Embedded finance is a rapidly developing sector within the financial industry characterized by the integration of banking and financial products and services into the platforms of nonfinancial companies (NFCs) or fintech firms. This integration enables businesses that traditionally offered only nonfinancial services to present their customers with financial solutions such as buy now, pay later (BNPL), digital wallets, and point-of-sale (POS) credit. The burgeoning embedded finance market is driven by the global proliferation of smartphones and expanding internet accessibility, making financial services readily accessible to billions globally and presenting significant growth potential.
The Growth Potential of Embedded Finance
A report by Spherical Insights highlights the potential of embedded finance, revealing that the global embedded-finance market size was $81.4 billion in 2023 and is estimated to reach $1.16 trillion by 2033, growing at a compound annual growth rate (CAGR) of 30.43 percent. The Asia-Pacific (APAC) region is projected to experience the fastest regional growth due to a high number of smartphone and internet users, particularly in countries like India, China, Indonesia, and Vietnam. Economic development and GDP growth in these regions further fuel demand for embedded finance.
The embedded-payment segment is anticipated to hold the largest market share within embedded finance, driven by increasing customer demand for seamless transactions and enhanced security. E-commerce platforms, for instance, are embedding micro-investment facilities that allow consumers to invest in financial markets, such as stocks and bonds while shopping, or round up purchases to earn rewards. This integration illustrates the broader trend of nonbanking platforms becoming primary customer touchpoints while banks provide the necessary infrastructure and regulatory approvals.
Key Opportunities for Businesses
Several key opportunities emerge for businesses integrating embedded-finance solutions. Embedding financial services within the customer journey can help businesses attract and retain more customers. New financial services offerings can boost revenue streams from existing customers and increase the lifetime value of these relationships, particularly through premium service charges and cross-selling complementary products. Leveraging user data allows businesses to provide personalized financial experiences and recommendations.
Offering integrated, frictionless experiences that meet multiple customer needs through a single platform strengthens customer loyalty and reduces the need for customers to seek financial services elsewhere. A study by McKinsey & Company in 2023 illustrated the growing consumer preference for convenient and seamless experiences, with 40 percent of automobile-finance industry consumers favoring online channels for financing car purchases. This trend has prompted automotive manufacturers and dealerships to embed financing solutions within their sales platforms, along with insurance and leasing options, simplifying the vehicle purchasing process.
Technological Advances and Cost Reduction
Technological advances, such as APIs (application programming interfaces), have significantly reduced the costs of offering embedded finance. Underwriting decision-making for lending, for example, can now be automated with minimal cost through instant connections to public and private data sources. The BaaS (banking-as-a-service) business model is becoming prominent, with lenders integrating their digital products and services into the platforms developed by nonfinancial companies.
This model allows these companies to offer services like mobile banking, loans, and credit cards directly to their customers without needing banking licenses, while sponsor banks provide the financial expertise and infrastructure to support these integrations. Additionally, embedded finance could aid sponsor banks in achieving sustainability goals by offering ESG (environmental, social, and governance)-compliant products through their platforms.
Impact on Financial Inclusion
The potential of embedded finance to drive financial inclusion, particularly in emerging markets and developing countries, is compelling. Integrating financial services into widely used platforms like mobile apps or e-commerce sites can provide unbanked or underbanked populations easier access to financial products. With increasing smartphone and internet penetration in developing regions, embedded finance can enable more people to participate in the formal financial system, fostering economic empowerment and growth.
An example is telecom companies in Africa embedding micro-lending services into their mobile money platforms, offering small loans to individuals without access to traditional credit. This approach not only provides financial services to underserved populations but also helps build credit histories and financial literacy.
Revenue Growth and Customer Loyalty
Embedded finance also increases merchant sales through higher conversion rates, larger basket sizes, and enhanced customer lifetime value. According to Alloy’s “2024 State of Embedded Finance Report,” sponsor banks attributed 51.4 percent of their deposit income to embedded-finance partnerships. The survey also revealed that 92 percent of sponsor banks believed more adaptable partnerships were needed, with many banks diversifying their collaborations across multiple fintech sectors or customer segments to spread risk and maximize opportunities.
Embedded finance is also a key growth driver for software-as-a-service (SaaS) platforms. A report by Adyen and Boston Consulting Group (BCG) highlighted the importance of embedded finance for meeting the needs of small and medium-sized businesses (SMBs) and differentiating in a competitive market. The embedded-finance market has seen a 25-percent growth over recent years, supported by favorable interest rates leading to higher banking revenues.
The Future of Embedded Finance
Embedded finance is a rapidly evolving area within the financial sector, marked by the seamless incorporation of banking and financial products into platforms run by nonfinancial companies (NFCs) or fintech firms. This integration allows businesses, which traditionally provided only nonfinancial services, to offer their customers various financial solutions like buy now, pay later (BNPL), digital wallets, and point-of-sale (POS) credit.
The embedded finance market is experiencing robust growth, largely fueled by the global expansion of smartphone usage and increased internet accessibility. These advancements make financial services easily available to billions of people worldwide, thus presenting ample growth opportunities for the sector.
With smartphones becoming ubiquitous and internet access continually expanding, consumers can now access financial services instantly, whether they’re shopping online or in-store. This ease of access not only enhances the customer experience but also encourages consumer spending and loyalty. Companies outside the traditional financial space are increasingly recognizing the value of embedding financial services into their platforms to stay competitive and meet evolving consumer demands.
In conclusion, embedded finance represents a significant innovation in the financial industry by leveraging technology to integrate financial solutions seamlessly within everyday platforms, thus offering convenience and fostering greater financial inclusion on a global scale.
