Embedded Finance, Member Exclusive

Embedded Briefing: The growing value proposition of embedded finance across industries

  • Changing demographics and behavior, increasing internet penetration, technological advances, and growing trust in the digital ecosystem is helping make embedded finance the norm among consumers.
  • Embedded finance can serve to benefit the entire financial value chain, from banks, to brands, governments, and consumers.

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Embedded Briefing: The growing value proposition of embedded finance across industries

Every two weeks I write about how the embedded finance industry is growing to become a behemoth. I enjoy citing reports and studies to do so, because they show that that’s not just a gut feeling – it is founded in solid numbers.

I genuinely believe that embedded finance (EmFi) will evolve to become the norm in terms of how people avail financial services. And yes, I have another report to help make my case today – one by KPMG this time.

Embedded payments – popularized by consumer grade experiences like digital wallets and instant payments – were worth $16.1 billion in 2020. And by 2025, it is expected to be worth $140.8 billion. Embedded insurance, another largely popular EmFi use case, worth $5 billion in 2020, is expected to be worth $70.7 billion by 2025.

In the same time frame, embedded lending, which entails products like SMB inventory financing and BNPL, is expected to grow from $1.4 billion to $15.7 billion. Wealth management, which is a relatively newer category in EmFi, is forecasted to be worth $2.6 billion in 2025.

This growth is not coming out of thin air. While yes, embedded finance has increased access to financial services for many individuals and communities, there is also migration from consumers who have so far gotten financial services the old fashioned way.

Embedded finance makes complicated things like applying for a loan faster, more accessible, and user friendly. This is especially appealing for Millennials and Zoomers, who would do most things on their phones if they could.

With all that in mind, it is understandable that embedded finance presents great opportunities for FIs, consumers, governments, & non-financial brands.

  • For financial institutions, now is the time for strategic partnerships with non-financial brands. Online shopping and embedded payments has ushered in growth for both the value and the volume of transactions performed globally. As more and more non-financial brands claim these transactions, FIs can partner with them to expand their distribution channels.
  • For consumers, the benefits are straight forward – seamless and easy access to financial services when and where they need them. They do not need to log on to other webpages to make payments, they can do it at checkout. They don’t need to go to an insurance company to insure a new car, they can do it as they buy the car. 
  • Governments could also benefit, as embedded finance enables greater access to financial services, spearheading society’s move to becoming cashless — both things on top of governments’ agendas globally.
  • Non-financial brands are perhaps the ones to benefit the most from the embedded finance boom. Embedded finance presents them with an opportunity to diversify and grow their revenue streams, increase customer stickiness and lifetime value, and generate better consumer insight.

Three factors are considered the main drivers of the embedded finance boom, according to the study: 

Firstly, the changing demographic and consumer behavior. There are approximately 1.2 billion people between the ages of 15-24 in the world right now. As early adopters of technology, many of them are extremely tech-savvy and eager to hop on board digital ecosystems.

Secondly, internet penetration and technological advances are making the shift easier. More people today have a smartphone and access to the world wide web than ever before, which is fundamentally reshaping the world economy. As APIs get more advance, it is also becoming easier for companies to distribute financial products.

Lastly, the pandemic has exacerbated consumers’ trust in digital ecosystems, as they are now willing to share their personal and confidential information online much more readily. And this trust is crucial in the adoption of embedded finance products.

The fintech ecosystem consists of three primary categories of players, with each playing a distinct role in the value chain. First of these are chartered providers of financial services, like banks or credit unions. Second are the infrastructure and technology providers, like API providers. Lastly are the marketplaces and platforms, which are consumer-facing and actually own the customer journeys.

Embedded finance also helps fill a much open space in business trade finance – a space worth $1.7 billion in 2020. The pandemic had a role to play in this, which hit SMBs the worst – nearly 40% of all trade finance rejections were handed to SMBs. Their lack of collateral locks them away from traditional sources of finance. We are seeing this shape up in a few different ways.

  • B2B marketplaces have become a hub for business lending, granting SMBs access to capital, often based on proprietary data and not credit checks. 
  • Invoice factoring is another tool that's being used to increase access to capital. 
  • Similarly, embedded finance is changing how international business is done by owning the supply chain activities and payments – uniting them into a single platform.

Within the context of business, many industries have adopted embedded finance already while many are leaning into it as time progresses. Here’s how the service can create value in different industries:

Just look at the chart

Source: PYMNTS

SMBs are among the fastest and most eager adopters of embedded financial solutions. That is because they’ve faced unique challenges that have never really been addressed by legacy systems and incumbent institutions.

Processing payments swiftly has been a recurring challenge for SMBs. The leading reasons for that are reported to be incorrect invoicing, insufficient cash reserves, and late payments. Almost one in three SMB owners said they’re unable to find themselves unable to pay vendors due to issues with accounts payable and account receivable. Additionally, 3 in 5 said they have cash flows issues monthly, and another one in three report having over $20,000 in receivables. 

Furthermore, paper-based invoicing is still common among SMBs – which is time and resource consuming. A study found that the average paper invoice adds up to $30 in administrative time costs, while a digital invoice costs around $10. Digitization invoices is hence a significant space for SMBs to streamline their operations and cut costs.

What we’re producing

Embedding financial services in SMB verticals: 5 questions with GlossGenius CEO Danielle Cohen-Shohet
GlossGenius brought fintech to the beauty and wellness industry, embedding financial services like real-time payments, deposits, loans and business management tools all in one app.

Quick Take: Behind Wise and Deel’s new feature for global payroll
Wise recently partnered with payroll and HR platform Deel to create a feature that would help the latter’s customers transfer funds for payroll more efficiently.

How FNBO built Bend, an in-house credit card as a service offering with Marc Butterfield
Stories about a traditional institution evolving into something new are compelling – it’s just really hard to do.

Power of Payments Ep. 19: Stripe’s Josh Ackerman on the changing nature of online checkout
Ackerman talks about the existing gaps between consumer expectations from online checkout and what most merchants currently offer, as well as how the checkout experience has evolved over the years.

Data Snack: Millennial retail traders rise during the bear market
Millennials opened 46% of all new retail trading accounts in the first half of 2022, according to DriveWealth’s Global Investor Report.

What we’re consuming

BNPL giant Klarna is launching its own open banking technology, Klarna Kosma, for select fintechs and banks
Klarna says it is specifically targeting fintech, eCommerce and data analytics firms, and hopes the free offering will help accelerate the development of open banking use cases.

New research finds US financial institutions find open banking to be a must have, with a renewed focus on data and infrastructure
56% of US respondents regard open finance as a 'must have', up from 45% in 2021, with 82% believing that shared data and infrastructure will become a key part of the strategy for the move to Open Banking and Finance.

The fintech winter: firms preparing for drying investments in 2023
Payments startups and other fintech challengers are bracing themselves for an extended winter which will see investment activity continue to plummet, writes Hokodo’s founder and CEO Louis Carbonnier.

Are rising interest rates a threat to non-bank lenders? Potentially
The Wall Street Journal noted that non-bank lenders are paying as much as four times the amount they paid in January to borrow the cash they lend to companies.

What’s powering the development of open banking in 2023?
Besides ease of banking, digital technologies and solutions open up a plethora of innovative products and services that banking and financial services organizations offer to its customers.

Small US banks would rather abandon partnerships with firms than take liability for P2P payments scams
Industry groups representing the country’s community banks and credit unions say these institutions could abandon partnerships with instant payment services like Zelle if forced to pay back customers who are victims of scams.

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