Market Insight

Embedded Finance Trends

Published Last Updated 9 min read

This industry insight article was provided by an external source.

From buying easily online and securing quick, low-cost loans, to sending funds overseas without fuss, or insuring our homes and cars without leaving our armchairs, embedded finance has brought increased convenience, economy, and speed to many of the daily things we do. It’s therefore no surprise that embedded finance is the fastest-growing sector in the fintech industry – with global revenues of $54.3 billion in 2022 and forecasts of expansion to $248.8 billion by 2032.

As embedded finance continues to integrate more deeply into private, public and corporate life, so it evolves to match the needs of diverse communities and provide solutions to age-old problems and obstacles. Where will this evolution take us next? Read on to discover the most important trends in embedded finance and the potential impacts they may bring.

What is Embedded Finance?

Embedded finance integrates various financial services into a business’s digital sales and accounting systems. It achieves this with software called an API (Application Programming Interface), which allows businesses to fulfil financial transactions without the intervention of a bank – as seen when shoppers buy products and services from websites and mobile apps. Embedded finance is most often utilised for payments, but it can also manage other financial products, such as loans, insurance, and foreign exchange.

What’s the Difference Between Embedded Finance and Banking as a Service (BaaS)?

The primary task of embedded finance is to streamline customer transactions – for example, buying a product online with just one click, or sending funds overseas from your smartphone. Banking as a Service (BaaS) allows non-banking institutions (virtual banks), to offer traditional banking services, such as loans and credit cards.

What are the Trends in Embedded Finance?

Embedded finance has already revolutionised our relationship to financial services. But this is just the beginning. As new markets and new opportunities for embedded finance arise, so the technology is evolving to play a larger role in everyday life.

Payments Proliferation

One of the most common applications of embedded finance is for integrated payments, which allow transactions to be processed quickly at the point of purchase. This convenience factor has been mutually beneficial for consumers and for businesses. Consumers can now pay by digital wallets or other in-app gateways with just one click, and businesses can generate additional (side) revenue opportunities and strong brand loyalty – outcomes that have become clearly evident in industries as varied as ride-sharing, fast food delivery, and media and streaming services.

However, as dramatic as the impact of embedded finance on payments has been thus far, it is only the tip of the transactions iceberg. Proliferation into a much broader range of services is now underway, with fintech providers already exploring ways to speed up, streamline or automate payments for products, services and industries that have largely been immune to embedded finance until now. Sectors currently under consideration include:

  • Healthcare
  • Health monitoring
  • Education
  • Social care
  • Law and court proceedings
  • Professional services
  • Business services to SMEs
  • Environmental
  • Local government
  • Licensing and passports

Embedded Banking and Lending

A swathe of non-financial entities now offer financial products to businesses and private consumers. Loans and mortgages are some of their most popular products. However, other banking services, where institutions are responsible for the stored safety of customer funds, have been kept at arm’s-length from these new providers. Advances in embedded banking seem set to change this. Fintech partnerships with traditional banks will allow savings accounts to be opened by non-bank entities and deposits to be held on demand. In the UK, the immediate impact of this change will be good news for savers, as the newcomers seek to attract saver deposits by offering more generous rates and benefits than incumbent banks and building societies.

Embedded lending enables a consumer to split an online purchase into instalments without taking out a formal loan. Sometimes the buyer may not even attend the payment process as they are automatically charged after the fact via Buy Now Pay Later (BNPL) schemes. This area of embedded lending is set for explosive growth, with the BNPL market - valued at $141.8 billion in 2021 - forecast to expand at an annual rate of 33.3% (CAGR) during 2021-2026.

Greater Cooperation Between Banks and Fintech Providers

As the backbone behind the growth of online sales, it is inevitable that the application of embedded finance will increase in parallel with the advance of global e-commerce markets.

According to Statista, worldwide retail e-commerce sales amounted to approximately $5.2 trillion in 2021 and are forecast to grow by 56% to reach $8.1 trillion dollars by 2026. Such dramatic growth is driving greater productive cooperation between traditional banks and new fintech entrants as they rush to capture revenues and valuable data from trillions of new transactions. This collaboration will see banks and fintechs playing to their strengths, with the former capitalising on their well-established credit and infrastructure, and the latter supplying a range of new and diverse applications that increase the flexibility of payments and collections.

Expansion and Increasing Competition in International Payments

A booming e-commerce sector in emerging markets, where business growth is primed and customer bases are expanding, is generating increased possibilities for embedded finance technology. Financial fulfilment of this sales growth is driving significant investment in and the development of new cross-border payment infrastructures, as a host of disruptive fintech entrants seek to change the nature and inherent dynamics of the cross-border payments industry and place more competitive pressure on incumbent banks and cross-border network (CBN) providers.

Africa, Latin America, and Asia are the playing fields of the new embedded finance providers, most of whom are focusing on low-value transactions in the C2C, B2C, and B2B segments, which are currently underserved by banks and most traditional payment providers. The fintechs perceive these low-value transactions between emerging markets as offering the highest disruption potential driven by consumer behaviour, increased trade within emerging markets, and higher financial inclusion.

Additionally, the increasing penetration of smartphones, and popularity of digital access points like alternative payment methods (APMs) for remittances, have created new demands that incumbents are also struggling to meet. Advances in digital money transfers, that work via direct banking relationships within the sending and receiving countries, and back-end networks, that partner with the bank or digital wallet providers of sending or receiving parties, are the most immediate and prominent embedded finance challenges to the global payments status quo.

Abundant Market Opportunities Await Those Who Seek Them

Embedded finance seems poised for its next big bang, as it reaches out beyond its heartlands of payments in industrialised nations to new territories in emerging markets and areas of business and personal life that have been ignored until now. Faster, better, cheaper will continue to be the driving forces of embedded finance, but we should expect the things that accelerate, improve and become more affordable to be unlike any financial developments we have seen before. Abundant market opportunities for individuals and businesses to capitalise upon this revolution will be many, and they may be found everywhere the economically adventurous are prepared to look.

Embedded Finance Making Cross-Border Payments Easy with Clear Treasury

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Open an account with Clear Treasury today for quick, secure, and cost-effective international currency transfers. Talk to us to find out how you can mitigate the impact of currency risk on your international payments with forward contracts, stop losses and more.

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