Embedded finance, a rapidly evolving segment of the financial services industry, involves the seamless integration of financial products and services within the platforms of nonfinancial companies (NFCs) or fintech (financial-technology) firms. This concept has revolutionized the approach businesses take to offer financial solutions like “buy now, pay later” (BNPL), digital wallets, and point-of-sale (POS) credit. The evolution of the financial landscape to include these innovative integrations means a significant opportunity for a wide array of nonfinancial businesses, empowering them to deliver popular financial services. The proliferation of smartphones globally, coupled with widespread internet accessibility, has broadened the reach of embedded financial services, anticipating exponential growth for this burgeoning market.
Market Potential and Growth Projections
A report from Spherical Insights, published in August 2023, underscored the substantial growth potential of the global embedded-finance market. It estimated the market size to be at USD 81.4 billion in 2023, with projections to skyrocket to USD 1.16 trillion by 2033, registering a compound annual growth rate (CAGR) of 30.43 percent. The geographical breakdown indicates that the Asia-Pacific (APAC) region is poised for the fastest regional expansion in embedded finance during this period. This surge can be mainly attributed to the substantial numbers of smartphone and internet users in countries like India, China, Indonesia, and Vietnam, along with the robust economic and GDP growth in these areas driving demand.
Within the broader embedded-finance spectrum, the embedded-payment segment is expected to secure the largest market share. This encompasses embedded insurance, investments, lending, and banking, driven primarily by rising customer demand for seamless payment transactions and enhanced security features. For instance, e-commerce platforms are embedding micro-investment options, enabling consumers to invest small amounts in financial markets like stocks and bonds while shopping, alongside rounding up purchases to earn investment rewards. The potential for integrated financial services to address a wide range of consumer needs places this market on a trajectory for rapid expansion.
Opportunities for Businesses
Charles Richards, a senior manager at PwC UK, observed that the rise of nonbank platforms has created a new reality for the banking and capital markets industry, where customers increasingly seek seamless and personalized user experiences. Nonfinancial platforms often serve as the primary interaction points for customers, while banks provide the necessary infrastructure and regulatory compliance. Businesses are keen to capitalize on the varied opportunities presented by embedded finance. By adding financial services into the customer journey, businesses can attract and retain more customers, enhancing brand loyalty and reducing churn rates.
In addition to customer acquisition and retention, new financial service offerings can significantly enhance revenue streams within existing customer bases and boost the lifetime value of customer relationships, particularly if firms charge for premium financial services or cross-sell additional financial products. Leveraging user data can enable businesses to garner critical customer insights, thereby delivering more personalized financial services and recommendations. These tailor-made experiences not only meet the immediate financial needs of customers but also build a deeper connection between businesses and their clientele.
Providing a frictionless, integrated experience can strengthen customer loyalty by addressing multiple needs through a single, unified platform. The deeper the customer’s integration into a business’s ecosystem, the less their need to leave the platform for financial tasks. This consolidated experience ensures customers return for various services, fortifying the company’s market position and creating a robust, loyal customer base. Nonfinancial companies integrating these solutions can see substantial gains in both customer satisfaction and fiscal performance.
Shifting Consumer Preferences
A 2023 McKinsey & Company survey of the automotive finance industry illustrated the shift in consumer preferences, with 40 percent of respondents favoring online channels for financing car purchases. Consequently, automotive manufacturers and dealerships have begun integrating embedded financing, insurance, and leasing solutions within their sales platforms, simplifying vehicle purchases. Customers now demand immediate access to affordable financial services like loans and insurance with minimal clicks, driving the adoption of embedded finance in the automotive sector and beyond. This shift towards subscription and leasing models further opens up opportunities for finance offerings at the point-of-sale.
Technological advancements, notably APIs (application programming interfaces), have drastically reduced the costs associated with offering embedded finance. Automating underwriting decisions for lending can now be achieved almost at zero marginal cost. Through instant connectivity to public data sources such as tax records and private sources like account transactions and balances, financial services providers can streamline processes, making financial products more accessible. Additionally, in some regions, it has been observed that the cost of acquiring a qualified SME lending lead is significantly higher—up to 15 to 20 times—than that of an embedded finance lead. This cost efficiency underscores the value embedded finance offers to financial services providers for customer acquisition, further amplifying the shift in consumer preferences.
Banking-as-a-Service (BaaS) Model
Financial-services providers are increasingly participating in the embedded-finance revolution through the BaaS (banking-as-a-service) business model. In this model, lenders integrate their digital product suites into nonfinancial corporate platforms, allowing these companies to offer mobile banking services, loans, and credit cards directly without obtaining banking licenses. Sponsor banks can leverage their financial expertise, extensive customer bases, and trusted reputations to provide these advanced financial solutions. This strategic partnership creates an environment for innovation while maintaining regulatory compliance.
Additionally, embedded finance can aid sponsor banks in achieving sustainability goals by enabling ESG-compliant product offerings through nonbanking platforms. With rising demand for responsible financial solutions, customers can access sustainable finance options, such as green car loans, directly from the digital platforms they frequent. These offerings align with growing consumer awareness and demand for environmentally responsible financial products.
A study by Alloy, an end-to-end identity-risk solution provider for banks and fintechs, surveyed professionals at U.S. banks involved in delivering embedded-finance products. It revealed that sponsor banks credited 51.4 percent of deposit income to their embedded-finance collaborations. Moreover, 92 percent of sponsor banks emphasized the need for more adaptable embedded-finance partnerships, indicating that scalability could be essential. While some banks may maintain multiple partnerships to mitigate risk and seize opportunities across different fintech sectors, the efficacy of these partnerships varies. Successful collaborations often generate substantial revenue, demonstrating the pivotal role embedded finance plays in the modern financial ecosystem.
Conclusion
Charles Richards, a senior manager at PwC UK, noted that the emergence of nonbank platforms has revolutionized the banking and capital markets industry. Customers now seek seamless and personalized user experiences primarily from nonfinancial platforms, while banks continue to provide the essential infrastructure and regulatory compliance. The trend of embedding financial services into the customer journey presents significant opportunities for businesses. By integrating these services, companies can attract and retain more customers, enhancing brand loyalty and reducing churn.
New financial service offerings also contribute to increasing revenue streams within the existing customer base, especially if firms charge for premium services or cross-sell additional financial products. Utilizing user data allows businesses to gain crucial customer insights, which can be used to offer more personalized financial services and recommendations. These customized experiences meet the immediate financial needs of customers and build a deeper bond between businesses and their clientele.
Offering a frictionless, integrated experience reinforces customer loyalty by addressing various needs through a single, unified platform. The more deeply a customer integrates into a business’s ecosystem, the less likely they are to leave for financial tasks. This cohesive experience ensures that customers return for multiple services, strengthening the company’s market position and cultivating a loyal customer base. Nonfinancial companies that embrace embedded finance solutions can experience substantial gains in both customer satisfaction and overall financial performance.