Embedded Finance: Beyond the Frontiers of Small Business Banking

Embedded Finance or EMFI, is the consequential yet understated revolutions infusing fresh life across banking and retail categories. Unlike traditional banking, which is accessed through defined institutional interfaces, embedded finance brings financial services to users where they already are—on e-commerce apps, fintech platforms, payment gateways, and even retail portals. While it could unlock a significant economic bumper, it has propensity to spark the SMB (Small Medium Business) lending space. 

Take, for example, a small trader in Nashik who might not have a formal credit score but maintains impeccable inventory and order data via a mobile-based logistics app. Or a homemaker in Jabalpur who lacks a demat account but routinely tops up her mobile wallet. These are credible financial participants. Embedded finance, when supported by smart data models and inclusive policy, can translate such behavioral signals into real financial access.

EMFI: A PIONEERING USE-CASE FOR MSMEs 

The momentum in EMFI is just beginning. Globally, the embedded finance market is projected to exceed $7 trillion by 2026. For India, where digital public infrastructure like Aadhaar, UPI, and Account Aggregators are already in place, this creates fertile ground for rapid adoption.

Case-studies where EMFI strategies have been adopted indicate growing relevance for BFSI ecosystem. A McKinsey report found that top-performing banks in Western Europe generated over 30% higher revenues per SME customer than their competitors. Accenture, in its report has projected that embedded banking for SMEs could capture up to 26% of global SME banking revenue by 2025 and expand the overall SME banking market by up to $92 billion. A BCG report found that EMFI was a huge $320-billion revenue market by 2030. 

According to McKinsey, the market for embedded finance has been so huge that payment volumes in Europe grew three times as fast as directly distributed loans in the decade to 2023. There is also a strong consumer demand for these rising volumes. A BCG report found that 64% of SMBs were likely to scout for an embedded financial service in their platform of choice. This means if an SME customer were looking at a trade portal for a machine; they could be equally interested for a financial scheme such as a BNPL (Buy Now Pay Later) or a Structured Credit Scheme or a business loan to acquire that machine.

Globally, over 72% of SMEs accessing finance via embedded solutions reported a positive experience, compared to 57% using conventional channels. This proves that embedded leads can be up to 20% more cost-efficient than traditional sourcing methods. This is a game changer, especially in a market where acquisition cost and time to decision have often been bottlenecks to scaling credit.

SCALE VS RELEVANCE

This narrative is not just about scale—it is also about relevance. India’s financial services ecosystem has often struggled with two seemingly opposing challenges: over-penetration in urban, affluent markets and under-penetration in rural or semi-formal ones. Embedded finance, by design, narrows this gap.

Previously, embedded finance was an abstract concept but today is an indispensable tool to better lending. Several examples such as the tax agency’s use-case of APIs (Application Programming Interfaces) indicates how a frictionless journey can be setup. More recently, a real-estate portal has offered its users the ability to seamlessly manage their payments (monthly rents and maintenance charges) from within the app and the website. From a trade finance perspective, some banks have the ability to view information far-superior than just balance sheets and cash-flow statements to proactively lend better. 

Although there are countless examples indicating how a good Embedded Finance journey can be setup, building a frictionless journey is only easier said than done. Questions of data privacy, ethical AI, consumer protection, and regulatory compliance remain central. The solution is not to retreat from innovation, but to embed guardrails—clearly defined protocols for consent, explainability, and risk containment. Encouragingly, new frameworks like the RBI’s digital lending guidelines and the DPDP (Digital Personal Data Protection) Act are beginning to provide a balanced foundation.

MORE CATCHY LESS CATCH 

Until some years ago, EMFI was perceived as a convergence of a handful of new-age technologies and entities. Today, this embedded model aligns well with how younger generations consume services—on-demand, seamless, contextual, and hyper-personalized. India is also uniquely positioned to lead this EMFI movement with her 800 million internet users and 500 million smartphone owners, and a government committed to financial inclusion. What remains is for institutions—banks, fintechs, NBFCs, and regulators—to align around this shared opportunity.

Embedded finance can be taken a step further by leveraging decentralized financing or P2P lending and even asset tokenization. Additionally, smart contracts could further democratize access to capital. While we innovate around EMFI, it gets important to acknowledge expectations and stay grounded. Ultimately, embedded finance is not a silver bullet. It may not be able to eliminate all systemic inefficiencies, but it does offer a credible pathway to scale inclusion, enhance competition, and foster a user-centric financial ecosystem.

Our goal therefore should be to ensure every creditworthy business, regardless of geography or scale, has a viable path to growth—and that every Indian saver has access to a broader, safer, and smarter set of financial choices. After all, this is not just a financial imperative, it could be a national one.

By Mr. Rohit Arora, CEO and Co-Founder, Biz2X and Biz2Credit