Banking as a service, Member Exclusive

Embedded Briefing: Where does value lie in embedded finance?

  • In today's briefing, let's review what makes embedded finance so attractive and what it could look like tomorrow.
  • Then a quick snapshot from McKinsey's new report on the industry's competitive landscape.

Email a Friend

Embedded Briefing: Where does value lie in embedded finance?

Where does the value lie in embedded finance?

Another week, another embedded finance report. Not surprising since this sector has been drawing so much interest lately. Today we're looking at a report from Weavr - a qualitative piece of research built around opinions from industry experts.

Anyway, we’re past the stage where I tell you embedded finance is everywhere – you already know that. However, we often forget that while influential, the industry is still in its early development stage. The explosion, so to speak, is yet to come.

Weaver’s whitepaper outlines that the embedded market was worth $54.3 billion last year, and is expected to be worth $138 billion by 2026. Furthermore, the total addressable market stands at $15 trillion globally – a significant jump from its current worth.

Embedded finance is huge in fintech. Over 26,000 fintech startups were registered in 2021, and the vast majority of them use BaaS to build up their offerings. For non-financial companies, though, implementing BaaS has been more of a struggle. This is due to the costly implementation mechanisms the industry currently uses.

The future, hence, holds a simplification of BaaS offerings to the point where they become plug-and-play. With no financial expertise, non-financial companies should soon be able to deploy BaaS smoothly, efficiently, and effectively.

“Let’s break it down simply; a tailored suit always fits better than something off the rack. That same theory applies to financial services. Sure, a one-size-fits-all approach may work for some people, but it leaves others excluded. What’s more, nobody is getting a service built specifically for them. Plug-and-play embedded finance flips that on its head. It’s allowing you to specifically tailor products and services to customers in valuable ways, without the process having to take longer, or cost more,” Alex Mifsud, CEO at Weavr, says in the report.

While the potential of embedded finance is clear, there is still a mismatch between the expectations from BaaS providers, brand distributors, and end consumers. What will aid this mismatch? Education. 

This was reiterated by Yann Ranchere, Partner at Anthemis Group, who said, “There’s a lot of learning that needs to happen, and that’s on both sides. I think there are a lot of regulatory aspects regarding the subject that still needs to be properly understood. Additionally, some still question how much value embedded finance can add to a business, but this information will come with time.”

The value in embedded finance is currently understood to be in 4 places: firstly, it opens up all new revenue streams. It is quite telling that almost half of Shopify's revenue now comes from financial services. Secondly, it expands a business’s total addressable market. Mindbody managed to grow its TAM by 3.5% since adding a payment functionality – a case study of this is present in Weavr’s whitepaper.

Embedded finance also generates very valuable user data that can be used to personalize offerings for users. And lastly, embedded finance creates more customer stickiness.

Individuals, and industries, that are further ahead in this education are able to reap greater and timely benefits. That is also a clear motivator for companies to understand embedded finance better, and expand their businesses into this lucrative space.

“There’s a reason fintech companies are a step ahead right now. They are more educated on the benefits and will probably lead the charge when it comes to adoption. I’d imagine that will be the direction of travel for a while, but I’m sure not long after you’ll begin to see businesses at different stages of their growth journey incorporating the technology in their operations,” said Paul Staples, the Global Head of BaaS at HSBC.

Taking a macro perspective, embedded finance offers two very desirable outcomes for economies and societies as a whole. Firstly, it creates smooth financial experiences – arguably making transactions less intrusive, and finance less stressful.

“It will change lives, because it will help to close the gap between what people need and what they are being offered. Brands with greater knowledge can better understand when someone needs a loan, or insurance. Those companies are in a good place to make plug-in financial services part of their proposition, but obviously this wasn’t possible before at the same scale, cost and speed as it is now and will be in the future,” said Simon Torrance, Founder at Embedded Finance and Super App Strategies.

The other benefit is that embedded finance comes with the promise of making a more inclusive world. The rise in popularity of the term ‘democratizing financial services’ went hand in hand with the advent of embedded finance technologies. 

Today, in many parts of the world, including developed economies, people face a lack of access to financial services for one reason or another. In the 21st century, mobile phones have become very widespread and in many cases the first point of contact with consumers. Taking finance to that level of convenience has made it accessible to many more people.

“Ultimately, it’s a solution that can help to foster inclusion across the globe. Embedded finance helps to empower entrepreneurs to start new businesses which, in turn, helps to create new jobs and provides more economic opportunities. So, in that sense you’re empowering people, as well as giving them more financial freedom by opening up their access to financial services,” Daniel Greiller, CCO of Weavr.

A sector within embedded finance that hasn’t been explored much yet, and offers great room for growth, is employee benefits. It allows employees to avail the financial benefits within a single seamless app experience, with compliance, regulation, and data security built into the process.

Embedded solutions offer employers all new functionalities, like being able to segregate the funds employees are granted for benefits and expense purposes. Additionally, from the back end, they can set budgets and controls for employee compensation. Employees can be enabled to attain benefits through a variety of form factors, like payment cards or digital wallets. And lastly, ease of onboarding and offboarding at the start and end of employees’ stints.

Chart of the day

Source: McKinsey

Empowered by embedded finance, and motivated by business growth prospects, financial services are being offered today by a wide array of distributors. These distributors may look like traditional retailers offering BNPL checkouts at online and/or offline POS. Software firms like Uber are also adopting them to embed payments, for example, into their user experience. 

Marketplaces and platforms have come forth as ready distributors of embedded offerings, as it helps them create value on both ends of their experiences – merchant and consumer. Similarly, telecom and OEM operators also have embedded these solutions into their products.

The demand for embedded products has matured in today’s industry, with top-demanded products including deposits, payments, card issuing, and lending.

The embedded finance product portfolio is expected to grow in the coming years. Today, customer onboarding and product-servicing processes are seeing digitization, as real-time risk analytics and services grow more sophisticated. 

“Risk is likely to remain a constraint on growth, however, as products that require case-by-case assessment, in-person touchpoints, or regulatory waiting periods, such as commercial real estate financing, are less susceptible to end-to-end digitization,” McKinsey’s report reads.

The firm however then went on to predict that products suitable for offering via embedded finance could account for as much as 50 percent of banking revenue pools.

What we’re producing

What we’re reading

0 comments on “Embedded Briefing: Where does value lie in embedded finance?”

10-Q, Member Exclusive

How Affirm Card plans to kill credit cards

  • How would you dub a card that has the practicality of a debit card with the added functionality of a credit card? That's the Affirm Card.
  • Launched in early 2021, the Affirm Card has been in the spotlight lately. But what led to garnering significant attention now?
Sara Khairi | December 04, 2023
10-Q, Member Exclusive

Robinhood unveils a 5% APY for Gold members, but how will users respond?

  • Robinhood's recent move to challenge traditional banks includes its increased savings offering, a 5.0% APY for Robinhood Gold Members. 
  • The stock trading platform appears to be in a precarious balancing act, grappling with the escalation of deposit strategies while facing a decline in both transactions and monthly active users.
Sara Khairi | November 20, 2023
10-Q, Member Exclusive

Q1’24 affirms Affirm’s upswing in BNPL

  • Affirm's quarterly results indicate that back-to-back enterprise collaborations in conjunction with collective strategies are eventually winning out keeping the firm on course.
  • Going forward the BNPL provider intends to focus on continuing to invest in risk management, technology, and product development.
Sara Khairi | November 13, 2023
10-Q, Member Exclusive

Q3: The PayPal story isn’t over

  • PayPal saw improved earnings in the third quarter compared to the previous one.
  • Chriss answered some of the burning questions and gave a bit more color on what firm assets could require more work to turn around than he thought.
Sara Khairi | November 06, 2023
10-Q, Member Exclusive

Ted Pick is Morgan Stanley’s new leader. Where does it go from here? 

  • The question, 'Who will succeed James Gorman at Morgan Stanley?', that echoed in Wall Street's nooks and crannies has finally been answered.
  • The present and incoming CEOs might have different management styles. What they both share, however, is a shrinking economy and growing macroeconomic pressures at the time of assuming control.
Sara Khairi | October 30, 2023
More Articles