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Banking where you want it – why embedded finance is set to change the world

Estimated reading time: 5 minutes

Want to access your bank accounts inside your accounting software? Or take out a loan in an e-retailer’s checkout basket? Thanks to new regulation and open APIs, you can. This is embedded finance, and it promises a new era of customer freedom…

Is finance about to disappear? Well, in one sense, absolutely not.

The global finance industry was worth, by one estimate, $22.5 trillion in 2021. This vast market – encompassing banking, insurance, loans, payments, savings and more – comprises a quarter of the world's economy

Obviously, the finance industry is not going anywhere. But the products? Well, that’s a different story.

Put simply, technological innovation is changing the way that consumers find and interact with financial services. The first phase of this process saw people reduce their physical journeys. For example, they cut back on visits to bank branches and started to do all their banking on websites and mobile apps.

The next phase takes this a stage further. Now, financial products are escaping the ‘walls’ of those banking apps. They are being delivered at the point of need. 

In short, they are disappearing inside other non-banking experiences.

We define embedded finance as a non-financial software platform providing an adjacent financial service, for which it takes some degree of economic ownership.
Bain & Company

This is embedded finance. In practical terms, it means any business can integrate financial services so that buyers do not have to migrate away – or even enter their details – to complete a transaction. This is a compelling benefit, removing friction for users and improving ARPU and retention for service providers. 

And it is not speculation. It’s happening now. The most frequently quoted example is the Uber transactional experience, in which users make payments seamlessly and automatically inside the Uber app.

Another familiar example is the Buy Now Pay Later space. BNPL solutions let online consumers apply to make payment by instalments when they are completing their transactions. The process takes seconds and requires minimal form-filling. 

BNPL has proved so successful that it is now commonplace in online checkout baskets all over the world. According to WorldPay, BNPL is on target to account for approximately 5.3 percent ($438 billion) of all global e-commerce transaction value by 2025.

And to give one final example, consider the changes happening in accounting software. All the major providers are now working towards a future in which cloud-based accounting products become the central hub of a business finances – and let users connect to banks, lenders, insurers and more without migrating away.

All of these trends will change the way that people (whether consumers or employees) think about financial services. However, embedded finance also opens the door a revolution that excludes humans altogether: machine-to-machine payments. It promises an era in which artificially intelligent machines adapt and make financial decisions independent of human agency.  

All of these trends will change the way that people (whether consumers or employees) think about financial services. However, embedded finance also opens the door a revolution that excludes humans altogether: machine-to-machine payments. It promises an era in which artificially intelligent machines adapt and make financial decisions independent of human agency.  

Examples? Well, the car is an obvious one. In fact, card issuers and motor manufacturers have already experimented with scenarios in which the vehicle itself pays for fuel or parking etc without the owner’s direct participation. 

So how developed is this market now? A 2020 report by Mercator Advisory Group says IoT payments stood at $5.76 billion in payments in 2019, but will hit $7.56 billion by 2024. 

What are the factors that make embedded finance possible?

The embedded finance revolution didn’t happen by accident. Two key factors made it possible. The first was virtualisation. Over the last two decades, many physical services turned into cloud-hosted software – and this profoundly changed many well-established industries from music to TV to taxis. The same transformation is now impacting finance.

The second key factor is regulation. This is critical. Regulation is less important in other verticals. Minimal oversight is needed when the music industry moves from CDs to streaming. But when it comes to people’s money, regulators need to ensure that consumers are protected.

So let’s look at the conditions that have made it possible to move financial products out of their traditional silos and take them to where consumers are.

•    Open banking

In the past consumers have become more data-aware.  It has become easier for them to access their personal information. They have demanded more control. In response, regulators have passed laws that compel banks to share personal data with specialist intermediaries when a customer requests it. 

This represents a major shake-up. It’s effectively saying that financial data belongs to customers, not banks. Sound fair. But it requires a major change in mindset by all stakeholders. And it opens up the risk of fraud if not done properly. 

Still, open banking is rippling out across the world. The best-known examples are Europe’s Payment Services Directive 2 and the UK's Open Banking Standard. But dozens more countries are now exploring the topic.

•    APIs 

The humble application programming interface (API) is the tech behind the dramatic disruption of the digital era. It offers a simple way for computer programs to communicate with each other. An API lets you embed a simple Google Map on your website rather than paying a programmer to build a complete map from scratch. 

APIs can have the same simple but powerful impact in financial services. For example, banks can share account APIs with approved third party providers so that consumers can:

•    Access bank account information
•    See balances and transactional history
•    Make ‘push’ payments from personal and business current accounts
•    See information about banking products, branch and ATM locations

•    Real time payment rails

When moving money, multiple checks and balances are needed to ensure the payment is legitimate, accurate and secure. For most of history, this oversight slowed payments down. Transactions could take several days to clear. 

Now, these delays are disappearing. Digital processes can automate many of the checks and make payments nearly instant. In 2014, 17 countries had launched live real-time payment rails. Today, that number stands at more than 60. Today, nearly three quarters of the global population has access to these services.

•    Analytics

The explosion of available data is making it possible to tailor experiences for the individual. This is happening across all verticals. Finance is no different. Digital transactions leave a data trail, and service providers can analyse the patterns to improve their offerings.

An example is credit scoring. Today’s systems were mostly created in the 1950s and based solely on a person’s employment record and borrowing history. It’s a very limited approach. In the 2020s there’s the opportunity to assess someone’s credit worthiness using thousands of data points – such as browsing history and even whether they use caps to complete a form. 

How to make finance products safe and trustworthy

While embedded finance offers the chance to make financial services more convenient and intuitive, it also widens the attack surface for fraud. Regrettably, when there is no physical card present, criminals can take advantage. 

So how can we keep card payments secure and reliable when there is no physical card to present and authenticate? One of the answers lies with tokenization – the tech that makes it possible to virtualise cards inside other products

Tokenization replaces sensitive payment information with a randomized number. This string of numbers and letters can be decrypted only by the eCommerce company that issued it. And since tokens don’t store any identifiable customer information, they are worthless if stolen. 

Thanks to contactless payments phone-based wallets, tokenization is now moving into physical environments too. Obviously, any card stored in a phone wallet is virtual, not plastic. 

So tokenization represents a major breakthrough. It makes online payment safer, and can also improve acceptance rates by merchants. When a physical card is present merchants typically decline just 2 percent of payments. In card-not-present transactions, the decline rate is 15 percent. 

The emergence of embedded finance marks a new phase. It is changing the way consumers think about financial services – and shaking up the structure of centuries-old industries. For forward-thinking companies this represents a huge opportunity.

How huge? Let’s review what the analysts say.

How much is embedded finance worth today?

A Bain & Company study says embedded finance accounted for $2.6 trillion in 2021 in the US alone. That’s nearly five percent of total financial transactions. It estimates that by 2026 it will exceed $7 trillion, or more than ten percent of transaction value.

How much revenue does embedded finance generate now? 

A report by Juniper Research estimates global revenue from embedded financial services will exceed $183 billion in 2027 – up from just under $65 billion in 2022. It says that this expansion will be driven by non-financial businesses incorporating embedded finance options into their product offers. 

What will be the future impact of embedded finance?

IDC forecasts that, by 2030, 74 percent of digital consumer payments globally will be conducted via platforms owned by nonfinancial institutions.

How much interest is there in embedded finance?

FIS’s Global Innovation Report asked c-suite executives about their key areas of financial investment in 2023. It found 36 percent of financial services firms will invest significantly in developing embedded finance products within 12 months.

Examples of embedded finance products

Bank accounts/deposits 
Accounts that consumers can open and use from within an app or software platform.

Moving money between accounts inside non-bank apps or software. 

Card issuing
The issuing of virtual prepaid, debit, and credit cards for customers and employees from within software or apps.

This comprises both unsecured lending (embedded in business management software (e.g., merchant cash advance) and secured lending (for large purchases with underwriting and origination at point of sale).

Examples of embedded finance distributors

Traditional e-retailers
Merchants can add attractive financial products to enrich their checkout experiences and improve completions

Software firms
Software vendors such as accounting specialists can easily embed finance products to improve sign-up numbers, keep users inside their solution and strengthen their value propositions.

Marketplaces and platforms
Platform companies such as ride sharing firms and auction sites can offer tailored financial products to improve the customer experience and increase merchant adoption/retention.

Telecom companies
MNOs are well-placed to provide embedded finance products. They can enhance the customer experience inside mobile hardware and software – most obviously by simplifying the provision of loans for new devices.

Device makers
Similar to MNOs, OEMs can use embedded finance to simplify ownership and financing of their products.

Source: McKinsey 

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