The deep dive: Applications of embedded finance

By Gaia Lamperti

The deep dive’ is our bi-weekly exploration of a relevant topic, hot trend or new product. For Prime subscribers only.

Embedded finance is largely fuelling the FinTech sector and consists of integrating financial services into a traditionally non-financial platform, like a website or an app, in order to make the customer experience easier and seamless. So, now, virtually any platform can offer services like payments, lending and banking.

How does it work?

The removal of the need for consumers to “go to their bank” paves the way for businesses across industries to form stronger relationships with customers, which is essential to preserving loyalty in the face of increasing choice and competition, as well as developing new revenue streams. Embedded finance brings financial services directly to the consumer, with lending, payments, and insurance-related opportunities exhibit the most potential.

What embedded finance providers will do is shift a large part of the revenue to non-financial players as they start embedding these solutions within their own ecosystem. For instance, instead of outsourcing the payment to banks or acquirers, merchants can embed the payment within their flow and be part of it. They would still need to work with a financial services provider for the actual building blocks but they would control the flow and share the revenue. That is why the growth potential is huge and it is such an attractive prospect for investors.

Who is under the radar?

Up to now, embedded finance has focused on the retail consumer market, however, over the next few years, we will see it used more commonly in the corporate world as well, particularly in B2B transactions. This will be particularly true for SMEs where inefficiencies prevent them from accessing higher value-added services. like bundling payments and banking as part of their offering. This will result in improved access to capital for smaller businesses.

According to IBSi’s data, from here to 2030, the most significant opportunities will still be in the retail sector, expected to hit over $3,500b by 2030, but it will be closely followed by healthcare ($1,224b), education ($504b), and telecom ($432b). Other sectors like transportation, hospitality, pharma media, and real estate will also increasingly enter the market.

Why does it matter now?

In the US alone, the opportunity for the embedded finance market is forecasted to reach $7tn by 2030. This signals that embedded finance is set to witness significant consumer adoption, with IBS Intelligence’s data showing that, for example, over 85% of consumers are interested in buying groceries from a cashier-less store and over 80% of consumers are interested in purchasing health insurance via an app. The potential is huge and we are set to see more and more verticals jumping on the bandwagon.