top of page

How to earn your piece of the $7 trillion embedded finance pie



If you’re a software developer with an app, e-commerce business or an established, traditional financial services institution, now is not the time to hesitate when it comes to grabbing the opportunities that embedded finance models offer.


What is embedded finance?


Embedded finance is defined as finance-related offerings present in non-financial platforms. It can broadly be broken down, currently, though it is ever expanding, into five areas, namely embedded payments (like click to pay at checkout for online transactions), buy now pay later options at online checkout, investments, and insurance, especially for high-value online purchases and travel packages.


The value of embedded finance


Opportunities abound in this ground-breaking ecosystem, which in 2021 was worth a reported $2.6 trillion or nearly 5% of all financial transactions in the USA. and its value is expected to soar to $7 trillion by 2026.


Embedded Finance transactions

As consumers increasingly seek no-contact transactions for many of their everyday activities and purchases, the closure of many physical bank branches has reduced person-to-person interaction between financial institutions and their clients. Embedded finance is reducing friction during the checkout process and is becoming a natural alternative for transactions that were once the sole domain of traditional banks.


Should banks now fail to evolve and look to embedded finance as a new revenue stream or fail to make strategic partnerships with entrants into the fintech market, they may find their core business will be so eroded by new competition that they will have little to offer customers in the future.


Embedded finance in your SWOT analysis


Embedded finance is a win-win proposition for financial institutions. In the ‘Opportunities’ quadrant of your SWOT analysis is the ability to reach new customers, lower customer acquisition costs, and develop new value-added services to create unprecedented opportunities of scale.


For those non-financial companies that offer embedded finance options in their processes, the opportunities lie in the ability to deliver financial services at a fraction of the cost of incumbent financial institutions, allowing them to extend their service offering and increase customer retention.


For the customer, embedded finance greatly expands financial services options, making the movement and management of money easier and more convenient.


Key players in the embedded finance ecosystem

Source: qentelli


US$7 trillion value by 2026


The ‘Threat’ posed by embedded finance is not one of operational risk, but rather failing, as a non-financial company, to incorporate embedded finance processes into as many functions of the business as possible. Without a financial partner that is agile, forward-thinking, and ready to explore all opportunities, new e-commerce businesses and tech companies will not be able to focus on their core skills and competencies.


In fact, in this new environment, everyone needs to remain true and close to their core functions, and it is strategic partnerships that will mitigate any real risks to any of the parties involved.


Banking as a Service (Baas) is relevant


The challenge for traditional financial institutions is to be bold and to maximise on the new Baas (banking as a service) culture and seize the day with the likes of e-hailing companies, food delivery apps, and a whole range of other e-commerce businesses while recognising that their new role will be largely invisible to the end user.


A report from the IDC estimates that 73% of digital consumer payments globally will be conducted via platforms owned by non-financial institutions by 2030 and that the failure to adapt may cost the losers $250 billion in payments revenue.


Embedded Finance Forecast

Source: Lightyear Capital


For all the stakeholders involved, from the end-user to the platforms that have a direct relationship with the customer and offer excellent user experiences, to the software enabler, and the licence providers and regulatory bodies, the business model has shifted radically with the advent of this new financial ecosystem. Embedded finance is opening up finance to businesses and consumers, and away from banks as we traditionally know them.


Earn a share of the embedded finance pie


The ultimate objective of embedded is to improve customer user experiences and their relationship with service providers. There is much to gain by entering this significant sector of the fintech environment, not least a share of a multi-trillion dollar pie.

Comments


bottom of page