Digital Finance 2025: From Fintech to Embedded Finance – How AI, open banking, embedded finance and digital payments are reshaping banking, fintech and regulation

The financial services landscape is undergoing a profound transformation. Traditional banks, challenger fintechs and regulatory bodies are all being impacted by a wave of innovations: artificial intelligence (AI), open-banking, embedded finance, and ultra-fast digital payments. In 2025, these trends aren’t just niche experiments.

They are becoming core parts of the business models. In India, this change is particularly dynamic, thanks to the unique digital infrastructure and regulatory push.

This article explores:

1. The major technologies driving change (AI, open banking, embedded finance, digital payments)

2. The implications for banks, fintechs and regulation

3. What this all means specifically for India: opportunities, challenges, and the way forward

1. The Drivers: AI, Open Banking, Embedded Finance & Digital Payments

Artificial Intelligence (AI) in finance

AI and machine learning (ML) are increasingly used across financial services from credit scoring, fraud detection, customer service (chatbots), to advisory and personalised products. In India, fintechs are leveraging AI to speed up loan origination and automate decision-making.

Open Banking & Data Sharing:

Open banking  where banks and financial institutions share data with consent with third parties via APIs. It is enabling new ecosystems. In India, the Account Aggregator framework is a good example of enabling secure and consent-driven data flows.

Embedded Finance:

Perhaps the biggest leap: financial services are no longer confined to banks or fintech apps alone. They are being embedded into non‐financial platforms: e-commerce, ride-hailing, marketplaces, supply-chains. This means lending, payments, insurance, wealth solutions are integrated into everyday digital journeys.

For example: In India, embedded finance is already influencing MSME financing and supply-chain tokenised acceptance.

Keywords: embedded finance India, embedded lending India, integrated financial services, contextual banking.

Digital Payments & Fintech Infrastructure

Digital payments in India like Unified Payments Interface (UPI) have grown rapidly, enabling real-time, low-cost transactions. Combined with mobile penetration, they form the foundation for the digital finance revolution.

2. Implications for Banks, Fintechs & Regulation

For Banks: Evolve or become commoditised

Legacy burden: Traditional banks are challenged by legacy technology, slower processes and cost inefficiencies.

Need to embed and partner: Banks must evolve from being isolated service providers to becoming platform‐friendly, API‐enabled and open to embedded models.

Risk and opportunity: On one hand, banks can partner with fintechs and platforms to embed banking services (e.g., lending, deposits) into new channels. On the other hand, if they don’t adapt, they risk being relegated to commodity infrastructure (just plumbing) while value accrues to platforms.

Margin pressure & disintermediation: Embedded finance and fintech upstarts may capture margins that traditionally banks held ,  e.g., origination, servicing, data monetisation.

Data and trust assets: Banks have the trust and regulatory licence; their challenge is to leverage data and open-banking to stay relevant.

For Fintechs: Scale, regulation and embedded models

Fintech renaissance: Fintechs can exploit flexibility, technology first models, embedded flows, AI-driven personalise services. In India the fintech landscape is booming.

Embedded business models: Fintechs are shifting from standalone apps to embedded services integrated into other platforms (shopping apps, marketplaces, SaaS).

New distribution, new players: Non-finance platforms (mobility apps, commerce, social media) become fintech channels by embedding financial services. The fintech role thus expands beyond “digital bank” to “financial layer for platforms”.

Regulation and governance become critical: As fintechs scale, regulatory compliance, governance frameworks (for AI, data, cyber risk) become differentiators. In India, a “Trust Score 1.0” blueprint is being referenced for assessing fintechs on governance.

Competition and partnerships: Fintechs must decide whether to partner with banks or become independent full-stack challengers. Embedded finance opens more options but also more complexity integration, risk, regulatory etc.

Regulatory Implications: Speed, risk, inclusion

Regulatory frameworks must keep pace: With AI, embedded finance and open banking,  is inadequate. India is moving forward with frameworks like Account Aggregator, data sharing, digital public infrastructure.

Financial inclusion & consumer protection: Embedded finance and fintech can deepen access for underserved segments. But regulators must ensure fair practices, transparent pricing, data privacy. For example, use of alternative data for credit must be governed to avoid bias.

Cyber-risk, fraud, systemic risk: As finance embeds into many platforms, risk surfaces multiply like  data breaches, misuse of AI, operational dependencies. Regulators will need to monitor systemic exposures outside traditional bank-branches.

Open banking and competition: Regulators will encourage open ecosystems to prevent monopolisation of payments or embedded finance by a few big platforms.

Digital currency & payments oversight: Digital payment systems and central bank digital currencies (CBDCs) are part of the regulatory agenda globally and in India.

3. What It Means for India: Opportunities, Challenges and The Way Forward

India’s unique advantages:

Digital public infrastructure (DPI): India has built a powerful stack: Aadhaar (digital identity), UPI (payments), DigiLocker (documents), Account Aggregator (data). These create a fertile ground for fintech, embedded finance and digital banking.

Massive digital payment adoption: High smartphone penetration and usage of UPI make India one of the fastest movers.

Embedded finance momentum: In India, embedded finance is already transforming MSME financing and lending via platforms. For example: “embedded finance is no longer a buzzword … it’s right here unfolding across apps we use every day.”

Regulatory push for inclusion: Government schemes (such as Jan Dhan, Aadhaar, mobile linkages) and regulatory openness provide inclusion tailwinds.

The big growth levers:

Embedded finance for MSMEs: Given India’s large base of small businesses, embedding finance (credit at checkout, supply-chain financing) offers huge opportunity.

AI driven credit and risk models: Many Indians have thin credit histories; fintechs leveraging alternate data and AI can improve access. Regulators and banks need to support model transparency.

Platform‐finance convergence: E-commerce, mobility, IoT devices will become channels for finance (payments, loans, insurance). Embedded finance will reach everyday apps.

Cross-border & remittance opportunities: With India’s diaspora and payment flows, embedded finance and open banking may enable new cross-border models.

Key challenges:

Data privacy, governance and algorithmic fairness: As more finance happens via embedded flows and AI, issues around data misuse, bias, transparency grow.

Cybersecurity, fraud and operational risk: The more embedded and API-driven the financial services become, the larger the attack surface. India must scale its cyber-resilience accordingly.

Regulatory lag and complexity: While DPI is strong, regulation must continually evolve. For instance, fintechs need to embed compliance, risk management early.

Competition and margin squeeze for banks: If banks don’t transform, they risk becoming back-end providers while platforms capture customer interface and value.

Integration and system complexity: Embedding finance into non-financial apps is operationally complex (APIs, risk, compliance, user experience). Some partnerships face delays and glitches.

Strategic imperatives for India’s ecosystem:

Banks should adopt APIs & platforms: Banks must open up fintech-friendly APIs, adopt modern tech stacks, partner with platforms and fintechs aggressively.

Fintechs should embed finance intelligently: Fintechs should shift from being standalone apps to enabling embedded flows, in partnership with platforms (commerce, mobility, social). They must bake in governance from day one.

Regulators should facilitate while safeguarding: The regulatory regime should promote innovation (sandboxing, flexible licences) while ensuring data protection, fairness, transparency and systemic stability.

Focus on inclusion with technology: Use AI and embedded finance to deepen reach into rural India, women, small businesses, underserved segments. Yet also monitor bias and inclusion gaps.

Develop trust, not just speed: Amid the race for digital finance, trust remains a key differentiator. Institutions (banks, fintechs) that foster trust via transparency, security and ethical AI will win.

4. A Preview of 2025 and Beyond:

Embedded finance will surge globally (from $115.8 billion in 2024 to $251.5 billion by 2029) and India will be a key growth engine.

India’s fintech ecosystem shifts from “growth” to “resilience”. The emphasis is on governance, trust, regulatory hygiene and stable operations, not just disruption.

Open banking, data sharing and digital public infrastructure will turn Indian financial services into a global reference for scale and inclusion.

Traditional banks will either evolve into platform-partners or risk becoming commoditised infrastructure.

Fintechs will increasingly operate via embedded models, not just niche apps: they will become enablers of financial flows within everyday digital experiences.

Regulation will no longer be reactionary but proactive: issues like algorithmic bias, data privacy, systemic risk from non-bank platforms will be central.

India’s journey will show that digital finance is not just about “banking online” but “finance embedded in everyday life”.

5. Conclusion:

Digital finance in 2025 is not an incremental evolution ,  it’s a structural shift. The era of apps bolted onto banking is giving way to an era where finance is embedded, seamless, contextual and platform-driven. For India, the convergence of AI, open banking, embedded models and digital payments offers a tremendous leap in inclusion, efficiency and innovation.

Banks must embrace platform thinking. Fintechs must embed themselves into broader ecosystems. Regulators must balance innovation with protection. And Indian consumers and businesses stand to benefit if the ecosystem aligns right.

Whether you are in a bank boardroom, a fintech startup, or a regulator’s office in India, the question is not if you will engage with embedded finance, AI-driven banking or open models , it is how fast and how well you will do so.