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The Rise of Embedded Finance: How Fintech is Reshaping Traditional Industries

Table of Contents

Introduction to Embedded Finance and Its Consumer Impact

A person in business suit analysing some embedded finance related graph, with a laptop in front.

Embedded Finance: A Definition and Overview

Embedded finance is revolutionizing the intersection of financial services and non-financial sectors, reshaping traditional business models and consumer interactions. Simply put, it is the seamless integration of financial services like payments, lending, or insurance directly into the offerings of non-financial businesses, via technological platforms such as APIs​1​​2​. This innovative trend is part of the broader fintech wave, embedding banking and financial tools within the customer journey of various products or services, traditionally outside the financial sphere, like an e-commerce platform offering installment loans, or a ride-sharing app that includes payment solutions​3​.

The Impact on Traditional Industries

Embedded finance is not just a fleeting trend but a substantial economic force, with financial services integrated into e-commerce and other software platforms accounting for $2.6 trillion, or nearly 5%, of total U.S. financial transactions in 2021. This figure is expected to exceed $7 trillion by 2026​4​. The essence of this transformative power lies in its ability to make financial products more relevant and accessible to consumers across various industries—from e-commerce to healthcare and transportation—tailoring financial experiences to consumer needs and habits.

Consumer Behavior: A Shift Towards Embedded Experiences

The rise of embedded finance has had a marked effect on consumer behavior, with benefits extending well beyond mere convenience. Customers are now experiencing financial products that are more closely related to their purchases, such as supermarket debit cards that offer exclusive discounts, which add greater value to their shopping experiences than traditional bank offerings​5​. Such integrations are predicted to propel the embedded finance market to a valuation of $7.2 trillion by 2030, indicating a significant shift in how consumers interact with financial products​5​.

Consumer brands are now harnessing embedded finance to deepen engagement and loyalty. By integrating financial services into their platforms, brands are not only facilitating transactions but also embedding themselves into the daily lives of consumers. The result is a more intimate brand-consumer relationship and a new frontier for customer loyalty programs, as seen with brands like the McLaren F1 Racing team, which offers branded debit cards with exclusive rewards​5​.

The Post-Pandemic Shift in Customer Expectations

The pandemic has accelerated the adoption of digital finance, reshaping the habits of even the slowest digital adopters. Consumers, young and old, have become versed in digital transactions, and many are expected to continue favoring digitally native e-commerce solutions. On the flip side, those returning to physical stores come with heightened expectations for a seamless and integrated shopping experience, combining the best of both digital and physical retail worlds​5​.

Brick-and-mortar stores, therefore, are looking at embedded finance as a means to enhance in-store experiences, ensuring that the innovation in e-commerce is also reflected in the physical retail space. By leveraging embedded finance, traditional retailers can create a frictionless payment experience and offer incentives for customers to shop in-store, thereby maintaining their competitive edge in an increasingly digital-first economy​5​.

The Technological and Regulatory Framework of Embedded Finance

Technological Enablers of Embedded Finance

Embedded finance has surged ahead, thanks to the convergence of various technologies and the digitization of commerce. At its core are APIs and open banking, which have democratized access to financial services by allowing third-party providers to create banking and payment solutions that can be directly integrated into non-financial digital platforms​1​. Cloud computing has provided the necessary infrastructure to scale these solutions, enabling businesses to manage vast amounts of data and transactions securely and efficiently. Furthermore, advancements in real-time risk analytics have also played a critical role, allowing providers to offer personalized financial products by analyzing customer data on the fly​1​.

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The result is an ecosystem where a small business owner can interact with their e-commerce or accounting platform not just to manage their business but also to access financial services like opening a deposit account or ordering a debit card, without ever needing to set foot in a traditional bank​1​. Retailers, online marketplaces, telecom companies, and business-software firms are among those that have capitalized on this trend, not just as distributors of financial products but also as innovators creating new use cases, such as providing instant-payments settlement for merchants or just-in-time funded debit cards for gig economy workers​1​.

The Role of Fintechs and Financial Institutions

Fintechs have been the linchpin in the rise of embedded finance, providing the platforms through which financial products are accessed and customized. Companies like Marqeta specialize in certain financial product categories, while others offer a broader range of services, from deposits to money movement and lending​1​. Traditional financial institutions aren’t left behind either; some, like Cross River Bank, have built their own technology to provide a full suite of embedded finance services directly to distributors​1​.

Regulatory Landscape and Strategic Considerations

As embedded finance blurs the lines between financial and non-financial services, regulatory bodies in the EU, UK, and beyond are taking note. The integration of third-party financial services into digital platforms raises questions about market integrity and consumer protection. Financial services firms looking to venture into embedded finance must consider regulatory pressures and enable an environment where consumer rights, data security, and system resilience are paramount​2​​3​.

There are significant benefits to embedded finance, such as removing friction from consumer experiences and creating new growth avenues. Yet, it introduces complexities, especially for non-financial entities unfamiliar with financial regulations. This necessitates a careful balance between customer experience, commercial priorities, and compliance. As there is no single regulatory framework for embedded finance, firms must enhance their risk management frameworks to meet the diverse regulatory requirements that depend on the specific services they offer​2​.

Regulatory authorities are focusing on four key areas: consumer protection, data security, operational resilience, and governance. These areas are critical to maintaining the integrity of the financial market and ensuring the success and long-term viability of embedded finance solutions​3​​4​. Firms must navigate these regulatory landscapes to meet consumer needs effectively, gain access to new markets, and maintain customer trust while managing risks within their appetite​2​.

Embedded Finance in E-commerce

Financial Integration within E-commerce Platforms

E-commerce has been one of the primary beneficiaries of embedded finance, with financial transactions on these platforms reaching approximately $2.6 trillion in 2021. The predictions suggest an upward trajectory, with numbers possibly exceeding $7 trillion by 2026. Payments and lending are the primary services used, but the spectrum is expanding to include insurance, tax, and accounting services​1​.

E-commerce and the Embedded Finance Revolution

The transition of embedded finance into a critical element of the e-commerce value chain has been remarkable. Platforms like Shopify have transformed from mere marketplaces into comprehensive ecosystems offering a suite of embedded financial services. End users increasingly favor this integration over traditional standalone services from financial institutions, signaling a preference for a unified consumer experience​1​.

Quantifying Embedded Finance in E-commerce

Although there has been rapid growth in embedded financial services, research to quantify this segment’s dynamics is nascent. However, the available data underlines the significant role of embedded finance in e-commerce, promising improved customer experiences, enhanced financial access, and operational efficiencies for businesses​1​.

The Consumer-Centric Approach of Embedded Finance

Embedded finance has shifted the paradigm, enabling customers to engage with financial services organically through the software and services they already use. This change is not merely functional but transformative, fostering a new kind of relationship between consumers and financial providers​1​.

Key Insights into Embedded Finance

Embedded finance has improved the value proposition for customers, who now enjoy more contextual and seamless experiences. For e-commerce platforms, this means unlocking new use cases and leveraging customer data to enhance financial access and reduce costs. The focus on payments, lending, banking, and cards illustrates the trend towards a more integrated digital ecosystem​1​.

Embedded Finance in the Healthcare Industry

Incorporating Finance into Healthcare

The Western healthcare systems have undergone significant transformations in recent years, shifting from traditional face-to-face consultations to telemedicine, remote patient monitoring, and online communication. This shift has necessitated the quick, digital payments that embedded finance facilitates. With the healthcare industry expected to make up 17% of the embedded finance sector over the next decade, the implications are substantial​1​.

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Enhancing Healthcare Operations and Patient Experience

Embedded finance within healthcare implies the integration of financial operations—payment, banking, lending, insurance—into medical software, making financial transactions more straightforward for both patients and providers. This integration not only optimizes billing and streamlines claim processing but also simplifies access to healthcare services, granting patients more control over their treatment choices​2​​1​.

Benefits Across the Healthcare Spectrum

  • For Patients: Embedded finance introduces a customer-centric approach, offering freedom in service selection, avoiding the need for in-person payments at banks or hospitals, and providing additional online services, such as health tracking and medication reminders. Furthermore, it facilitates remote access to healthcare services, crucial for those in distant locations​1​​3​​4​​5​.
  • For Clinicians and Healthcare Providers: About 50% of nonfinancial companies, including healthcare providers, are investing in embedded finance. The benefits are clear: continuous communication with patients via subscription-based platforms, the ability to make informed treatment decisions with integrated insurance data, improved revenue control, and higher patient satisfaction due to the autonomy and convenience offered​1​​6​​7​.
  • For Insurers: Embedded finance solutions often include insurance functionalities, which allow for a shorter claims processing cycle, more accurate data, and additional transparency and data security. These benefits stem from the automated and efficient data exchange processes enabled by embedded finance technologies​8​​9​​10​.

The proliferation of embedded finance in healthcare is emblematic of a broader trend towards integrated services, where the lines between industries blur, providing more cohesive and user-friendly experiences.

Embedded Finance in the Transportation Industry

Embedded Finance: A Catalyst for the Transportation Sector

The transportation industry, specifically airlines, is on the brink of a financial revolution, steered by the principles of embedded finance. The sector is poised to capitalize on this trend, with airline retailing predicted to be worth $40 billion by 2030. In this context, embedded finance isn’t just a convenience; it’s a strategic imperative​1​.

Tackling High Costs Through Embedded Finance

Every year, the airline industry conducts about 2.9 billion booking payment transactions worldwide, amounting to approximately $1 trillion. Yet, these transactions come at a high cost, with the industry spending over $20 billion annually on payment processing. A significant portion of this expense, around 70%, is attributed to the prevalent use of credit cards, which, despite their convenience, impose heavy costs on airlines​1​​2​.

Rethinking Payment Strategies with Embedded Finance

In the face of these expenditures, intermediaries such as booking platforms and online travel agencies are redefining the payment experience. By leveraging fintech solutions, they aim to create a seamless end-to-end payment journey. For airlines, improving the payment infrastructure is key to staying competitive and maximizing retail opportunities​3​.

The Financial Upside of Embedded Finance

Embedded finance presents a substantial opportunity for the airline industry, with the potential to unlock an additional $14 billion in value. This opportunity includes enhancing loyalty programs, increasing sales of ancillary services, and offering more flexible exchange and refund processes. Cost reductions in payment processing, especially for B2B or corporate sales, also contribute to this potential upside​1​.

Aligning with Evolving Customer Expectations

Customer expectations in the transportation sector are evolving, with an increased comfort level in conducting high-value transactions digitally. Airlines are thus encouraged to onboard alternative payment methods like digital wallets and bank transfers to meet these changing preferences. Furthermore, innovations like mobile point-of-sale devices can not only improve the customer experience but also provide airlines with valuable customer data​1​.

Future-Proofing Payments in the Transportation Ecosystem

Embedded finance aligns with five key industry trends, including the growing acceptance of alternative payment methods and a consolidated payment market. Airlines have the opportunity to forge strategic payment partnerships and adapt to regulatory changes, thereby lowering costs and enhancing the customer payment journey. Such strategic shifts are integral for airlines to capitalize on the embedded finance trend and its benefits for both operational efficiency and customer satisfaction​1​.

As the transportation industry continues to navigate the embedded finance landscape, it is clear that the integration of financial services into digital platforms will be a pivotal factor in shaping the future of how consumers interact with and experience transportation services.

Impact of Embedded Finance on Consumer Behavior and Business Operations in Transportation

Adapting to Consumer Behavioral Shifts

Consumer behavior in the transportation sector is undergoing a shift, influenced by various factors including safety, sustainability, and digitalization. The perception of cars as a ‘personal safe space’ has strengthened, especially post-pandemic, leading to a cautious approach towards ridesharing and public transportation. This heightened need for safety is likely to drive consumers towards transportation options that they perceive as secure, which may include vehicles enabled with embedded finance solutions that offer contactless payments and personalized services​1​.

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Omni-channel retail in the automotive sector is expanding, with customers expecting flexibility and a seamless experience whether they purchase a car online or offline. This trend towards digitalization is where embedded finance thrives, offering financial services that can facilitate the entire purchasing journey, from browsing to final transaction​2​.

Sustainability and Consumer Usage

Sustainability is becoming a crucial consideration in consumer decisions within the transportation sector. Data indicates a growing consumer preference for electric and hybrid vehicles, influenced by their desire to reduce environmental impact. Embedded finance can play a pivotal role by providing accessible financing options for these vehicles, thereby promoting their adoption​1​.

However, there’s a gap in meeting the transportation needs of the aging population, who may not be served by the push towards more sustainable but less accessible transportation modes like e-scooters or bikes. Embedded finance could offer solutions by enabling more personalized and accessible financial products tailored to the needs of this demographic​1​.

Consumer Data and Trust

Trust and safety concerning personal data are paramount for consumers to accept embedded finance. The willingness to share personal information is contingent on the assurance of data protection and value in return. This underlines the importance of transparency and security in the expansion of embedded finance within transportation platforms​1​.

Operational Impacts on the Transportation Sector

Embedded finance is not only altering consumer behavior but also reshaping business operations within the transportation sector. By integrating payment and financial services, companies can streamline the user experience, making transactions more convenient and fostering loyalty. Moreover, it opens up new revenue streams for businesses through commissions and partnerships with fintech firms​3​.

Mobility service innovations, like in-app payments for ride-hailing or food delivery services, are being driven by embedded finance. Such integrations eliminate the need for separate payment apps, simplifying the transaction process for users. Collaborations between fintech firms and electric vehicle manufacturers to provide integrated finance and insurance options are making sustainable transportation choices more financially accessible​3​.

Regulatory and Privacy Considerations

The growth of embedded finance brings about heightened regulatory and privacy concerns. Ensuring consumer protection and confidence necessitates adherence to compliance standards such as AML, KYC, and data protection regulations. It’s critical for fintech companies to collaborate closely with regulators and industry partners to develop standards that balance innovation with consumer protection​3​.

As embedded finance continues to mature within the transportation sector, its influence on both consumer behavior and business operations will likely expand, necessitating ongoing adjustments to accommodate evolving expectations and regulatory landscapes. The synergy between technological innovation and financial services is poised to create a more integrated, efficient, and consumer-friendly transportation ecosystem.

Future Prospects and Strategic Considerations for Embedded Finance

Evolving Landscape of Embedded Finance

The integration of financial services into traditional business platforms is rapidly becoming the norm. Payment services are now frequently integrated, offering customers a range of options that enhance convenience and the likelihood of repeat business. This trend is transforming industries, as businesses are beginning to offer lending platforms and insurance services directly on their platforms, creating new revenue streams and elevating the customer experience​1​.

Strategic Considerations for Integration

Embedded finance’s trajectory indicates that its market size is poised to double in the next three to five years. With this anticipated growth, companies need to be strategic about their participation in this space. For banks, particularly those with proprietary distribution networks, embedded finance presents a risk of cannibalization, while for others, it offers an attractive avenue for expansion. Payments-focused technology providers are currently leading the embedded finance charge, attracting distributors with their payment capabilities and expanding into traditional banking products like lending​2​.

Differentiation in Embedded Finance

To stand out in the embedded finance space, providers need to focus on differentiation through product breadth or depth and ancillary program management services. There are several options for differentiation:

  1. Product Breadth: Adopting a “land and expand” approach where companies start with basic services like payment acceptance and then add more complex offerings to meet broader financial needs.
  2. Product Depth: Specializing in specific embedded finance categories to claim a larger market share through niche expertise.
  3. Program Management Support: Offering sales, servicing, and risk management expertise, particularly for new entrants concerned about navigating the regulatory and reputational risks associated with financial products​2​.

Key Decisions for Market Entrants

For new entrants, the key to capitalizing on embedded finance includes:

  1. Choosing where to compete, with a focus on differentiating through advanced products and support.
  2. Building a modern developer experience with self-service access and well-documented APIs to allow for easy integration of financial services.
  3. Adapting to B2B2C and B2B2B sales motions by developing new capabilities to support distributors.
  4. Developing support and risk services, ensuring that the deployment of embedded finance is risk-controlled, regulatory-compliant, and effective​2​.

Revenue Dynamics and Market Trends

Revenue in embedded finance primarily accrues to entities that take on risk and those that own the customer relationship. The distribution of revenue varies with the type of service offered, but those offering lending products and services tend to benefit significantly. Additionally, there is a trend of technology providers seeking to capture a larger share of embedded finance revenues by expanding across the value chain and sharing in the risk​2​.

Closing Thoughts on Embedded Finance’s Future

Embedded finance is not just a passing trend but a substantial shift in how traditional industries operate and interact with their customers. It represents a paradigm shift towards a more integrated, seamless consumer experience, blurring the lines between financial services and other service offerings. As businesses adapt to and adopt these new models, they will need to remain agile, customer-focused, and regulatory-compliant to thrive in this evolving landscape. The companies that will lead in the future are those that are already laying the groundwork with the necessary technology, expertise, and strategic partnerships today.

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