Embedded finance refers to the seamless integration of financial services or products into non-financial company’s platforms or applications. This innovative model has gained popularity worldwide due to its potential to provide a frictionless user experience. Major companies like Uber, Amazon, Apple, and Tesla have successfully adopted this model, leveraging various advantages, significantly generating revenue for service providers and banks by offering differentiated financial products to new customers. According to ‘Research and Markets,’ a global leader in market research, the embedded finance opportunity in Bangladesh is projected to reach approximately US$817.10 million by 2024, with an impressive annual increase of 28.5%. This growth trajectory is expected to sustain a compounded annual growth rate (CAGR) of 48.0% from 2024 to 2029, leading to an expansion worth US$5.80 billion by the end of this period.
Scope for Financial Inclusion and Market Expansion: Embedded Payments
The Concept of Embedded Payments
Embedded payments integrate financial capabilities directly within the user’s current environment, such as an e-commerce platform, ride-hailing app, or social media marketplace. This approach negates the need for users to redirect to separate payment gateways or banking applications, making transactions much more seamless. Despite the huge potential for growth in this area, Bangladesh’s economy, which is driven by around 6 million SMEs and a burgeoning middle class including approximately 5 million Gen Z individuals, has not yet fully tapped into the potential of embedded payment infrastructure due to process and policy gaps.
Embedded payments can significantly enhance user convenience and drive the adoption of digital transactions. As users become more accustomed to making payments directly within their favorite apps or platforms, the overall efficiency of financial transactions increases. For instance, rather than redirecting to a bank’s website or a third-party payment service, users can complete their purchases with a single tap. This vastly improved user experience can lead to higher transaction volumes, benefiting both businesses and consumers by streamlining payment processes. This model aligns with successful implementations in neighboring countries where integrated payment solutions have become a norm, significantly boosting the digital economy.
Current Landscape and Potential for Growth
Currently, platforms such as bKash and Nagad have succeeded somewhat in integrating their payment systems into various applications. Despite these efforts, the majority of digital transactions in Bangladesh still rely heavily on standalone payment applications or traditional banking channels, highlighting a significant opportunity for further growth in the adoption of embedded payments. Success stories from neighboring countries like India, Indonesia, and Vietnam provide valuable insights into the benefits of embedded payments. India’s Unified Payments Interface (UPI) has enabled seamless payments across numerous platforms, while Indonesia’s platforms like Gojek and GrabPay have driven substantial growth in their respective digital economies with similar demographic characteristics.
Vietnam, in particular, offers a relevant case study with the successful integration of embedded payments into social commerce platforms. By 2022, over 45% of Vietnamese consumers were using embedded payment solutions in social commerce, making it a global leader in technological integration. Encouraging social commerce platforms in Bangladesh to integrate payment functionality could significantly accelerate the adoption of digital payments. With the country’s high social media penetration rate, such a model could yield exceptionally promising results. By enabling users to make purchases and complete transactions directly within their favorite social media apps, embedded payments could remove many of the barriers currently preventing consumers from engaging in the digital economy.
Regulatory Environment and Future Prospects
Bangladesh Bank is gradually fostering a supportive regulatory environment for digital payment innovation. The introduction of the National Payment Switch Bangladesh (NPSB) and the regulatory sandbox for fintech innovations have laid the essential foundation needed to expand embedded payment solutions across the country. Despite these efforts, several challenges related to infrastructure readiness, regulatory compliance, and merchant adoption remain. To replicate the successes seen in other countries, Bangladesh should focus on developing robust API infrastructure to facilitate easy payment service integration. Moreover, creating clear regulatory guidelines that balance the need for security with allowing for innovation is crucial to fostering growth in this sector.
Incentivizing merchants and digital platforms to adopt embedded payment solutions is another critical step. By reducing transaction fees and simplifying onboarding processes, more businesses can be encouraged to integrate these solutions into their systems, ultimately boosting the overall adoption rate. The mobile-first nature of Bangladesh’s internet users presents a significant opportunity since embedded payments can be naturally integrated into the apps and services that consumers use daily. This alignment with successful implementations in countries like Indonesia and Vietnam, where mobile-based embedded payments have driven notable financial inclusion, could significantly propel financial inclusion and market expansion in Bangladesh.
Access to Risk Minimization: Embedded Insurance
The Insurance Landscape in Bangladesh
In Bangladesh, the insurance industry currently comprises 81 companies, including 35 life and 46 non-life insurance firms, serving approximately 18.97 million customers. Life insurance companies hold a significant market share at 74%, while non-life insurance companies constitute the remaining 26%. Another notable service in this sector is Bancassurance, which integrates banking and insurance services. Despite its global significance, the insurance sector remains underdeveloped in Bangladesh, struggling to gain widespread popularity among the population.
Many individuals are either unaware of or distrustful of traditional insurance products due to a lack of understanding and negative past experiences. This underdevelopment highlights the need for innovative solutions that can embed insurance services within more frequently used non-financial platforms. By introducing insurance products seamlessly into day-to-day transactions, awareness and trust can be built, facilitating higher adoption rates. For example, integrating insurance offerings into existing banking apps or popular e-commerce platforms could help demystify insurance services for the general public, encouraging more people to secure their assets and financial well-being through insurance.
Potential of Embedded Insurance
Embedded insurance represents significant potential for transforming the insurance landscape in Bangladesh. By allowing customers to avail insurance products concurrently with the purchase of primary products from non-financial companies, this model could revolutionize sectors ranging from consumer products, travel & hospitality, healthcare, real estate, to transport & logistics. The key benefit for customers lies in the convenience of not having to approach insurance providers separately, as they can secure insurance services right when they need them. This integrated approach simplifies the user experience and encourages higher adoption of insurance products.
Implementing embedded insurance can also drive growth in various sectors by offering additional security and peace of mind to consumers. For instance, the purchase of high-value consumer electronics could be accompanied by embedded insurance, protecting the buyer against potential damages or losses. Similarly, travel platforms could integrate travel insurance during the booking process, ensuring travelers are covered for unforeseen events. This approach not only enhances customer satisfaction but also creates new revenue streams for companies that offer embedded insurance solutions.
Opportunities for Growth and Innovation
As of November last year, 6.20 million motor vehicles were registered in Bangladesh, with ongoing registrations indicating a growing market. Implementing embedded insurance for motor vehicles would not only simplify the motor insurance process for customers but also increase government revenue through higher compliance rates. Real estate is another sector that could benefit from embedded insurance. Partnerships between real estate brokers and insurance providers could offer bundled insurance products for property buyers, protecting their investments and encouraging more people to venture into the property market.
E-commerce platforms selling wellness products also have an opportunity to integrate life and health insurance at the point of sale, further embedding insurance into everyday transactions. Moreover, travel booking platforms could incorporate travel insurance during the booking process, ensuring every traveler is protected. These opportunities illustrate the extensive potential for growth and innovation within the embedded insurance domain in Bangladesh, fostering greater financial inclusion and risk minimization. By leveraging embedded insurance, companies can provide added value to their customers, enhancing their overall experience and contributing to a more secure and thriving economy.
Expansion of Digital Lending: Embedded Lending
The Concept of Embedded Lending
Embedded lending involves integrating lending services directly into non-financial platforms or applications, transforming conventional lending into digital solutions that use artificial intelligence (AI) technology for a more inclusive financing approach. AI-driven digital credit scoring is used to assess eligibility for loans and identify repayment capacities, employing various data components such as personal information, financial structure, and credit history. By incorporating these insights, the digital lending process is significantly enhanced, making it more accessible and efficient for borrowers.
Digital lending covers a wide range of services, including retail loans, credit cards, and Micro, Small, and Medium Enterprise (MSME) loans, all facilitated by digital banks worldwide. This tech-driven method has reshaped the traditional financing landscape by harnessing data to provide personalized lending solutions. One of the primary assets of this approach is the vast amount of data available, enabling lenders to conduct precise credit scoring and offer tailored loan products that meet individual borrowers’ needs.
Benefits of Digital Lending
Currently, platforms like bKash and Nagad have had some success integrating their payment systems into various apps. However, most digital transactions in Bangladesh still predominantly rely on standalone payment apps or traditional banking methods. This reveals a significant opportunity to further grow and adopt embedded payments. Success stories from countries such as India, Indonesia, and Vietnam provide compelling insights into the advantages of embedded payments. India’s Unified Payments Interface (UPI) has created seamless transactions across numerous platforms, while Indonesia’s Gojek and GrabPay have bolstered the growth of their digital economies with similar demographic profiles.
Vietnam presents a particularly relevant example, with successful implementation of embedded payments in social commerce platforms. By 2022, over 45% of Vietnamese consumers were utilizing these payment solutions, establishing Vietnam as a leader in tech integration. If social commerce platforms in Bangladesh integrate similar payment functionalities, it could greatly enhance the adoption of digital payments. Given Bangladesh’s high rate of social media use, this approach could lead to highly promising outcomes. By allowing users to make purchases and complete transactions directly within their favorite social media apps, embedded payments could remove many obstacles currently discouraging consumers from participating in the digital economy.