdaq on June 28, 2021, after merging with FTAC Olympus Acquisition Corp, a special purpose acquisition company. “Businesses and consumers are demanding a level of innovation. They’re looking for how they can scale their business more effectively and globally, and how embedded finance players are going to create those connections for businesses to connect and access different markets,” Nagesh Devata, Payoneer’s vice president in the APAC region, told KrASIA.
Despite its popularity, embedded finance is under regulatory scrutiny. The Central Bank of Malaysia (BNM) is set to enact the Consumer Credit Act in 2022 to tighten regulatory requirements for all consumer credit activities, including popular offerings such as “buy now, pay later” (BNPL). And, the Monetary Authority of Singapore is reviewing the regulatory approach to BNPL amid concerns about mounting consumer debt.
“These schemes have been on the rise, not just in Malaysia, but also in other countries. There are legitimate concerns that such offerings may encourage consumers to spend beyond their means, with expensive debt that they may not be able to repay. Most BNPL schemes in Malaysia are offered by non-banks,” BNM governor Datuk Nor Shamsiah Mohd Yunus said during a press conference on November 12.
While the embedded finance industry continues to evolve, KrASIA spoke to Devata, who offered his outlook for the embedded finance industry in Southeast Asia.
This interview has been edited and consolidated for clarity and brevity.
KrASIA (Kr): How developed is embedded finance in Southeast Asia?
Nagesh Devata (ND): We’re seeing significant integration of financial services into non-financial platforms. The idea of embedded finance connects back into the global e-commerce boom, in which not just traditional payment providers—financial institutions—offer services. Consumers expect a seamless checkout experience when shopping online, while businesses see demand for an integrated payment experience.
Southeast Asia’s embedded finance industry is clearly on a tremendous growth curve. For example, in Singapore, there’s been a huge push to advance fintech and drive adoption. Although the region’s legacy infrastructure is not as mature as in countries like Japan and Korea, it provides space for creativity and innovation, enabling businesses to build new models.
Kr: What are the top use cases in the region?
ND: “Buy now, pay later” is a very popular theme. E-wallets are exceptionally popular in the region.
Kr: What’s an important strategy for firms that offer embedded finance solutions?
ND: Step back and look at the needs of businesses and consumers. For example, if you were a Vietnamese enterprise that wanted to sell products cross-border, you would need working capital, as well as the ability to move money between point A and point B. This requires a range of services, including payment acceptance solutions, cards, and other financial products.
It is really about bundling all of these offerings, so consumers and businesses do not need to go to separate providers for different services.
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Kr: Does consumers’ financial and tech literacy stay in step with the development of embedded finance?
ND: We’ve seen a broad level of abilities when it comes to financial literacy. Many new internet users are figuring out where to go for information, while the region’s fintech players have been trying to address the challenge of low financial literacy.
Kr: What challenges will hinder growth for the embedded finance sector?
ND: It’s a challenge to know who the customers are, and being able to do this differentiates a service from others. Industry players will need to figure out how to serve a diverse group of customers.
Another challenge is to create the right customer experience. We can think about the user interface design—how can service providers present this in a way that makes sense to a consumer or seller?
We also need to think about what problems we are trying to solve. Are we trying to address something that only happens in Southeast Asia, in the Asia Pacific, or across the world? Being aware of these nuances is important.
Kr: What can we expect from Payoneer in the next two to three years?
ND: Payoneer will continue to expand our reach. Cross-border commerce continues to accelerate. We have already inked strategic partnerships with some e-wallets across the region and in other parts of the world.