In recent years, embedded finance has emerged as a transformative force in the financial services industry, rapidly reshaping how individuals and businesses—particularly micro, small, and medium enterprises (MSMEs)—access credit. By integrating financial services directly into nonfinancial platforms and workflows, embedded finance is creating new pathways for financial inclusion, enabling underserved segments to access credit in ways that were previously unimaginable. This shift is not only redefining traditional lending models but also challenging the role of conventional credit information systems.
While market size and growth estimates vary, the global potential of embedded finance is measured in trillions of dollars in transactions and hundreds of billions of dollars in provider revenues.
What is Embedded Finance?
Embedded finance refers to the integration of financial services—such as payments, lending, insurance, and investments—into nonfinancial platforms, marketplaces, and workflows. For example, e-commerce platforms like Hepsiburada and Mercado Libre offer working capital loans to merchants, based on their sales and revenue data. Similarly, Buy Now, Pay Later (BNPL) services allow customers, be they individuals or small businesses, to access credit at the point of purchase, often without the need for traditional credit checks.
The World Development Report 2022: Finance for an Equitable Recovery, highlighted how embedded finance leverages contextual information from transactions to mitigate credit risk. By linking lending directly to underlying economic activities—such as inventory purchases, utility bill payments, or crop planting—lenders gain greater visibility into borrowers' financial behavior and repayment capacity. This contextualized approach may motivate the embedded finance lender to take on credit risk that a traditional lender would not, in order to facilitate, and generate additional revenue for, the core business.
The Financial Inclusion Potential of Embedded Finance
For MSMEs, access to credit has long been a challenge due to limited collateral, lack of formal credit histories, and high costs of borrowing. Embedded finance addresses these issues by leveraging alternative data—such as transaction histories, sales performance, and supply chain activity—to assess creditworthiness. Platforms like Shopify, Alibaba, and Mercado Libre use these data to offer tailored financing solutions to merchants, enabling them to grow their businesses without relying on traditional banks.
For individuals, embedded finance solutions like BNPL and merchant cash advances provide access to credit at the point of need, often with simplified application processes and automated repayment mechanisms. This is particularly beneficial for consumers in emerging markets, where traditional credit infrastructure may be underdeveloped.
The Rise of Alternative Credit Information Ecosystems
One of the most significant implications of embedded finance is its potential to create an alternative credit information ecosystem outside that of traditional banks and credit bureaus. Historically, credit bureaus have relied on formal financial data—such as loan repayment histories and credit card usage—to assess creditworthiness. However, this model excludes millions of individuals and MSMEs who lack prior access to formal financial services. Embedded finance platforms generate rich datasets from high-frequency transactions, supply chain activities, and other customer interactions. These alternative data from within the platform can provide a more nuanced and dynamic view of borrowers' financial behavior, enabling lenders to make accurate credit decisions. Platform providers with access to such data often have better visibility into credit risk than traditional lenders.
However, the expansion of lending based on alternative data creates challenges. If embedded finance ecosystems operate in silos or within the “walled garden” of a particular platform, borrowers may face difficulties in building a comprehensive credit profile that is recognized across platforms and by traditional lenders. Fragmentation of credit information ecosystems means that lenders may not have visibility into all the different forms of indebtedness of potential borrowers. To address this, there is a need to link new and traditional credit information ecosystems through open data frameworks.
Modern approaches to data privacy, which vest ownership of data with the data subject, can facilitate this. Historically, credit bureaus and financial institutions have controlled borrowers' credit data, often without their explicit consent. However, emerging privacy regulations—such as the General Data Protection Regulation (GDPR) in Europe and similar regulations being adopted in other markets—are increasingly conferring ownership of data to the data subject.
Source: CNIL. Data protection around the world. Recreated by WBG.
This paradigm shift is an application of Coase Theorem: conferring property rights to enable a more efficient outcome. In this case, broader use of data as a non-rivalrous good (i.e., one that can be consumed by one user without reducing the ability of another user to consume it as well) can improve the welfare of data subjects by enabling them to choose which providers of financial or other services can access their data regardless of its source.
Linking privacy regulations with data ownership empowers digital platform users to control how their data are shared and used, enabling them to leverage their transaction histories and other data outside the “walled garden” ecosystem of a single platform.
Policy Implications: Building a Connected and Inclusive Credit Ecosystem
The rapid growth of embedded finance presents both opportunities and challenges for policymakers. While access to finance is broadening, where the relevant data, and even the existence of the loan, stay within each platform, the inclusive impact may be limited and systemic risks stemming from lack of transparency on borrower indebtedness may increase to maximize financial inclusion potential while mitigating risks, regulators should focus on creating a connected and inclusive credit information ecosystem.
1. Enable Embedded Finance
Modernizing the regulatory frameworks for nonbank finance to encourage the development of fintech and embedded finance, and re-examining competition and regulations that might affect core value propositions of embedded finance such as product tying. (See Fintech and the Future of Finance p. 54) Embedded finance may require not only the expansion of the regulatory perimeter but also an expanded perimeter of regulators including those covering finance, consumer protection, competition, data/privacy, and telecommunications, as well as the specific industry in which an embedded finance player may be operating. (op. cit. p. 71)
2. Broaden the Range of Credit Information Reporting Entities
Policymakers should broaden credit reporting requirements to include innovative lenders, and encourage the adoption of open data frameworks that enable interoperability between traditional and alternative credit information systems. By broadening the range of reporting entities to include embedded finance platforms, e-commerce marketplaces, and other nonbank lenders, regulators can ensure that borrowers' credit profiles are comprehensive and portable. (See ICCR Guidance Note “Use of Alternative Data to Enhance Credit Reporting to Enable Access to Digital Financial Services by Individuals and SMEs Operating in the Informal Economy” (2018), Recommendation 9)
3. Modernize Privacy Regulations to Confer Ownership to the Data Subject
Regulators should implement privacy laws that give borrowers control over their data, enabling them to decide how their information is shared and used. This approach not only protects borrowers' rights but also facilitates the creation of a transparent and trustworthy credit ecosystem. (See ICCR Guidance Note, Recommendation 15)
Conclusion
Embedded finance is revolutionizing the way individuals and MSMEs access credit, leveraging alternative data and contextualized lending models to drive financial inclusion. By integrating financial services into nonfinancial platforms, embedded finance is creating new opportunities for underserved segments to participate in the formal economy. However, this transformation also challenges traditional credit information systems, necessitating the development of interoperable data ecosystems.
By encouraging open data frameworks and creating an inclusive credit information sharing ecosystem, policymakers can ensure that the benefits of embedded finance are widely shared while safeguarding borrowers, lenders, and systemic stability.
This blog is supported by the Swiss State Secretariat for Economic Affairs (SECO) under the IFC Global Financial Infrastructure Program
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