Embedded Briefing: What’s driving the embedded finance boom?

Of all the subcategories in embedded finance, payments, lending, and banking are spearheading its boom. Platforms enabling embedded payments, B2B and consumer-grade, collected about $14 billion in revenues last year, while embedded lending providers across businesses and consumers scooped up $6 billion. By 2026, payments are forecasted to generate about $20 billion in revenues, and lending about $13 billion.

Other areas poised for growth are embedded insurance, tax, and accounting. For now, though, let’s take a closer look at embedded payments and lending.

Embedded payments allow consumers to send – and merchants to accept – money through a variety of methods, like debit and credit cards, ACH, and mobile wallets. In the case of providers targeting SMBs, embedded payment facilities are generally the most important and first to be deployed for a client. They provide quick and secure payments while allowing shoppers to transact however they prefer.

Consumer payments made up the bulk of the embedded transactions in the US in 2021 – at $1.7 trillion, or 60%. Powering these payments, platforms and enablers generated about $12 billion in net revenue last year. While such payments are growing in prevalence across the board, their adoption so far has soared in e-commerce, retail and restaurant POS, wellness businesses, nonprofits, and field services.

Consumer payments are expected to continue growing. By 2026, their penetration is expected to rise to 29%, from 15% today, and their transaction value is expected to swell to $3.5 trillion, as against $1.7 trillion today. This signifies considerable revenue growth opportunities for platforms and enablers, with a net revenue of $21 billion expected in 2026.

B2B payments are massive too, sporting a transaction value of $27.5 trillion in 2021. Within B2B payments, though, accounts payable and receivable services account for around 90% of the value. So, it's true that embedded payments have not been adopted by businesses at the same level as consumers, with continued reliance on checks and ACH payments. There is, however, a migration to digital underway, with newer features like e-checks and virtual cards gaining heat.

Of the $1.9 billion in revenue from B2B embedded payments through 2021, card transactions accounted for $700 million, while ACH made up $1.2 billion. 

By 2026, though, B2B embedded payments are expected to quadruple in terms of transaction value, from $0.7 trillion to $2.6 trillion, with revenues for platforms and enablers expected to rise from $1.9 billion to $6.7 billion.

Lending is the other area that embedded finance has penetrated considerably, with BNPL and POS lending leading the charts. 

Let's start with the fact that between 3% and 4%, or $50 billion, of the total sales in the US in 2021 happened through BNPL. By 2026, the total is expected to reach $2.4 trillion in transaction value, bringing the BNPL market size to $265 billion. The revenue BNPL operators generated in 2021 came to nearly $1 billion, and even as margins in the business shrink, that figure is expected to rise up to $4 billion by 2026. 

POS lending is another area in embedded lending that has played a critical role in the industry’s growth. Although similar to BNPL in many ways, it differs from it on the payback time. While BNPL loans are generally up to four months long and used for cheaper purchases, POS lending spans up to a year and is generally used to buy expensive products.

In 2021, POS contributed 4% to total consumer transactions, or around $428 billion. While traditional lenders took the major chunk here, some 10% was scooped up by embedded providers, representing a loan value of around $43 billion. While POS lending itself is not expected to grow much by 2026, the share taken by embedded finance is poised to reach between $80 billion and $90 billion.

SMBs have found credit hard to come by from traditional lenders. When the pandemic hit, and they needed cash to stay afloat, fintechs became a good choice. The relationship built then stays strong today, making business lending one of the most bustling spaces in embedded finance.

In 2021, around $12 billion in B2B loans were completed through embedded means. This is built on the estimation that total SMB loans stand just under $400 billion, while individual loans are below $1 million in value. Based on these figures, embedded lending shows a 3% penetration, with balance sheets like those of Cross River Bank and Celtic Bank powering the show.

The report predicts that by 2026, embedded lending will swell up to somewhere between $50 billion and $75 billion, or around 15% of the market.

Chart of the week

Source: Panagiotis Kriaris

Following the outbreak of COVID-19, mobile payments became hugely popular. As the pandemic settled, and the world began opening up, the preference for mobile payments only grew stronger. It is now estimated that nearly 2 billion people use mobile payments daily, with millions of new users adopting the format every year.

Looking at the leading global mobile payment platforms in the chart above, a few geographical differences stand out. To begin with, one notices that just a few big platforms dominate the market in the East, whereas the West has multiple big players sharing the market. This is because platforms in the East have grown and developed into ‘super apps’, which provide multiple functionalities and create sticky relationships with customers. Furthermore, the penetration of mobile payments is also much higher in the East. Experts believe that is because since eastern markets did not adopt payment cards as readily as the western ones, they sort of skipped that stage of cashless transactions, and jumped directly onto mobile payments.

What we’re producing

• How American Express is focusing on SMB lending with Kabbage at its disposal
• Regulators are coming after fintechs, and they’re coming hard. Why though?
• The CFPB has long had its doubts about BNPL, and now it finally has a report that details why.
• Americans just really like buying financial products from non-financial brands. Why? Read here.
• Payments are going omnichannel. Protecting them is thus becoming more complicated.
• Financial platforms are doing for B2B payments what SaaS did for enterprise software: Stripe’s Suzanne Xie

What we’re consuming

• “Traditional lending models are ‘broken’ and no longer fit for purpose,” reads embedded platform Tink’s latest research.
• Atlanta-based alternate lender Momnt set to expand globally with a new $9.5 million round.
• UK’s Lending Works rebrands to 'Fluro', with a slick new logo and all-new brand colors
• The power of embedded finance to aid financial inclusion
• Embedded finance is a $7 trillion opportunity – how can banks claim their share?
• How the next generation of the internet will boost open banking solutions