Embedded finance aims to simplify transactions and improve customer experience.

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The Philippine e-commerce landscape has significantly emerged since the COVID-19 pandemic hit the world, as consumers turned to online shopping to meet their needs and desires.

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Despite e-commerce and digital services not being the most accessible to the Philippines in the previous years, the Philippines have recently adapted and caught up to its Southeast Asian counterparts in terms of employing digital channels in the retail industry.

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A research by e-commerce company iPrice Group, in collaboration with app analytics platform App Annie and web analytics services SimilarWeb, revealed that the Philippines experienced the highest increase in the usage of shopping apps (53%) in Southeast Asia since Q2 2020.

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At the same time, the country also saw the largest increase in basket size (57%), compared to neighbouring countries, since the pandemic hit.

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The upward trend seen from these activities poses challenges to the Philippine retail industry, which includes the need to revamp traditional retail strategies and to cope with shifts on consumer behaviours.

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This is what embedded finance aims to address.

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Simplifying transactions through embedded finance
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Embedded finance aims to improve customer experience through a seamless integration of banking, payments, or credits in a transaction. This comes as the recent years see customers’ preference for convenience and ease in their shopping experience.

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According to Vishwas Mysore, CredoLab senior director for global presales and solution consulting, improved customer experience just follows as a consequence of implementing embedded finance, as simplification of the transaction process is its core.

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“It is as simple and intuitive as the embedded advertising on social media and search of yesterday, and the embedded retail on social media of today,” Mysore added.

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A report by private equity firm Lightyear Capital shows that the embedded finance market is expected to increase tenfold from $22.5b in 2020 to $230b in 2025.

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The model is commonly seen in online marketplaces such as Lazada and Shopee, specifically on the checkout page.

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Mysore mentioned that embedded card payments are made available through ShopeePay or through options to pay via credit or debit cards. Whilst, mobile wallet app GCash is also available on Lazada, along with buy now pay later (BNPL) options such as Cashalo and BillEase. For merchants, there is Shopify, an embedded banking which provides sellers easy revenue management on their own platform.

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Mysore also noted that despite embedded finance’s seeming acceleration in the Philippine retail market, there are still gaps that need to be addressed, amongst which is the issue of shopping cart abandonment for e-commerce merchants.

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A report by market data firm Statista found that in March 2020, 88% of shoppers around the world abandoned their carts on a retail platform. The reasons for doing so range from needing more time to mull over a purchase, changing one’s mind about the purchase, to simply not having the preferred mode of payment.

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Mysore mentioned that alternative payment options, as well as credit lines like a BNPL purchase or an equated monthly installment (EMI) purchase, have significantly reduced cart abandonment.

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However, he stated that implementation is key to solving such problems.

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“Security issues, development costs, down-time and other issues make businesses hesitant to delve into newer more robust payment options. And underwriting credit is an unknown risk for retailers and non lenders. Embedded credit needs embedded scoring and this is where a partnership with fintech companies like CredoLab would be integral to implementing an embedded finance solution,” Mysore said.

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Making credit more accessible

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CredoLab’s embedded scoring solution takes a fresh approach to risk, as it harnesses smartphone metadata to provide highly predictive risk insights with a protective approach to personal data.

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“Through our machine learning algorithms, we convert non-personal digital footprints into a powerful credit score that can identify the customers who have the willingness and ability to repay,” Mysore said.

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He added that by providing embedded scoring to neobanks, digital fintech lenders, P2P platforms, market aggregators, BNPL, and e-wallets, CredoLab modernises its approach to lending as they make risk assessments more accurate, reliable, and secure.

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“By working with these industries, we’re enabling more Filipinos access credit for consumption, lifestyle, or business,” Mysore said.

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Revamping traditional retail strategies

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Embedded finance benefits both customers and e-commerce businesses in terms of ease and convenience.

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For customers, ease of payment is one of its biggest advantages as it “creates a frictionless checkout experience, allowing customers to pay by whichever method they would prefer.” BNPL options also encourage responsible spending by allowing customers to spread out their spending to meet their monthly budgets.

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On the other hand, embedded finance can help e-commerce businesses by reducing its customer turnover at the checkout stage through streamlining customer experience.

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“With far fewer carts abandoned and improved customer experiences, businesses can benefit from higher conversion rates, revenues, and customer loyalty in the long run. Embedded finance can also help small business owners easily manage their revenue and minimise customer acquisition costs,” Mysore said.

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With the Philippines having the largest increase in online shopping since the pandemic, the online first way of shopping has accelerated. Embedded finance has made online shopping more accessible for Filipinos with little to no credit history as it streamlines processes and allows multiple methods of payment.

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Businesses are now compelled to adopt such a paradigm as banking and financial services in the Philippines are shifting online, and this is transforming the way consumers pay or sign up for credit.

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“Store credit is being replaced by credit cards and BNPL on the consumer side and P2P lending platforms and aggregators and marketplaces on the business side,” he said.

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Since consumers are vetting for a more convenient and personalised shopping experience nowadays, giving them multiple embedded payments can accelerate the overall process as it allows them to skip dealing with third-party vendors for transactions.

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“Consumers today are also more inclined to spend responsibly, given that many have been affected financially by the pandemic. Having BNPL options takes away the pain of making big purchases by spreading these out into smaller portions,” Mysore added.

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He also mentioned that e-commerce businesses can also work with embedded finance solution providers like CredoLab to offer lucrative payment options at controlled risk.

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“CredoLab specialises in alternative credit scoring, which can open up doors to Filipinos with little to no credit history. This will allow businesses to not only reach a wider pool of consumers, but also focus on their core business strategy while credit risk is controlled by means of embedded credit scoring,” he said.

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Embedded finance ‘still in infancy’

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Despite the growing trend on the use of embedded finance, it is still in its infancy. E-commerce businesses would have to convince more Filipinos to choose these solutions over cash, as the Philippines has the lowest banking penetration in Southeast Asia.

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A 2019 survey conducted by the Bangko Sentral ng Pilipinas found that around 51.2 million Filipinos were unbanked.

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“More Filipinos have opened up bank accounts since the pandemic hit to receive government cash assistance. It is only natural that as more Filipinos use their smartphones to access their bank account or pay for shopping or utility payments, fintech and embedded finance will grow exponentially in the near to medium term,” Mysore said.

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Nevertheless, embedded finance is going to be present in other sectors such as banking, investments, and insurance. Mysore also believes that the Philippines will adopt the paradigm on a wider scale in the coming years, especially as the Philippine government continues to push for a cashless society.

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“By working with financial services providers and e-commerce platforms themselves, we’re hoping to help increase financial independence and empowerment in the Philippines through our alternative credit-scoring solutions,” he said.

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This interview originally appeared in Retail Asia.