A Market Ripe for Growth

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By Samantha Barnes, International Banker

Embedded finance involves the integration of digital banking and financial products and services into the platforms of nonfinancial companies (NFCs) or financial-technology firms (fintechs). This burgeoning area of finance opens up significant opportunities for businesses that previously offered only nonfinancial services to begin offering popular financial solutions, such as buy now, pay later (BNPL), digital wallets and credit at the point of sale (POS). Thanks to the widespread global proliferation of smartphones, as well as rapidly expanding internet accessibility, such financial services are increasingly available to billions of people around the world, making embedded finance a market with considerable growth potential.

According to a Spherical Insights report published in August, the global embedded-finance market size was US$81.4 billion in 2023 and was estimated to reach $1.16 trillion by 2033 at a compound annual growth rate (CAGR) of 30.43 percent during this period. Geographically, it is the Asia-Pacific (APAC) region that will experience the fastest regional growth within the global embedded-finance market during the projected timeframe. “The swift growth of the industry across the continent can be attributed to [the] high number of smartphone and internet users in the region, especially in India, China, Indonesia, and Vietnam,” according to the report. “The rapid economic and GDP growth in the region in recent years is another reason for rising demand for embedded finance in the region.”

The embedded-payment segment is expected to hold the greatest share of the market—a market that also comprises embedded insurance, embedded investment, embedded lending and embedded banking—with growing customer demand for seamless payment transactions and improved security as the driving factor, the report added. For example, e-commerce platforms are increasingly embedding micro-investment facilities into their platforms, allowing consumers to invest modest sums into financial markets, including stocks and bonds, while they shop, as well as to round up purchases and earn rewards through investments.

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“The rise of nonbanking platforms has created a new reality for the banking and capital markets industry, where customers are increasingly looking for seamless, personalised experiences,” according to Charles Richards, a senior manager with PwC UK. “Nonfinancial platforms serve as the primary touchpoints for customers, while banks provide the infrastructure and regulatory approvals.”

The professional-services firm also identified a number of opportunities being generated for businesses that choose to integrate embedded-finance solutions:

• By offering financial services as an additional dimension within the customer journey, businesses can acquire and retain more customers.

• New financial-services offerings can substantially bolster revenue streams within existing customer bases, as well as boost the lifetime values of customer relationships. This is especially possible if firms can charge extra for premium financial services and cross-sell complementary financial products and services.

• Businesses can leverage user data to glean crucial customer insights and thus deliver more personalised financial experiences and recommendations to their customer bases. 

• Customer loyalty is strengthened by delivering a frictionless, integrated experience that addresses a multitude of customer needs through a single, unified platform. The more deeply integrated a customer becomes within the business’s ecosystem, the less need he/she will have to leave the platform to conduct financial tasks elsewhere.

It has become clear that customers are increasingly prioritising convenient and seamless user experiences. A 2023 McKinsey & Company survey of the automobile-finance industry, for example, found that 40 percent of consumers already preferred online channels for financing a car purchase. As such, automotive manufacturers and dealerships are now offering embedded-financing solutions within their sales platforms, as well as insurance and leasing options, which greatly simplifies the process of purchasing a vehicle for customers.

“They want instant access to affordable financial services such as loans and insurance, when and where needed, with the fewest possible clicks,” McKinsey recently noted. “Further opportunities for finance offerings at the point of sale arise from the consumer trend away from purchasing and toward subscription and leasing models…. For merchants, embedded finance increases sales through higher conversions, increased basket sizes, and enhanced customer lifetime value.”

The consulting firm additionally observed that on the supply side, the costs of offering embedded finance have been significantly reduced compared to a few years ago due to technological advances such as APIs (application programming interfaces). “Underwriting decisioning for lending can now be automated at nearly zero marginal cost through instant connections to public data sources such as tax records and private sources such as account transactions and balances,” McKinsey added. “For financial services providers, embedded finance will become an increasingly important means of customer acquisition in some areas. In one major European market, we found that the acquisition cost of a qualified SME lending lead is 15 to 20 times higher than an EF [embedded finance] lead.”

Indeed, with financial-services providers increasingly keen to partake in the embedded-finance revolution, the BaaS (banking-as-a-service) business model is coming to the fore, whereby lenders integrate their suites of digital products and services into platforms developed by nonfinancial corporates. As such, these companies can offer the likes of mobile-banking services, loans and credit cards to their customers directly through their platforms without having to obtain banking licences, while the sponsor banks are leveraging their financial expertise, extensive customer bases and trusted reputations to provide their nonbanking partners with the most advanced financial solutions.

It may also be the case that embedded finance can help such sponsor banks achieve their sustainability goals, with companies potentially offering ESG (environmental, social and governance)-compliant products and services through their platforms. With the demand for responsible financial solutions growing substantially in recent years, customers can seamlessly access sustainable-finance offerings directly from nonbanking platforms. For instance, they could purchase green car loans directly from the platform of an electric-vehicle (EV) retailer.

Having surveyed 51 professionals at banks that partner with fintech companies to deliver embedded-finance products and services in the United States for its “2024 State of Embedded Finance Report”, Alloy found that sponsor banks—that is, banks that partner with a fintech or nonfinancial company so they can provide financial products or services to their customers—attributed 51.4 percent of their deposit income to their embedded-finance partnerships.

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An end-to-end provider of identity-risk solutions for banks and fintechs, Alloy also found that 92 percent of sponsor banks believed that more adaptable embedded-finance partnerships between banks and fintechs were needed. “With 96% of sponsor banks operating more than five embedded finance partnerships, banks may be diversifying their partnerships to spread risk and increase opportunities across different fintech sectors or customer segments,” the report also noted. “This also suggests that sponsor banks need scalable processes and infrastructure to support their embedded finance initiatives across multiple partners. The quantity of partnerships doesn’t necessarily correlate to the percentage of a sponsor bank’s revenue derived from embedded finance; some sponsor banks may only have a few fintech partnerships that generate a significant amount of revenue.”

Embedded finance is also proving a major growth driver for software-as-a-service (SaaS) platforms. A report jointly published on October 28 by business fintech platform Adyen and management-consulting firm Boston Consulting Group (BCG) found that embedded finance is proving pivotal for meeting the needs of small and medium-sized businesses (SMBs) and is also a key differentiator in an increasingly competitive market. The report noted that the embedded-finance market had experienced 25-percent growth in just the last couple of years, supported by favourable interest rates that have enabled higher banking revenues.

Platforms that do not seize the opportunity now, the report warned, risk falling behind and losing market share. “Embedding financial products creates a win-win scenario: SaaS platforms deepen user relationships and unlock new revenue streams by addressing SMBs’ overlooked financial needs,” according to Blake Breathitt, senior vice president of platforms and financial services at Adyen. “Our research underscores the window of opportunity for SaaS platforms to embrace embedded finance to stay competitive or get left behind. There is an immense market opportunity here for SaaS platforms, which are in an ideal position to deliver these within their existing ecosystems.”

SMBs are also expected to drive significant growth for the embedded-finance market, with 50 percent of the 2,000 SMBs surveyed across North America, Europe and Australia in eight industries expressing “a high likelihood of utilising a full suite of embedded finance products” in the near future. “We are observing an appetite from SMBs to consume a broader range of financial services from within their SaaS platforms, notably loans extending beyond simple cash advances or current accounts tightly integrated in receivables and payables workflows,” Stefan Dab, founder of BCG’s Payments and Fintech practice, also confirmed.

It is perhaps the implications that embedded finance could have for driving financial inclusion, particularly in emerging markets (EMs) and developing countries, that make this new form of banking integration so compelling. “By integrating financial services into platforms that people already use, such as mobile apps or e-commerce sites, previously unbanked or underbanked populations will gain easier access to financial products,” according to insights firm Absrbd.

“The proliferation of smartphones and internet access in developing regions, combined with the flexibility of embedded finance, will enable more people to participate in the formal financial system, leading to greater economic empowerment and growth in these regions,” the fintech market-research firm also observed. “For example, telecom companies in Africa could embed micro-lending services into their mobile money platforms, providing small loans to individuals who would otherwise have no access to credit.”