Digital transformation has been gaining momentum in Japan, and many businesses are working to enhance the customer experience by making full use of their software. Against this backdrop, a mechanism for integrating financial functions, such as payment processing, into nonfinancial services—known as embedded finance—is attracting significant attention.

This article provides an easy-to-understand explanation of embedded finance, covering the fundamentals, the main types, the current state of the Japanese market, the advantages of adoption, and successful cases.

Key takeaways

• Embedded finance allows nonfinancial businesses to incorporate financial features into their existing services and offer them directly to customers.
  
• Embedded finance is primarily categorised into five types: payments, lending, insurance, investment, and banking.
  
• The embedded finance market in Japan is projected to continue growing as cashless payments become more widespread.
  
• A good example is Uber, a leading ride-hailing and food delivery platform, where drivers can use financial services, such as instant money transfers, within the app.
  
• Stripe Connect helps businesses that have complex payment processing needs—such as software platforms and marketplaces—enhance their entire payment workflow, including revenue sharing, fee collection, and handling international transactions.
  

What is embedded finance?

Embedded finance refers to a system where nonfinancial businesses integrate financial functions, such as payments, lending, and insurance, into their own services and apps.
By introducing this approach, businesses allow customers to access a variety of financial offerings directly within the websites and apps they use every day, without leaving those platforms.

In other words, by integrating these functions into nonfinancial services, embedded finance aims to enhance convenience and provide a simple user experience.

Three players supporting embedded finance

There are three key players or roles in embedded finance:

• Brand: Nonfinancial businesses that operate e-commerce sites or apps and have direct contact with customers.
  
• License holder: Financial institutions or financial service providers that hold the legally required licences. These consist of banks with banking licences and insurance companies with life insurance licences that provide financial services to brands.
  
• Enabler: A fintech company that acts as an intermediary between the brand and the license holder, connecting the two parties via an application programming interface (API) platform to enable the implementation of financial functions.
  

Differences from banking-as-a-service

Banking-as-a-service (BaaS) is often confused with embedded finance.

BaaS describes the technical infrastructure that enables nonfinancial businesses to integrate banking functions provided by banks into their services via APIs, thereby making them available to their customers.

One important distinction is that BaaS enables nonfinancial businesses that lack a banking licence to use services previously available exclusively to licensed banks, such as deposits, foreign exchange, and lending.

In contrast, embedded finance describes the practice of nonfinancial businesses incorporating BaaS (infrastructure) provided by banks into proprietary services and offering them to end users.

In other words, BaaS is infrastructure as a means, and embedded finance is the result that this means produces.

Main types of embedded finance

This field encompasses five main categories:

Embedded payments

Embedded payment refers to a setup that adds a payment-receiving capability, allowing customers to complete purchases easily without leaving the company's e-commerce site or app. For instance, if a business implements one-click or no-click features in its services, the user experience will improve significantly, helping to both prevent cart abandonment and increase sales.

Embedded loans and financing

Embedded lending (embedded loans and financing) refers to a framework where nonfinancial businesses that lack a banking license integrate financial institutions’ lending functions into their services. This allows businesses to offer shoppers buy now, pay later (Buy now pay later), instalment payments, and funding options.

When businesses implement embedded lending and funding solutions, their customers (both individuals and companies) can complete the borrowing process on the websites and apps they use daily. In addition, when businesses offer their own financing plans, users might be able to access these options on more attractive terms than before.

Embedded insurance

Embedded insurance is a model where businesses add insurer capabilities and coverage options to websites or apps, combining their products with policies and offering them to shoppers.

Good examples are trip cancellation coverage built into travel booking sites and extended warranties offered when purchasing furniture or home appliances on e-commerce sites.

The common feature of these embedded insurance products is a clear connection between the goods and services the business sells and the policies it offers. Customers can purchase insurance with a few clicks, and the claims process is also straightforward. This high level of convenience is driving demand.

Embedded investment

Embedded investment is a system that integrates investment functionality, such as robo-advisors, micro-investing, and portfolio management, into existing digital products or offerings, enabling users to manage their assets within the same environment.

By adopting this model, brands that lack traditional financial licences can propose and provide fine-tuned portfolio services tailored to each customer's individual circumstances (such as age, income, investment objectives, and life stage) on their own platforms.

Embedded banking

Embedded banking is a framework where banking capabilities, such as opening an account, making deposits, and transferring funds, are directly integrated into the website or app operated by a nonfinancial business. Users can readily access these features on the website or app they regularly use, without having to transfer to an external bank's site.

Current status and growth potential of the embedded finance market in Japan

In Japan, the adoption of this model is advancing rapidly as digital transformation is being pursued in a variety of industries.

A PayNXT360 survey reports that the country's embedded finance market has an annual growth rate of 38.8%. Furthermore, the industry is projected to maintain steady expansion at a compound annual growth rate (CAGR) of 27.7% from 2024 to 2029, reaching $36.297 billion USD by 2029.

In particular, driven by the need to improve operational efficiency amid recent labour shortages and the growing popularity of cashless payments, the trend of online platforms incorporating monetary functions is expected to accelerate further across a wide range of industries, among them retail, healthcare, education, logistics, and real estate.

Advantages of adopting embedded finance

Embedded finance offers businesses the following benefits:

Improved customer experience

One of the biggest benefits of embedded finance is improving the customer experience.

By integrating financial capabilities such as payments and loans into your company's website or app, users can complete various procedures entirely within your service, increasing satisfaction.

The approach improves conversion and customer retention rates, helps prevent churn, and maximises customer lifetime value (CLV) by fostering greater brand loyalty.

Improved marketing accuracy by using customer data

By using all the data collected through financial services, such as customers' purchasing power and interests, you can achieve more accurate analysis and personalisation. The design of promotional campaigns and product recommendations will improve as a result, ultimately increasing marketing effectiveness.

Securing new revenue streams from payment processing fees

Embedded finance has the potential to create new sources of revenue.

In the past, interest on loans and payment handling fees were collected directly by banks. However, with this approach, you can build a system that generates income from your own business's services, broadening monetisation channels.

Examples of embedded finance

Here are some typical use cases for embedded finance:

Embedded finance, which allows businesses to integrate financial services that were previously limited to banks with their own solutions, enables them to provide higher-quality experiences. The model must therefore be regarded as an effective strategy for accelerating digital transformation and business expansion, regardless of industry or sector.

How Stripe Connect can help

Stripe Checkout is a fully customisable prebuilt payment form that makes it easy for you to accept payments on your website or application.

Checkout can help you:

• Increase conversion: Checkout's mobile-optimised design and one-click checkout flow make it simple for customers to input and reuse their payment information.

• Reduce development time: Embed Checkout directly into your site, or direct customers to a Stripe-hosted page, with just a few lines of code.

• Improve security: Checkout handles sensitive card data, simplifying PCI compliance.

• Expand globally: Localise pricing in 100+ currencies with Adaptive Pricing, which supports 30+ languages and dynamically displays the payment methods most likely to improve conversion.

• Use advanced features: Integrate Checkout with other Stripe products, such as Billing for subscriptions, Radar for fraud prevention and more.

• Maintain control: Fully customise the checkout experience, including saving payment methods and setting up post-purchase actions.

Learn more about how Checkout can optimise your payment flow, or get started today.

FAQs on embedded finance in Japan