Embedded finance is fundamentally altering the way we engage with money. Before the advent of embedded finance, traditional finance was characterized by rigid, siloed systems - requiring users to navigate multiple platforms to complete daily activities like pay for rides and food deliveries. That's no longer the case. Embedded finance is the driving force behind the creation of seamless experiences that cater to customer demands for convenience and simplicity. Meaning customers no longer have to leave the app to complete a purchase. However, embedded finance has further use cases outside of payments – explaining why the market size is projected to reach $6 billion US dollars by 2025, according to EY. Together, let's explore four trends in embedded finance shaping the future of finance.
1. Multi-Rail Payments are Becoming Mainstream
In the past, financial transactions were limited to a single payment method. Today, multi-rail payments have become mainstream to meet the growing consumer demand for versatility. Studies have shown that ''9% of online shoppers will abandon their carts if the checkout lacks their preferred payment option.'' Restricting customers to a single payment method will result in significant revenue loss for companies unwilling to expand their payment methods.
The integration of payment methods into everyday activities has become remarkably ubiquitous today. Whether ordering a ride through a mobile app, shopping for groceries online, or purchasing clothing on social media, the convenience of integrated payment options has seamlessly woven into our daily routines. As these integrated payment methods continue to proliferate, they redefine the boundaries of convenience, underscoring the importance of multiple payment options to satisfy customers.
The emergence of multi-rail payments has ignited a favorable ecosystem for innovative business models to thrive, with ''buy-now-pay-later'' (BNPL) services and ''digital wallets ' wallets' standing out as prime examples. BNPL models, enabled by multi-rail payments, offer consumers greater flexibility in purchasing, allowing them to acquire products or services immediately while spreading the payments over time. The BNPL model has fueled consumer spending, as the global market size exploded to over 23 billion dollars last year. Similarly, digital wallets have flourished within this ecosystem – with Apple Pay standing out as a leading option. Users can effortlessly link a variety of debit and credit cards to their wallet app within seconds. As consumers increasingly demand convenience, Apple Pay delivers payment solutions accepted by over 85% of retailers nationwide.
2. Major Banks are Joining the Embedded Finance Ecosystem
Prominent banks are quickly capitalizing on the Embedded Finance market opportunity. JPMorgan Chase recently joined forces with Gusto – a cloud-based payroll software company – to provide ''embedded payroll services to small and mid-sized clients.'' Chase customers can now do banking and payrolling in a single location – eliminating the need for users to switch back and forth between applications.
Elsewhere, Goldman Sachs partnered with Modern Treasury – a payments software company – to ''combine Modern Treasury's payments operations platform with Goldman Sachs' TxB (cloud) platform'' to help companies add payments to their products without technical difficulty. The partnership also plans to help companies comply with financial regulations as they integrate embedded payment options.
Following bank collapses, such as Silicon Valley, Signature, and First Republic, a market opportunity emerged to attract new clients via embedded finance. Grasshopper, a digital-first bank, leveraged the partnership between FIS and Treasury Prime to ''act as the pilot bank'' for FIS's BaaS and corporate API platform. Following the integration, Grasshopper witnessed a substantial increase in total revenue, loans, and deposits – achieving exactly what they set out to do with the help of embedded finance.
Expect to see an increased number of partnerships in the future between major banks and emerging fintech startups to create customer-centric experiences.
3. Beyond Payments - Expansion towards Lending, Deposits, and Investing
Embedded finance has expanded beyond payments, encompassing lending, deposits, and investing.
Neo banks are increasingly venturing into lending, offering borrowers convenient digital loans. Sofi, a neo-bank with roots in student lending, has expanded to offer personalized loans for a wider audience. Ranging from home improvement loans to wedding loans – their easy-apply feature means borrowers can prequalify in less than a minute.
Elsewhere, the growth of deposits in embedded finance has been remarkable, as a growing number of users put their trust in digital platforms. High-yield online savings accounts are all the rage now as depositors shift away from traditional accounts offering little to no return. Neo banks will continue to push deposits in the future because it enables them to lend – a fundamental portion of growth.
In the world of investing, embedded finance has democratized investment opportunities for the masses. Consumers can now purchase cryptocurrency through familiar platforms like Venmo and PayPal. Gone are the days when investors were forced to open accounts with large financial institutions.
4. B2B Payments are the Future
Embedded finance is poised for expansion into the B2B market – as the market size for embedded finance in the business-to-business marketplace is projected to balloon to $1.91 trillion in five years. Marked by a seamless flow of payments between companies, suppliers, and vendors – businesses that don't exist within the financial domain will soon be able to accept payments on their native domain.
Security and compliance concerns loom large as embedded finance expands into the B2B sector. However, for now, ''no single embedded finance regulatory framework exists,'' according to Deloitte. Therefore, businesses must devote ample resources to comply with emerging regulatory laws, particularly those that have the potential to harm consumers and compromise market integrity, as they will be subjected to increased scrutiny by regulatory bodies. Meeting these challenges head-on will be crucial in fostering trust and realizing the full potential of embedded finance in the B2B environment.
Final Thoughts
The growth of embedded finance has been exponential, with businesses across industries realizing its potential to enhance customer experiences and drive revenue. Leading to an increasing number of partnerships between traditional financial institutions and fintech startups to harness the power of embedded finance. However, this rapid expansion has raised regulatory concerns as authorities grapple with ensuring consumer protection, data security, and fair market practices within this evolving financial landscape.
As embedded finance continues its ascent, it's important your company has elite talent in your corner to capitalize on this opportunity. Consider contacting our experts here to help locate best-in-class talent for your company.
