Embedded Briefing: Reviewing the embedded industry and supplier landscape

What about embedded finance makes it a bustling industry?

Walia: Embedded finance applications have been around for a while but there has been a concerted attempt in recent years to invent new use cases (like, customer experiences). Partly, this is because the enabling technologies are becoming more widely available. Service-Oriented Architectures and APIs made it possible for embedded finance vendors to package their services into easily utilized building blocks. Non-financial companies can easily create innovative and better customer experiences by using these building blocks. And as customer expectations evolve (the bar only goes higher) there is more incentive for companies to differentiate themselves with new innovative customer experiences, or at the least, to keep pace with the competition.

Oren: Over the past year or so, investment in the space has really taken off, and wherever money goes we see lots of organizations looking to move into the industry to capitalize on the opportunity. Overall though, the biggest driver of this growth is non financial companies looking to embed different financial services in order to improve customer experiences in digital channels. What it boils down to is making lives easier for consumers and the businesses that serve them. With embedded finance, we’re able to streamline transactions through more customer-friendly processes. 

Rehmetullah: Many fintechs are currently fighting for the same customers, so they are all trying to differentiate themselves and offer the most holistic and seamless payments experience they can. This is especially important for younger consumers like Gen Z, who want as many services as possible consolidated into one complete platform. Embedded finance greatly helps with this consolidation by providing a personalized snapshot of the consumer’s individual needs.

There are numerous embedded finance suppliers right now, as everyone is looking to create services and add value to their platform. Embedded finance also helps gather customer data so fintechs can offer more individualized solutions for customers, and this personal experience makes customers more willing to pay for these additional services. Because of this, embedded finance increases customer loyalty. It creates a payments ecosystem that customers do not want to leave since it services so many different needs.

Dangelmaier: While embedded finance is growing in popularity, the drivers for it are nothing new. People want convenience and want to be able to take the financial actions they want, when they want. Businesses just want to remove the friction, and embedded finance helps them help their customers do what they want to do.  

Credit Suisse is forecasting the total addressable market to be $850 billion and for embedded payments to account for more than $300 million of it. Software platforms are seeing the potential, and their customers want it. According to JP Morgan, software providers that embed payments into their solutions see up to a 5X increase in revenue per customer.  The right fintech companies are making adding payment functionality much easier for SaaS platforms. They can get all the benefits of embedding payments without becoming a payment facilitator themselves. They just need to identify the right partner. 

Is there a notion of too many suppliers? 

Oren: Right now, I don’t think we’re anywhere near market saturation. For many industries like real estate, healthcare, and even retail, the digital transformation of many companies is in its infancy, and there are transactions that still rely on outdated and time-consuming processes. More suppliers means more innovation, which is good for the industry, even if some of those suppliers will eventually fizzle out. Also, sometimes what can appear as too many suppliers early on is actually misunderstanding the unique value that each supplier provides.

Walia: Given how many use cases can be brought to life, I don’t consider Embedded Finance an overly crowded space yet. That said, it may be the case that there are a disproportionate number of enabling providers in select use cases. When that happens, traditional marketplace dynamics including customer service, ease of use, pricing, marketing, any special features, focus on industry verticals, etc. will determine who survives.

Far from opportunities drying up in the space

Oren: At this current point in time, there are so many sectors undergoing digital transformations and so many archaic processes that need to be updated for consumers that we’re nowhere near seeing that opportunity begin to dry up.. 

When opportunity starts to dry up, the suppliers that will be left standing are the ones with the adaptability to scale and grow their offerings with the needs of their businesses. Any time an embedded finance platform can efficiently handle multiple functions for a business at the scale needed, that’s going to be a major differentiator.

Walia: This is not yet a mature space and there’s room for lots more innovation. Like in any newly developing space, there will be winners and losers. Providers who don’t innovate or differentiate themselves fast enough will struggle to stay solvent and may become acquisition targets.

Rehmetullah: While embedded finance is a trend that isn’t going anywhere, the abundance of suppliers will inevitably lead to increased M&A and partnerships within the space. When looking to add a new capability, fintechs have to ask themselves whether it is best to build it out themselves, partner with another company that has that function, or acquire another company that fits in with their platform.

As the embedded finance boom continues, the number of suppliers will be offset by the M&A and partnerships within the space as companies look to combine platforms to create the most holistic and complete solution.

Chart of the day

Brands are increasingly using embedded finance to expand their offerings and create greater customer stickiness.

Embedded finance helps brands enhance their standing in the marketplace. Brands like Booking.com are using innovative mixes of embedded finance offerings to create competitive advantage for themselves, thus amping up customer acquisition and making their brand stronger. Beyond that, embedded offerings allow them to create all new revenue streams, and horizontally expand their business. Additionally, such offerings give their customers more reason to interact with them, allowing for greater stickiness.

There are three ways in which brands can use embedded finance:

1. Banking as marketing, where non-banks embed financial services to enhance their brand image. The benefits of this approach are limited, but it helps give a one time boost to the brand’s perception.
2. Banking services to enhance core business, where embedded services like rewards and loyalty programs are used to create meaning to the brand’s core offerings. 
3. Banking embedded in the core business. Here, brands seek to embed core banking functions to their existing offerings,  like checking accounts or online wallets, hence creating an entirely new value proposition to their customers. This strategy generally yields the best results, where the competitive advantage is the most prominent, and customer engagement has shown to be the highest.

Source: Nicolas Pinto

What we’re producing

• The need to minimize consumer data: 87% consumers demanding it
• Banks and fintechs are learning to work together, and embedded finance is at the center of it
• ‘Global open banking is more like the metaverse than you might think’ – Finicity’s Nick Thomas
• Embedded finance now helping firms fairly compensate and retain employees
• Consumers are developing a taste for mobile wallets
• Building just the right bank-fintech partnership

What we’re consuming

• VC funding in embedded finance, across Europe and North America, doubled between 2020 and 2021
• How banks are using embedded payments to strengthen ties with SMBs
• Traditional lenders are leveling the field with fintechs using embedded offerigns. Here’s how:
• The Publicis Sapient guide on how to successfully embed financial services
• Alviere launched a new embedded finance platform, and secured financing from Silicon Valley Bank

Cross River and SmartBiz unite to offer SMBs access to financing