Embedded finance (EmFi) has been one of the most hyped financial technology topics of the past two years and is estimated to reach revenues of US $7.2 trillion by 2026. Essentially the placement of a financial product in a nonfinancial customer experience, journey, or platform, EmFi is transforming the way customers approach areas such as banking, payments, lending, wealth management and insurance.
While EmFi’s focus is often on payments and lending, there is a lesser-known side of the trend: embedded savings. Despite the possibilities, which are wide-ranging and largely untapped, embedded savings has yet to receive its share of recognition and attention. This needs to change.
What is embedded savings?
As embedded savings continues to gain momentum, it is essential to understand its fundamentals. It encompasses a wide array of products and services, from traditional savings accounts to cutting-edge, micro-saving solutions that allow customers to regularly save small amounts of money. These include:
- Automated savings, allowing individuals to put money aside without having to actively think about it or make manual transfers.
- Round-up savings, rounding up transactions to the nearest whole unit and automatically transferring the difference into a savings account. This means individuals can accumulate a balance without even realizing it.
- Social savings, bringing together individuals to save toward a selected common financial goal, harnessing the power of community and peer pressure to encourage people to save more.
- Behavioral savings, leveraging psychology and behavior-change theories to encourage customers to save more, such as through gamification and nudge theory.
- Save now, buy later (SNBL), allowing customers to save for desired items in small increments, optimize their cash flow, lock in deals, and avoid borrowing.
The market is now witnessing the rise of specialized companies dedicated to seamlessly embedding these solutions into businesses’ journeys, providing customers with a new realm of opportunities to achieve financial stability and growth.
Rising inflation, declining trust in banks and the growth of fintechs all mean that consumers are becoming more open to these non-traditional options. Technology platforms make it easier for them to embrace new ways of saving and managing their money.
The customer benefits of embedded savings products are clear. For example, a recent study from the UK found a significant increase in savings participation from the integration of automated savings into payroll, which soared from just 1.3% to an impressive 52.6%. This highlights the effectiveness of embedded savings in encouraging individuals to save and take control of their financial well-being, while creating new opportunities for non-financial organizations.
Incorporating embedded savings within business models
A wide range of businesses can benefit from embedding savings into their offerings, supporting their customers, creating greater brand engagement, and opening up new revenue streams. These include sectors such as:
- Luxury goods. Setting aside the money to buy luxury items can be challenging. Enabling consumers to automatically save small amounts of money on a regular basis increases the chances of them being able to purchase luxury items, increasing sales for brands.
- Retail. Retailers can enhance customer loyalty through micro-savings programs. For example, a clothing retailer could enable customers to automatically set aside a small amount each time they make a purchase, saving for bigger ticket items and creating loyalty.
- Travel. There are clear applications for the travel industry, with micro-savings plans allowing customers to automatically save for trips on a monthly basis or when they make a purchase. Again, this boosts loyalty and repeat business.
- Health and wellness. A health and wellness company could introduce a savings plan to encourage customers to lead healthier lifestyles by offering incentives for reaching predetermined objectives, such as completing exercise or regularly working out at the gym.
- Home and car ownership. Big ticket items such as homes and cars are natural candidates for embedded savings. As well as enabling automatic savings towards the target amount, customers could be offered discounts when purchasing adjacent services (such as insurance) if these are bought through the savings program, encouraging loyalty.
- Retirement savings. Financial services and insurance companies can offer micro-savings plans for retirement saving. These could be integrated with existing products, such as investment services, and would facilitate saving small amounts and managing retirement funds over time.
- Energy and utilities. A utility provider can encourage customers to reduce consumption by introducing a micro-savings feature. Whenever the customer saves energy — through using energy-efficient appliances or turning off unneeded lights, for example — the provider will automatically place the difference between the energy saved and their average usage into a savings account. This creates a tangible incentive for customers to conserve energy, while helping utilities hit their energy reduction targets.
The transformational potential of embedded savings
Offering embedded savings products is an effective approach for businesses that wish to provide their customers with opportunities to increase their financial well-being, while boosting engagement and loyalty. It has the potential to transform the financial services industry by providing individuals with new ways to save and invest and presenting businesses with new sources of revenue.
While embedded savings can be a great opportunity for businesses, it’s essential for them to ensure that their programs are transparent, comply with regulations, and protect the interests of all stakeholders. This includes the customers, retailers, banks, investors, and regulators.
Overall, embedded savings is a win-win situation for businesses and customers alike. By expanding to offer these services, businesses can provide their customers with a better customer experience, increase customer loyalty, and earn revenue from new sources. Customers appreciate options to save money in a convenient and accessible way that could result in faster achievement of goals.
In today’s fast-paced, technology-driven world, businesses have a unique opportunity to integrate embedded savings into their customer journeys and reap the accompanying benefits. It is time for businesses to make the most of this approach and share with their customers a new way to save and invest.
