How Embedded Finance Is Transforming the World of Consumer Banking

Embedded finance is growing fast, with the global market projected to increase from $22.5 billion in 2020 to $384 billion by 2029, according to KBV Research. This growth will change how people shop, pay, and interact with financial products in their daily lives.

But what exactly is embedded finance? It’s the seamless integration of financial services into non-financial platforms, allowing people to complete tasks such as making payments or accessing credit directly within applications they already use.

Here are some common examples of embedded finance in action:

• Online retailers offering financing options like “buy now, pay later” at checkout
• Ride-hailing apps allowing payments directly within the platform
• E-commerce platforms offering protection plans for purchases without redirecting to a separate provider
• Travel booking sites providing the option to add insurance during the checkout process.

This service enables customers to link their financial accounts once, and then make all purchases effortlessly, eliminating the need for manual input of payment details for every transaction.

Recent research from Pathward shows that the expansion of embedded finance solutions is expected to take place rapidly. In fact, nearly 44% of executives reported that their company is supporting an embedded finance solution today and another 33% plan to offer it soon.

For consumers, the primary advantage of embedded finance is convenience. Making payments, getting a loan, or subscription management is integrated into platforms consumers already use, eliminating a switch between apps or providers. This builds user-friendly experience and simple, faster transactions.

For businesses, this technology unlocks new revenue streams through transaction fees, interest on lending, or partnerships with fintech providers, allowing companies to generate additional income beyond their core offerings. This integration strengthens customer engagement by streamlining the user experience and keeping customers within their ecosystem. Furthermore, businesses gain access to valuable customer data, which can be used to personalize offerings, enhance loyalty, and drive repeat transactions.

Financial institutions benefit by embracing embedded finance as they open new distribution channels and expand their customer base without the need to build additional infrastructure.     Take for instance a bank that partners with a company that offers a branded credit card. This collaboration allows users to keep everything in a non-financial ecosystem, and the card could offer cash back rewards, instant approvals, and expense tracking, all while benefiting from the bank’s robust compliance and regulatory expertise and the potential of co-branding. By teaming up with non-financial businesses, partner banks can reach a wider audience, including customers who might not engage with traditional banking services.

Embedded finance encompasses a wide range of financial products and services integrated into non-financial platforms. Here’s a closer look at key examples.

Embedded Banking

• Definition: Integration of traditional banking services (e.g., checking accounts, savings accounts, debit cards) directly into non-financial platforms.
• Examples:
  • A ride-sharing platform that allows drivers to receive earnings into a digital account linked to a debit card. This application streamlines the payment process to drivers and bypasses traditional banking hurdles.
  • Digital wallets where users store funds and perform transactions without a traditional bank account, often used in mobile payment applications.
  • Payroll solutions enable employees to receive their salaries into a digital account, often with features for early access to wages to earnings.

Embedded payments

• Definition: Payment-Process capabilities integrated within non-financial platforms, enabling transactions without leaving the app.
• Examples:
  • E-commerce platforms facilitate user transactions with a single click, eliminating the need to re-enter payment details.
  • A mobile coffee ordering app that lets users order and pay seamlessly within the app, enhancing convenience and user experience.
  • Point-of-sale systems in retail environments are equipped with integrated payment processing that enables customers to pay using various methods (cash, credit/debit, mobile payments) directly at the checkout.

Branded Cards

• Definition: Credit cards offered by large retailers or airlines include tailored financial products with specific perks.
• Example: A travel rewards credit card where users earn points for every dollar spent, and benefits like priority board and discounts on future travel.

Embedded Lending

• Definition: Seamless access to financing option during the purchasing process, simplifying borrowing.
• Examples
  • A buy-now, pay later service integrated into retail platforms, helping customers to finance their purchases at checkout and pay in installments, making larger purchases more accessible.
  • Online car marketplaces offer instant credit decisions at checkout, allowing buyers to apply for financing directly on the platform. When purchasing a vehicle, customers can review financing options and select terms, all without visiting a bank.

Embedded Insurance

• Definition: Easy purchase of insurance at the point of sale, offering immediate protection.
• Example: Travel booking websites that allow users to add travel insurance when booking flights or accommodations, providing coverage for trip cancellations, medical emergencies, or lost luggage.

The future is bright for embedded finance. However, among companies that currently offer embedded finance solutions, a surprising 81% of executives surveyed reported that they somewhat or significantly underestimated the complexity of building an embedded finance solution. This highlights the importance of preparedness when it comes to implementing embedded finance.

Without adequate planning and the right technical expertise, companies risk encountering costly delays, compliance issues, and scalability problems. As embedded finance matures, businesses looking to capitalize on its benefits must carefully assess their internal capabilities and seek out experienced partners who can help navigate this complex landscape. By doing so, they can better position themselves to unlock new revenue streams, enhance the customer experience, and stay ahead of the competition.

Partnership is crucial in embedded finance. Businesses should start by understanding their customers' needs and behaviors to determine the problem that needs solving. Once the vision is clear, evaluating the go-to-market strategy is key. Consider whether embedded finance is core to your business or if partnering with an expert provider is more beneficial.

Fintechs offer specialized technology for various solutions, while banks provide essential infrastructure, lending capabilities, and compliance frameworks. In today’s market, balancing customer experience with security and compliance is critical.

For businesses unsure where to begin, consulting a partner bank can be invaluable. Established partner banks typically have a curated ecosystem of fintech partnerships and can guide businesses in developing compliant, strategic solutions. These partnerships are crucial in navigating the complexities of embedded finance and bringing safe, effective solutions to the market.

Don’t let the complexities of embedded finance hold you back—get in touch with Pathward today and learn how we can help you navigate the world of embedded finance with confidence and success.