MSMEs power the African economy.
They provide more than 80% of the continent’s employment and 50% of its GDP (World Economic Forum data). If they have access to more financial tools that help them run more efficiently, it will benefit the continent’s growth.
One way they currently access more financial services besides the traditional banking system is through embedded finance.
While embedded finance is often confused with Banking-as-a-Service, we’ll refer to both as embedded finance in this article.
Embedded finance allows non-financial companies to integrate payments into their platforms without building a full-on financial backbone.
Applying this technology could be something as simple as adding a payment gateway to an e-commerce store or a wallet system to a logistics company web application.
In more complex examples, embedded finance allows businesses to offer core banking services like lending, payments, and insurance to their customers by building on pre-existing infrastructure from a bank or a payment company.
Embedded finance is booming in Nigeria and Africa as projections say it’ll reach $1.3 billion in 2024 and $4.2 billion in 2029. With this growth rate, more businesses will embrace embedded finance in the future.
How can businesses apply embedded finance?
Lending services
Traditionally, banks give loans.
However, with embedded finance, some financial institutions build loan products for their customers and even create APIs that allow other businesses to build and launch their loan products quickly.
A typical example is Oystr Finance, a startup in Nigeria that makes it easy for business owners to build their loan products.
Another example is Notch HR, an HR tool that helps businesses automate their HR processes. In addition to this, they also provide loans to the employees of businesses they onboard. While HR automation is their core service, with embedded finance, they’re able to provide lending services, too.
Accepting payments
This is the most common application of embedded finance.
E-commerce companies that want to accept payments embed payment gateways like Kora on their platforms and receive payments through cards, bank transfers, and other channels.
With embedded finance, some e-commerce businesses accept cross-border payments from other parts of Africa.
For example, Detail Africa, a shoe brand in Nigeria, uses the Kora payment engine to accept mobile money payments from its customers in Ghana. Using a gateway makes it easy for them to expand and grow to countries like Senegal, South Africa, Kenya, Tanzania and Cote d’Ivoire.
Card issuing
Another major application of embedded finance is card issuance.
With embedded finance, businesses can partner with a bank or licenced payment entities to issue cards for themselves, their customers or employees.
This is an improvement from traditional physical corporate cards, which are costly, sometimes take longer to process, and also come with excessive fees.
With virtual cards, businesses can issue payment cards on demand for their respective needs without incurring the costs associated with traditional corporate cards. This gives businesses more flexibility in managing their cards and transactions.
Benefits of embedded finance for businesses in Africa
Growth and scale
Using embedded finance solutions allows businesses to grow and scale faster—for example, a business owner who wants to expand their business to Ghana from Nigeria.
Ghana has a different currency and preferred local payment methods. This means businesses must find an efficient way to accept payments from Ghanaian customers.
With a payment gateway, they can easily embed payment collection on their website to accept Ghanaian cedis through local payment methods like mobile money.
Better customer experience and retention
Embedded finance helps businesses create a smooth payment experience on their platforms. Customers can complete the purchase process and payment without leaving the app, website, or platform. This increases customer satisfaction and will result in repeat customers. 88 percent of companies that use embedded finance also report increased customer engagement (Plaid and Accenture data).
More revenue opportunities
With embedded finance, businesses offer more than just their core product or service.
By providing other financial services, they offer more value to their customers and generate more revenue.
Take, for example, a telco business that provides insurance to its customers.
This business can partner with an insurance company and embed its insurance product into its offers, generating more revenue.
Challenges with embedded finance
Regulatory challenges
Offering financial services puts you on the radar of regulators. That means you have to play by the rules and regulations. Given Africa’s constantly changing regulatory landscape, this can be challenging for small businesses.
The level of regulation a business will face depends on the complexity of the financial service it provides. E-commerce platforms that embed a payment gateway to accept payments might not face regulatory scrutiny. However, platforms like Kora that provide core payment functions and other platforms that provide lending and insurance will do.
Data privacy and security
Platforms that provide financial services can access customers’ KYC information, funds, and other essential data. A leak or a security breach can devastate a business’s reputation.
That’s why it’s important to have strong cybersecurity measures and follow the industry data protection and security standards.
If you’re riding on a financial institution’s infrastructure, it’s essential to be sure they have the proper certifications and follow standards like PCI DSS and ISO.
Integration
Depending on the level of sophistication, embedded finance solutions can be challenging for businesses to deploy. That’s why it’s important for financial institutions that provide these services to have clear API documentation, making it easy for businesses to embed the tools on their platforms. To solve this challenge, financial institutions like Kora have no-code tools that make it easy for non-technical companies to access financial tools.
The future of embedded finance
Cash is still the preferred payment method for 90% of transactions in Africa.
This means that there’s a huge opportunity for businesses to use embedded finance to grow digital transactions.
The use cases for embedded finance are endless, so we project a future where products and payment tools are interconnected. It’ll bring people closer and people closer to businesses, not just in Nigeria but across Africa.
