Show me the money: Embedded finance in West Africa and the infrastructure that powers it

By Oluwafiropo Tobi Ogundare, Territory Sales Lead for West Africa and Mauritius at Red Hat

Embedded finance, which involves offering financial services through third parties via embedded digital applications, has become one of the most important trends in Africa’s financial ecosystem. The industry in the Middle East and Africa (MEA) region is experiencing a surge in embedded finance adoption, driven by factors such as high smartphone penetration and a young, tech-savvy population. Meanwhile, companies such as e-commerce startup OmniRetail have announced plans to expand their embedded finance business in countries such as Nigeria and Ghana.

Financial services providers (FSPs) and fintechs have a lot to gain by injecting their products and services into non-financial organisations and platforms. However, like any business digitalisation strategy, it requires enterprises to invest in technology and architecture that enables the development and deployment of new applications and digital services rapidly, reliably and at scale.

Financial inclusion and the jump to digital
While the trend of digital embedded finance represents many possibilities in African markets, it is not a new trend and has roots in traditional, albeit augmented, banking practices. A great example of physically embedded finance is branded payment cards, which enable retailers, hotel chains, and airlines to expand their relationship with their customers while leveraging partnerships with established and trusted FSPs.

Today, it’s possible for consumers and businesses to never interact with an FSP in a conventional way. Modern embedded finance is defined by the integration of financial products and services into the digital interfaces that we interact with daily. These include accounting software, digital wallets, and customer loyalty programmes, all of which manifest thanks to fundamental changes in consumer and merchant behaviour, as well as the digitisation of business and commerce globally.

For West Africa and the rest of the continent, this represents a lot of opportunities. Though less than half of Africa’s population uses banking services, that number has grown significantly thanks to the expansion of digital banking specifically in the form of mobile banking. Sub-Saharan Africa remains the world leader in mobile banking in terms of live services, subscribers and transactions, something that FSPs can capitalise on by integrating their services into popular, non-financial platforms and apps. In doing so, embedded finance becomes a way to strengthen financial inclusion and close the gap between banked and unbanked individuals.

Taking a modern approach to software development
As Africa’s cloud services industry continues to mature, enterprises have more opportunities to modernise and invest in platforms that let them develop and deliver digital products and services.

Cloud platforms and the modern approach to software development serve as the foundation for embedded finance. This approach includes event-driven architecture, which lets enterprises design applications and services in response to real-time information and events, microservices that break applications down into smaller, independent pieces that then work together, and application programming interfaces (APIs) that connect applications via standardised tools, definitions and protocols. All this paints a picture of interoperability, which is a key component of successfully implemented embedded finance applications.

Something important to remember is that FSPs and fintechs operate using highly sensitive information and are subject to stringent regulations that govern the overall sector. Partnering with third parties and connecting with them via applications result in new attack vectors and potential data privacy violations. In light of this, developers should integrate their risk management into their application development and delivery pipelines, shoring up the software supply chain and protecting both their partners and end users.

Benefits all around
Embedded finance may sound like it’s reserved for major industry players, especially given the infrastructure it requires from the outset, but it is with smaller enterprises that we begin to see its real benefits.

Let’s look at the example of a Lagos-based electronics retailer that has partnered with a regional FSP to provide an embedded insurance and credit lending facility on its digital platform. The three parties involved in this scenario are the retailer, the bank and the end customer, and all three reap benefits from it.

For the retailer, the facility is a source of alternate revenue, a competitive advantage, and a means to attract customers and enshrine loyalty. For the bank, it is a method of new customer acquisition and a source of useful non-financial data such as shopping preferences and platform usage frequencies. For the end customer, it promotes inclusion for those who may not have adequate access to financial services, said access is convenient, and the value offering is tied directly to their purchasing and spending habits.

This is embedded finance in action and it’s action at any scale. Whether it’s a small business in Lagos or a regional leader across Nigeria and neighbouring nations, embedded finance opens up new and exciting possibilities. With the right platforms and an eye toward next-generation IT infrastructure and architectures, these possibilities become within reach.