Embedded Finance in 2024: Meeting Customers Where They Are

This concept is reshaping the way we think about banking and financial transactions. At its core, embedded finance aims to make financial services more accessible and convenient for users by embedding them directly into the digital platforms and apps people use every day.

According to research conducted by Bain & Company and Bain Capital, the revenue generated from embedded finance services is expected to increase from $21 billion in 2021 to $51 billion by 2026. By the same year, consumer payment transactions on embedded platforms will exceed $3.5 trillion, generating $21 billion in revenue for platforms and enablers.

Embedded finance brings financial services to customers where they are, making it easier to manage payments and access credit and investments without the need to seek out separate financial institutions for each need.

Embedded finance has significantly reshaped how financial services are delivered. See how the concept evolved over time.

It all started with e-commerce platforms integrating financial services to streamline transactions and enhance the customer experience. Early adopters enabled customers to open deposit accounts, order debit cards, and access financing directly through their digital interfaces. This phase began a trend towards merging software and commerce to improve the customer journey.

Following its e-commerce success, embedded finance expanded into ride-sharing, real estate, and healthcare industries. Companies outside of traditional financial services began collaborating with fintechs to integrate financial services into their platforms, leveraging APIs as the technological backbone to facilitate these integrations.

One of the most noteworthy developments during this phase was the rise of the Buy Now, Pay Later (BNPL) model. BNPL solutions allow customers to split payments over time directly within e-commerce and other platforms. This innovative payment method not only revolutionized the shopping experience by providing a flexible payment option but also proved the potential of embedded finance to offer personalized financial solutions.

In 2021, online retailers and marketplaces in the US witnessed a whopping $1.4 trillion in transactions. Among these, $50 billion was facilitated through a BNPL (Buy Now Pay Later) platform, which accounts for 3% to 4% of total sales. By 2026, the transaction value is expected to reach $2.4 trillion, with 12% forecasted to be embedded.

Today, embedded finance accounts for a significant portion of financial transactions, with projections indicating it will exceed $7 trillion by 2026 in the US alone. The ecosystem encompasses various services integrated into non-financial platforms, including banking and insurance.

Why do so many organizations offer embedded finance solutions? Let’s see how various factors interplay:

1. Consumer Expectations: Consumers now expect personalized online experiences with real-time payments, reflecting the trend of instant gratification and tailored interactions across digital channels.
2. Business Objectives: In response, businesses are exploring new opportunities to generate revenue and enhance customer engagement. The focus is on integrating financial services into their offerings to provide greater value and convenience to customers.
3. Technological and Regulatory Landscape: APIs, fintech innovations, and banking-as-a-service are driving the integration of financial services into non-financial environments. Meanwhile, regulatory movements like open banking support the transition by promoting data sharing and competition.
4. Market Dynamics: Fintech startups and established financial institutions constantly interact in this competitive landscape. Fintechs, with their agile approaches and innovative solutions, are challenging traditional models, pushing the sector towards digital transformation. Established institutions are adapting through partnerships and technological adoption to remain relevant in the face of these disruptive forces. This interplay combines the strengths of both worlds.

This part will introduce the spectrum of embedded finance. Explore its applications, emerging trends, and the various types that are reshaping the financial landscape for businesses and consumers alike.

The partnership between Afterpay and Shopify is an example of a successful application of embedded finance within the retail and e-commerce sectors. Afterpay, a leading Buy Now, Pay Later (BNPL) service, allows customers to make purchases and pay for them over time in installments without incurring interest. Afterpay claims that partnering with them leads to an average 20% increase in cart conversion and an up to 40% increase in average order value.

In the technology sector, ride-sharing apps have begun offering embedded insurance directly through their platforms in response to drivers’ specific needs. Similarly, the gaming industry has undergone a significant transformation towards generating revenue through microtransactions. Nowadays, producers frequently provide in-game purchases, which allow players to buy virtual goods.

Partnering with fintechs is an exciting use case that allows banks to expand their customer base and generate new revenue streams while improving user experiences. Some noteworthy examples of such collaborations include JPMorgan Chase’s partnership with Gusto for payroll services and Goldman Sachs’s collaboration with Modern Treasury for a faster product launch.

Embedded finance is software that makes it easier for small and medium-sized businesses and entrepreneurs to access loans and process payments. This software integrates payment processing tools directly into business management systems. This means that companies can handle all their financial needs with the tools they use for their day-to-day operations.

Business-to-business (B2B) companies can also gain significant advantages from embedded finance. Embedded finance has the potential to simplify transactions and improve cash flow visibility and efficiency through solutions such as Request-to-Pay (R2P) systems, Purchase Order Finance, and Buy Now Pay Later (BNPL) options.

Embedded finance integrates financial services with other industries to enhance customer experiences, increase access to financial services, and improve loyalty. It offers a myriad of benefits for different players:

• Alternate Revenue Source: Businesses can create new revenue streams by offering financial products and services alongside traditional offerings.
• Competitive Edge: By providing a range of insurance and financing options, businesses can inspire confidence in their customers and make themselves more attractive to potential clients.
• Higher Order Value: Incorporating financial solutions like Equated Monthly Installments (EMI) and Buy Now, Pay Later (BNPL) schemes encourages consumers to make larger purchases than they would otherwise.

• Easier Customer Acquisition: By partnering with non-financial businesses, financial institutions can tap into larger customer bases and reduce the cost and complexity of customer acquisition.
• Data Insights: Companies in the finance sector can access diverse customer data to tailor their products and identify cross-selling opportunities.
• Customer interaction: Collaborating with businesses to manage customer relations can reduce the service burden on financial institutions, freeing them to focus on product development and innovation.

• Convenience: Embedded finance offers users a more streamlined and integrated experience, with easy access to payment options, financing, and tailored financial services.
• Tailored Offerings: It can also propose a more personalized user experience using data insights to provide relevant financial products.
• Financial Inclusion: One of the most significant benefits of embedded finance is its potential to extend financial services to underserved populations, making banking products and services more accessible and inclusive.

Despite its potential to revolutionize financial services, integrating embedded finance presents significant challenges. Overcoming these requires collaboration, innovation, and a focus on consumer protection.

• Regulatory Compliance: Regulatory compliance responsibility is complex. Policymakers and regulators must set clear data security and consumer protection guidelines to facilitate embedded finance growth without issues.
• Data Privacy and Security Risks: Sharing consumer data online increases the risk of data breaches. Protecting this sensitive information requires advanced security measures, thorough assessments, and strict data governance.
• Complexity of Integration: Seamless integration demands careful planning and collaboration among providers, institutions, and vendors. Compatibility, scalability, and minimal downtime are essential for high transaction volumes.
• Consumer Debt Concerns: Embedded finance can increase access to credit, but responsible lending and consumer education are necessary to prevent excessive debt and financial distress.

As we look ahead, the world of embedded finance is set to expand and evolve in fascinating ways. Imagine that services like embedded payments are becoming a norm across various industries in retail and healthcare, education, and even real estate. This means you could be paying for your doctor’s visit or your child’s tuition seamlessly through the platform you use directly from your bank account.

We will also see AI and machine learning take personalization to the next level. Financial solutions will be tailored specifically to customer’s needs, offering advice and services based on their unique financial behavior and goals.

Embedded finance promises to make transactions smoother for businesses, especially in the B2B sector. Imagine sending payments or receiving financing directly through the platforms where you already manage your business relationships and operations.

Now, what does all this mean for traditional banks and financial institutions? As finance becomes more integrated into non-financial platforms, banks might find themselves playing more of a supporting role, focusing on providing the infrastructure and backend services for these new financial ecosystems. But it’s not all doom and gloom. This shift also presents opportunities for traditional banks to innovate and partner with fintechs and service providers to stay relevant.

And let’s not forget about regulations. As embedded finance grows, we can expect to see regulatory frameworks evolve to ensure that consumer protection remains a top priority.

One thing is clear: customer expectations are driving this train. We all want financial transactions that are secure, quick, convenient, and integrated into the services we use daily.

While the future of embedded finance is still taking shape, one thing is sure: it will make managing money a lot more integrated into our digital lives. From seamless payments to personalized financial advice, how we interact with bank accounts is about to get a lot more interesting.

According to an EY survey, 70% of respondents believe that more than half of financial services will soon be provided through non-financial platforms. This shift requires innovation, strict security regulation, and collaboration for an inclusive financial ecosystem.

Scalo offers the expertise to develop these embedded finance solutions, focusing on technology, user experience, and security. We ensure your business can navigate embedded finance’s complexities with a focus on innovation and compliance.

For details on Scalo’s strategic approach to embedded finance, contact us.