Empowerment Infrastructure For Inclusive Finance
Rethinking Embedded Finance As An Everyday Infrastructure
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Han Wen (Vanessa) Chang
Smrti Ganesan
Aabha A. Kale
Shirin Navgire -
Mariela Sotomayor
Juan Francisco Cabana
Tomas Nalda
Embedded finance integrates financial services through the many digital interfaces and platforms now mediating socioeconomic transactions. Evolving beyond traditional banking models, embedded lending, payment, and investment functionalities now propagate across e-commerce, transportation, property, and other everyday domains via application programming interfaces (APIs). This embedding facilitates increasingly ubiquitous, convenient financial flows through multiple touchpoints in daily life. On one hand, embedded finance shows the potential to lower barriers and democratize access. Yet the streak of disruption also gives regulatory infrastructures pause to ensure financial digitization does not outpace protection. Ultimately, the depth and diversity of embedded financial tools demonstrate finance dissolving into the very circulation of routine activities that enable life and livelihood. Embedded finance therefore transforms relationships between finance, technology, and society in complex ways and lies at the intersection, making it an evolving everyday infrastructure that governs the way we spend our resources.
What is Embedded Finance? How is it an Everyday Infrastructure?
Embedded finance refers to financial services and products that are integrated into non-financial contexts, environments and transactions, transforming them into an infrastructure enabling the routine functioning of daily economic life. Evolving from traditional banking models, embedded finance represents the proliferation of financial services across diverse interfaces ranging from shopping platforms to ridesharing apps. Financial functionalities become seamlessly interwoven into the user experiences of such digital technologies via application programming interfaces (APIs) and other tools for integration. This embedding thus helps facilitate financial flows related to online payments, lending, investments and more in increasingly seamless and frictionless ways across multiple touchpoints in consumers' lives.
Partners
Credicorp is the leading financial services holding company in Peru, with a presence in Colombia, Bolivia, Chile, Panama, and the United States. It currently has consolidated universal banking insurance and pension platforms that serve all segments of the Peruvian population, complemented by a significant presence in microfinance, investment banking, and wealth management in Latin America.
Yape is a payment platform leveraging financial transactions for both individuals and businesses. It is a solution to address the challenges of a straightforward, rapid, and secure method of monetory transactions. It uses the cell phone number in your contacts, or a QR code of Yape, Visa, or Izipay. It is the most used app in Peru. As of 2023, Yape has played a pivotal role in promoting financial inclusion by extending its services to over 2.5 million Peruvians.
How did finance get here?
Advent of Fintech
2008-2009
The 2008 financial crisis led to a decline in trust in large financial institutions and created an opportunity for fintech startups to offer alternative lending, payments, and investment services.
+ Alternative Lending
2010-2012
Fintech lenders like LendingClub and Prosper pioneered online marketplace lending platforms to compete with banks in areas like unsecured consumer loans, student loans, and small business loans.
Rise of Neobanks
mid 2010’s
New challenger "neobanks" like like Chime, N26, and Revolut emerged, offering mobile-first checking and savings accounts without physical branches that have modern tech stacks focus on user experience, and offer product intergrtions.
Lending Commoditised
-2022
Point of sale lending and "Buy Now, Pay Later" (BNPL) providers like Affirm, Afterpay, and Klarna emerged, letting consumers finance purchases in installments over time. This embeds lending commoditizes consumer credit for e-commerce.
Embedded & BaaS
-2022
The idea of "embedded finance" has taken off with fintech startups providing "Banking-as-a-Service" (BaaS) solutions that enable companies to embed financial services into their own platforms. Using data and APIs this movement is revolutionizing finance, data and value exchanges.
Problem Space Analysis
In urban landscapes, embedded finance has become a commonplace feature. The establishment of a financial service platform, much like a bike-sharing station, introduces not only a new urban element but also acts as a nucleus for daily transactions. This creates an infrastructure imbued with specific protocols and rules, shaped by the collaboration of various organizations.
The activation of networks within this financial hub facilitates seamless mobile communication between users and the embedded finance service. Electronic payments, predominantly through credit/ debit cards, become a routine part of transactions. Simultaneously, the platform engages in surveillance to analyze usage patterns and monitors personal financial data. As organizations introduce new transactions through integrated offerings, they inadvertently set parameters that determine access to these financial services.
The reliance on credit card payments creates a discriminatory system. While providing easy access for credit card holders, it marginalizes individuals with limited or no access to credit and financial services. The design of the financial infrastructure may favor adults, neglecting families with children. The autonomous integration of offerings within these distributed ownership networks tends to replicate and amplify existing biases, reinforcing privileges, and inadvertently discriminating against specific demographics. The consequence is an unintended limitation of access, exemplified by families with children facing barriers due to the absence of credit access for utilizing embedded financial services.
Current System Dynamics Map
Hotspots Identified
1.
Lower levels of Financial Literacy
Financial systems grapple with knowledge gaps, biases, and conditions like low financial literacy, particularly among low-income individuals. Actions such as adding features without proper public education contribute to these issues.
Asymmetries within the system:
Lack of knowledge of personal finance
Advisory Tools/Resources to develop/ inform healthy financial habits
Assumption of Financial Literacy
Biases within the system:
Financial systems are often opaque and complex.
Conditions within the system:
Lack of financial literacy among low-income.
Actions within the system:
Adding features without the proper education of the public.
2.
Data Transparency and Literacy
In embedded finance, there are asymmetries, with agencies holding control over data. Biases emerge toward profit-centric data collection. Conditions like privacy concerns hinder widespread adoption due to security apprehensions.
Asymmetries within the system:
Agency with abilities in control and ownership of data.
Biases within the system:
Bias toward Data Collection for profit.
Conditions within the system:
Data privacy and security actions can deter individuals from adopting embedded finance.
3.
Gender Inequality
In embedded finance, a gender gap persists, limiting financial access for women. System biases favor the mainstream user base, and conditions create hurdles for women and gender minorities to access credit. The system inadequately tailors products for diverse populations, perpetuating financial disparities.
Asymmetries within the system:
Prevalent gender gap due to the lack of access to financial services.
Biases within the system:
Bias towards mainstream user base
Conditions within the system:
Limited access to credit or financial services for women/gender minorities.
Actions within the system:
Failure to tailor products for diverse populations.
4.
Creditworthiness asymmetries
Embedded finance exhibits asymmetries in credit access and financial complexity. Biases favor the mainstream user base, excluding specific incomes or professions. Negative credit-building behaviors persist, and predatory alternative financial services thrive. The system fails to educate the public on credit, perpetuating disparities.
Asymmetries within the system:
Ability to build creditworthiness and get credit as the financial system is often opaque and complex.
Biases within the system:
Bias Toward Mainstream User Base.
Bias against Users with only particular incomes/professions.
Conditions within the system:
Bad credit-building behaviours.
Alternative financial services that are predatory.
Actions within the system:
Not helping the public understand the credit system.
Are we empowering every financial user?
Addressing Asymmetries, Biases, and Improving Conditions
Need for Intervention
1. Addressing Asymmetries:
Interventions are crucial to rectify information and power imbalances within the financial system, ensuring fair access and control over personal financial data.
“21% of Latin America still remains excluded, and the use of more advanced products like credit, investments, insurance, and e-commerce is still underpenetrated.”
2. Mitigating Biases:
Interventions should aim to reduce biases, making financial systems transparent, unbiased, and accessible to diverse user groups.
“Due to a lack of trust in technology, 25% of survey respondents would prefer to open a bank account in person as opposed to via mobile or using a computer.”
3. Improving Conditions:
Interventions must focus on enhancing financial literacy, especially among marginalized groups, to create a more inclusive and equitable financial landscape.
“According to a consumer survey, 84% of respondents believe that access to financial education helps or would help them improve their personal finances, but the majority of Latin Americans have not received any training, guidance, or assistance in the past (less than 50% in any market) on how to manage their money.”
4. Regulating Actions:
Interventions are needed to regulate the introduction of features and services, ensuring they align with ethical practices and user education.
“The gap in credit access creates a huge opportunity for innovation, and the industry—along with regulators—must be vigilant about consumer credit protections so that what is being offered is sustainable and leads to financial well-being.”
Awareness and Advocacy:
Leaders and influencers driving awareness for equitable finance.
“According to the survey by WallStreetZen, 76% of Gen Z admit to turning to platforms like TikTok, YouTube, and Reddit for financial education.”
“For example, in Brazil, neobank N26 is establishing the notion of fincare, the idea that financial service providers should help customers understand how to get more value out of their financial products.”
Drivers for Change
Policy and Regulation:
Governments enact policies to foster fairness, security, and accessibility.
Latin Americans’ relationship with money and finance has dramatically changed since COVID-19, and the primary shifts were their adoption of mobile financial services and their reduction of cash use. This has been achieved via the government paying assistance benefits digitally, the improvement in the user experience of digital financial services, and the implementation of interoperable payment schemes that have made digital payments, especially P2P, easier, faster, cheaper, and more accessible.
1.
Embedded Finance & Financial Inclusion
By providing equal access to financial services for all segments of the population.
Goals
2.
Increase Financial Agency
By equipping people with financial literacy - the education, knowledge, skills and awareness to manage money flows and make sound personal finance decisions that enable shaping one’s economic future.
3.
Support Financial Empowerment
By giving customers more control over their financial lives through ongoing financial education, personalized products designed to adapt to emerging user needs, and data insights that expand opportunities for financial agency.
Macro Level
Opportunity Areas
Embedded Financial Literacy
Integrate personalized financial training, insights, and two-way support directly into account services and transaction flows.
Data patterns used for and by users
Provide people more control over shared data, insights into implications, and guidance to make informed consent choices that protect their interests.
Developing user controls for goals or hurdles
Meet users where they are across life stages and needs with tools and recommendations tailored to their individual situations for sustained daily empowerment via financial mentors accessible on the same platform.
Proposed Archetype
User needs focused
Current Capabilities
User research-driven
Co-designed solutions
User-type focused solutions
Embedded in daily lives
Intuitive tools
Responsible nudges
Automated actions
Seamless integration
Partnerships for products
Spending insights
Cash flow visibility
Cross-pollinated Data
Data from all stakeholders
Alternative scoring
Open infrastructure
Security & Protection
Financial Knowledge
Proposed New Capabilities
Tailored contextual knowledge building
Building confidence through trial tools
Foster positive behavior change
Transparency
Better insights based on personal patterns
Building confidence through trial tools
Ownership and access to data usage
User Controls
Fair eligibility
Access to trial tools to build confidence
Enable financial empowerment
How might we align these opportunity spaces with goals?
Developing possible strategies and tools to address these goals.
By gamifying financial literacy within the app, Yape can equip teens to make wiser money choices as young adult consumers. Partnering with schools turns key topics like budgeting and investing into entertaining and achievable challenges to develop a future where financial acumen is the norm.
Gamified Literacy Tools for Youth
Digital Identity as Financial Passport
Yape can empower the underbanked to self-report and track their financial data into a secure digital identity - a dynamic passport revealing financial credibility over time. With user controls it could be an open platform that enables permissioned data sharing to sustainably graduate financial access. This digital portal represents a powerful option for converting unbanked to digital opportunities.
Yape allows self-customized financial bundles syncing investing, insurance and credit services, lifestyle needs, and advisory into existing digital routines like bill pay and expense tracking - simplifying money management through an intuitive subscription model enhancing modern lifestyles.
Personalized Subscription Bundles
Features
Interactive Budgeting Simulators
Allow consumers to model different budgeting strategies through engaging “sandbox” interfaces reflecting their real finances. Build financial judgment.
Interactive
Planners
Interactive analyzers and planners with personalized budgets, benchmarking habits against peers, and adjusting goals through a platform that analyzes outflows and inflows to improve & motivate money management.
Personalized
Options
Offer self-customized bundled digital financial service packages - payment plans, credit, insurance, investing tools, etc. Simplify through one subscription model adaptable to consumer life stages.
Embedded Savings Nudges
The app uses behavioral prompts to encourage regular incremental transfers to savings accounts or investment vehicles aligned with the user's cash flow patterns and goals. Develops saving habits.
Cash Flow
Calendars
Users directly manipulate future income/expenses in a calendar view to visualize and optimize cash flow around goals. Builds financial planning skills.
Data usage and sharing controls
Users decide which pieces of financial data & profiles and connect other instrument data for visibility to maintain privacy comfort levels while still enabling personalized services with informed consent.
