Embedded Finance: What It Takes to Prosper in the New Value Chain Bain & Company

These can cover everything from cost-cutting strategies to investment opportunities, enabling SMEs to optimise their strategies and spot new growth opportunities. Digital transformation is revolutionising every aspect of our lives, and the financial services industry is experiencing the impact daily. Embedded finance, a term often used to describe the integration of financial services into non-financial platforms, is causing a seismic shift in how end users interact with money. To achieve this, some companies are embedded payments companies looking to become a “super app” — one that encapsulates several different experiences or services in one. Others, like neobank (now part of Australian digital bank, ubank) have created direct connections to other apps through APIs and open banking standards to provide a single view of an individual’s bank accounts, mortgages, and more. The unbundling of financial services over the past decade has, generally speaking, led to customer experience improving thanks to better mobile apps with intuitive user interfaces.

Demand for embedded finance soars among SMBs as traditional banks fall short – Yahoo Finance

Demand for embedded finance soars among SMBs as traditional banks fall short.

Posted: Tue, 24 Oct 2023 07:00:00 GMT [source]

In that world, achieving long-term differentiation with BaaS will be difficult, so banks will continue to distinguish themselves based on products, rates, reach, and other dimensions. Another possibility is that the market will be prone to returns to scale, much as cloud computing is dominated by big players. If this winner-take-all dynamic prevails, a few BaaS providers that are ahead of the pack in technology, analytics, and cost structure will likely form insurmountable advantages in the space. Our sizing focuses on the largest embedded finance markets today, namely payments, lending, and banking, as well as the subcategories within them.

To keep up globally in digital payments, the EU needs open banking, not the EPI

We estimate that US BNPL revenues for enablers and platforms came to nearly $1 billion in 2021. We expect that sum to grow (albeit with compressed margins) to around $4 billion by 2026 (see Figure 7). BNPL transactions have soared in Europe, and the US BNPL market will likely follow suit over the next few years. In the UK, BNPL accounts for roughly 5% of online transactions, while in Sweden it makes up 23% of all transactions online.

What is Embedded Finance

There’s huge potential to help small businesses access a broader range of services more easily in the tools and platforms they already use. The benefits — easier access to funding and seamless business workflows — are profound, and will only be truly successful if, as an industry, customers are the first and primary focus. One is the orchestration layer — it’s the API integration, something that allows you to connect to those third parties. Then it’s the capabilities-as-a-service layer, where as a bank, you’re exposing a specific set of capabilities that the third party can make use of, whether it is card issuing as a service, payments as a service, or bank account as a service. It could be a product, it could be a set of capabilities around the origination, around the fraud management, around the operations, for example. The question now is who brings all these components and how do these components get combined.

What are some examples of embedded finance?

In addition to these traditional financial products, novel use cases are emerging. For example, embedded-finance distributors are offering prepaid cards to employees as part of earned-wage access programs; giving merchants the option to use their deposit accounts for instant-payments settlement. Some are providing just-in-time funded debit cards for gig economy workers to use when making purchases for members of delivery-service platforms. Embedded finance and banking as a service (BaaS) are two emerging trend that is revolutionizing the financial services industry. It is a model that integrates financial services into non-financial products and services, providing consumers with a seamless and convenient way to manage their finances.

Then came the fintech revolution following the financial crisis, which saw the rise of start-ups with a mission to do financial services better than the established banks. This led to a proliferation of fintech apps all highly optimised for specific functions and the challenger banks like Starling,N26 and Tide. Indeed, today, there really is an app for nearly every type of financial service as the unbundling of banking develops apace. To us, that is actually a great example of how the need for financial services recognizes at the point a third-party experience. At the same time, PSD2 quite clearly divides market participants into account operators and financial providers. Having lost the exclusive right to be the sole service provider for its client base, the bank can sell payment expertise and infrastructure to those who will try to take advantage of technological and market changes.

Issuing branded payment cards

We anticipate rapid growth through 2026, with a fivefold increase in embedded B2B lending, bringing the loan volume to between $50 billion and $75 billion, or around 15% of the total, which will also rise slightly to around $430 billion. The enablers monetize through a discount rate on the total transaction value that they charge to the merchant. Card transactions accounted for $0.7 billion of revenue, split evenly between platforms and enablers, while ACH accounted for $1.2 billion of total revenue. Revenue growth will stem primarily from a substantial increase in transaction value through embedded finance platforms. We will see increasing penetration in certain industries and significant revenue multiples across smaller subsegments, such as business-to-business (B2B) payments and BNPL.

What is Embedded Finance

The reason I’m saying this is not the only way to do it is because we have seen examples in the industry where clear embedded finance type ideas and notions can be delivered without having that full stack of capabilities. The third stage aims to integrate financial processes through the existing platform. As platform ecosystems grow more significant with more payment/transaction flows on the forum, reliance on external financial processes (payment processing, facilitation, etc.) becomes more prominent.

How does embedded finance work?

Branded credit cards predate fintech, as shoppers have long been able to get branded cards from their favorite department stores. However, fintech has expanded companies’ ability to offer branded credit cards and increased the use cases where it makes sense. In both examples, embedded banking is designed to increase platform loyalty through a convenient user experience and special rewards. When a Lyft driver has a Lyft checking account that gets them paid faster, it’s less likely they’ll also drive for Uber. Another challenge is understanding the role your company would play in the ecosystem. We use technology on some of the pages of our websites, which may record user movements,
page scrolling, mouse clicks and text entered.

What is Embedded Finance

This concept takes many of those same financial services and embeds them directly into a non-financial workflow. Some predict the global embedded finance market will be worth a stunning $7trn by 2030. The reality, though, is that embedded finance has been around for a while, only now it has been labelled as you start to see examples of it across different financial services.

How will embedded finance evolve? 🔮

Embedded finance allows you to pay for a purchase online without entering bank details or instantly take out a consumer loan on digital platforms outside banks, among many other options. This Bank-as-a-Service model, which allows the integration of financial services via APIs, moved $22.5 billion in 2020, a figure that will increase tenfold in the next four years. The good news is that enabling partners to distribute banking products can be a low-margin, high-volume business for banks. Banks often struggle with their cost structures, which are frequently based on legacy technology and enabled through manual processes and operations.

  • By removing consumer pain points, such as the need to seek credit elsewhere, customers may be more likely to complete a purchase and experience customer satisfaction, which is essential in achieving brand loyalty.
  • However, tech-savvy banks, fintechs, and payments companies that are willing to invest and partner still have time to claim their share of this fast-growing market.
  • According to CB Insights, we saw $75.2B invested in fintech startups globally in 2022.
  • They are overlooked by traditional financial institutions and face complex, time-consuming finance processes, high fees, and limited access to credit.
  • This is especially valuable for SMBs, for whom late payments can threaten viability; by contrast, large enterprises generally have treasury solutions offered by traditional banks, often bundled with lending and investment products.

If you want to offer a complete embedded finance experience to your users, you need to give them a way to spend their funds. By issuing branded payment cards, platform users get direct access to the funds in their embedded bank account. They’re highly digitized, with universally accepted checkout and payment options. “Buy now, pay later” (BNPL) is one of the most visible forms of embedded lending seen by online shoppers.

Sustainability and Responsible Banking

In the past, if you wanted to finance that purchase, you’d have to leave Eight Sleep’s website to visit online lenders like SoFi or Discover. After comparing terms, selecting a lender, and completing your application, you’d get a credit decision. Assuming you were approved, the funds would become available in your bank account within 2-5 days. At that point, you’d have to return to Eight Sleep’s website, re-add the items to your cart, and check out.

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