The deep dive: 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, also known as the “$7 trillion market opportunity” is truly becoming a buzzword in recent times and it is largely fuelling the FinTech sector. Yet, sometimes, understanding what the term actually refers to can get challenging.

In short, embedded finance is the integration of a financial service into a traditionally non-financial platform, like a website or an app, in order to make the customer experience easier and seamless. In payments alone, embedded finance revenues were $16.1 billion in 2020, and by 2025 they are forecast to reach $140.8 billion, according to a Barclays report.

How does it work?

Embedded finance is quite a broad term, and it includes different use cases, among which:

• embedded payments
• embedded lending
• embedded investments
• embedded insurance
• embedded banking

It is powered by APIs (Application Program Interface), a technology that acts as an intermediary between two applications, essentially working as a gateway to allow software to talk to other software. APIs is what enables customer-facing digital platforms to ’embed’ financial services into themselves.

This results in a frictionless experience for the user, such that financial services are offered in the right context and right when the customer needs them.  It also makes finance management processes easier for businesses in the MSME, B2C, and B2B segments, as well as monetise their customer base and vertically scale their product offering.

Who is under the radar?

The answer is: digital platforms and financial institutions alike. In fact, it is not just FinTechs reaping the benefits of embedded finance, today the concept has become an essential part of the value proposition of any e-commerce, SaaS platform, or app-based service, like Uber or Deliveroo, with end customers using the embedded payments feature intuitively on a regular basis.

The ‘Buy Now, Pay Later’ (BNPL) boom was one of the earliest driving forces behind embedded finance, with revenue from this service expected to account for over 50% of the market by 2026. So big players like Klarna, Affirm and Afterpay surely play a role in the embedded finance landscape.

Even neobanks like Monzo and Revolut, benefitting from the flexible regulation and Open Banking rules in the region, which have allowed them to operate without having to become full banks, could be considered early adopters who managed to build a real sense of trust among their consumers.

Why does it matter now?

Embedded finance is the direct product of digitisation, which made financial services providers consider how they could leverage the layers of engagement and enablement that the web now offers.

Also, the development of API technology has unleashed a new wave of innovation in financial services and new banking segments and business models like Banking-as-a-Service, Core Banking, and Open Banking. Specifically in payments, APIs have significantly improved the customer journey with faster, more secure, and cheaper transaction processing.

While the sector is collectively agreeing on the great potential of embedded finance, its implementation raises many questions. Does the use of embedded finance for B2C application automatically turns companies into FinTechs? Is it better to build in-house technology or rely on third-party providers? Are banks under attack?