In a relatively short amount of time embedded finance has become a multi-billion pound sector. According to research from Lightyear Capital, embedded finance is on track to grow to £164 billion in revenue by 2025, up from £16 billion in 2020, indicating the vast potential of this sector. 

Firms in the finance industry are increasingly looking towards embedded finance solutions to transform how they operate. Services like buy now, pay later (BNPL) are attracting investment from financial companies who want to keep up with innovative competitors.  

Michael Treacy, Head of Marketing at OpenPayd commented, “What we are seeing in the BNPL space right now is the tip of the iceberg. Embedded finance use cases will flourish over the next 5 years to include payments, banking, insurance and more.  

Any digital-first business (not just ecommerce) looking to improve their customer experiences and drive new revenue will look towards embedded finance to achieve this. Infrastructure providers like OpenPayd are key to helping these businesses achieve their goals” 

With a report from Yobota finding that 44% of banking and financial institutions plan to invest in embedded finance solutions this year, all types of banking and financial firms are looking to make use of the innovations brought about by Fintech. 

Customer focused 

The Yobota report also finds that 55% of survey respondents agreed that embedded finance has played a major part in elevating the customer experience. The need to not just improve the customer experience but transform it is driving the finance industry’s interest in embedded finance solutions.  

With customers expecting seamless financial experiences in every part of their life, whether it be adding insurance to their smartphone purchase or food delivery workers using banking services through their gig worker app; there are countless areas where embedded finance can revolutionise conventional services. 

Traditional financial institutions who are watching the benefits of embedded finance play out in the wider industry are realising the importance of embracing solutions that give customers access to a wider range of products. Even those firms who have not moved quickly in the past when it comes to Fintech are increasingly seeing that embedded finance tools are not a nice to have but essential. 

According to Michael Pierce, Head of Embedded Financial Solutions Sales at FintechOS “Embedded finance is the next phase of the digital revolution, taking financial products beyond the basic digital contexts owned and managed by the bank, lender, or insurer and getting closer to the context which is most direct and convenient for the end customer. An embedded finance offer is to traditional branch-based banking as Deliveroo is to a sit-down restaurant. Put simply, embedded is about whether you go to the financial institution or whether their products and services come to you. 

Changing sector 

It’s not just consumers who are changing, with the conventional financial ecosystem expanding now that embedded finance enables all types of firms, even those who are not financial, to introduce financial solutions to their often large customer bases.  

The rapid growth of the Bank-as-a-Service model, which gives firms the ability to integrate financial services through APIs, is a clear example of the interest in this area. 

Greg Caldwell at point-of-sale finance platform Divido says, “Traditional banks are looking to embed their products into a wide range of other industries’ interactions with the end customer. As a result, they are having to learn fast and so are turning to specialist firms like ours, not just because the platform is valuable to the financial and the non-financial firm but because we understand both sides.” 

By 2025, the market capital of embedded finance companies is on course to reach $1 trillion. In the past, banks faced a great deal of challenges when trying to engage with non-financial firms who wanted to incorporate banking services into their product offering.  

Again from Michael Pierce, “To win in embedded you need to look at a gear shift in terms of how you launch and run digital-first financial products. This speed of innovation is what’s going to separate out whether you’re a beneficiary or victim of this next wave of disruption” 

However, the rise of APIs has virtually eliminated the vast amount of staff time and resources needed to achieve such integrations. Caldwell also commented that the “democratisation” effect of APIs means that there is more equality. “We see larger retail merchants wishing to pay for platform services, where lenders would typically have paid, because they want to retain control of the financial service that will be put in front of their customers.” 

While these changes are significant and will undoubtedly see the role of traditional banking players shift, there will still be a vital role for banks to play going forward. If the right approach is taken, banks can gain from reaching an entirely new customer base through partnerships that are win-win-win for customers, banks and their partners. 

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Written by Finbarr Toesland, Editorial Contributor.