Banner: Embedded Finance
Amy Skowronski & Bill Storage, High Seas

Amy Skowronski & Bill Storage

December 14, 2022

Embedded Finance Is Transforming the Marketplace

Businesses adopted embedded finance long ago, and the field has only been growing.

A natural evolution in services like rental car insurance, airline credit cards, and in-app purchases has changed the way business is conducted in nearly every industry.

Generally, embedded finance involves user-focused front-end access to financial services. Banking as a Service (BaaS) is usually—but not always—considered a separate but related entity, involving automated b2b, back-end banking processing.

Embedded finance removes bank involvement from business processes by allowing non-financial institutions to offer insurance, lend money, and make investments. It’s nothing new, like taking a car loan from a dealer or buying something on layaway. Financial services are integrated into the infrastructure of a business, providing a more streamlined and convenient experience for the consumer, without forcing them to be redirected to traditional financial institutions. While the services aren’t new, the technology backing them is. It allows the services to be easily integrated into apps, websites, and retail stores. Good news for small businesses and anyone wanting to launch a business fast.

In essence, embedded finance is any non-financial software platform providing a financial service that reduces friction for consumers. Lightyear Capital describes the embedded finance space as interconnected technologies in three general categories: Providers, Containers, and Enablers

  • Providers embed services into platforms to improve reach, to remove friction, and to enhance customer retention—for example, Affirm, Lemonade, and WealthSimple.
  • Containers aggregate providers’ services via a platform or network of interconnected functionality, giving the end user access to mature solutions via frictionless experiences—for example, Amazon, Shopify, SmartRent, and Gusto.
  • Enablers maintain the infrastructure and connectivity that allow providers and containers to transfer data and information safely and efficiently, including facilities for BaaS—for example, Plaid, Railsr, Marqeta, and Finicity.

The main appeal of embedded finance is convenience. By providing all the financial services needed to finish a transaction, companies are more likely to complete a sale, serve a satisfied customer, and receive payment with fewer delays. On the business end, it allows companies to expand their reach, open new revenue streams, and deepen their impact in the market.

In their article “Embedded Finance for SMEs” (small and medium enterprises), Accenture estimates that embedded finance might capture 26% of the SME banking market by 2025. While embedded finance constitutes a significant competitive threat to traditional banks, incumbent banking providers have historically defended their turf from digital platforms offering BaaS and point of sale integrations by leaning on their established brand.

But if incumbent banks rely solely on their brands and fail to embrace the advance of digital platforms, new entrants could capture $32 billion of the SME banking market by 2025. Although legacy banks are projected to lose roughly 10% of their revenue to new competitors, their total revenue is likely to increase by $92B with the advent of embedded finance, Accenture predicts.

Graph: Embedded FInance

Lightyear Capital projects an even bigger future for these services in their Embedded Finance Report. They estimate the revenue produced by embedded finance in 2020 at $21B and, assuming a 5x revenue multiple, forecast $1T of revenue by 2025—Bain Capital Venture predicts a $3.6T value in 2030. Looking more closely at the areas within embedded finance, Lightyear project $140B in revenue for embedded payments, $70B for embedded insurance revenue, and $16B in embedded consumer lending by 2025. They also predict these services to enter the wealth management market and account for $3B total revenue in 2025.

Embedded finance, with all its growth potential, is a broad term encapsulating several subsets.

Embedded payments

Embedded payments store a payment method for use at the point of purchase, and are evolving to address international transaction complexities, Know-Your-Customer requirements, virtual credit card scenarios, and liquidity timing concerns. 
Apple, Amazon, Walmart, Uber, Instacart and DoorDash were among the first to ease payment friction with one-click payments, often with secondary incentive programs like earning reward points. The reasoning being that if an online purchase makes a customer take out their credit card and type the numbers out, they may feel a point of friction and abandon the purchase—especially if their wallet is downstairs. 
BaaS sometimes enters the picture by giving buyers the option of paying directly from a bank account, offering the option of significantly lower fees compared to credit cards and first-generation online payment systems, like PayPal and Venmo.

Embedded lending

Installment plan lending emerged in the 1920s to address the demand for consumer durables that accompanied 20th century prosperity. Consumer credit allowed buyers to complete a purchase without taking out a traditional loan from a financial institution, though often at a high credit rate. Buy-now-pay-later (BNPL) plans matured in the 1960s but were somewhat overshadowed by credit cards, which eliminated the consumer pain of separate BNPL accounts for each merchant.

Embedded lending allows customers to sidestep the need to use a credit card or obtain a pre-purchase loan. Retail partners offer financing options at online and showroom checkouts, allowing vendors to finance customers on the spot. In contrast to the consumer credit of the 60s, BNPL services like Klarna, Affirm, and Afterpay often charge no interest to buyers; their revenue is from fixed and variable merchant fees, late payment fees, and advertising.

Embedded insurance

The option to purchase insurance has been available at in-store checkouts for years, like the rental car desk and electronics counter, so it is no surprise that it has spread to digital marketplaces and services. Embedded insurance products are supplied via APIs to vendors, streamlining integration and the number of insurance options available is mirrored by the number of businesses offering each option. 
Companies like Airbnb provide buyers with insurance add-on options without a separate insurance company, sometimes with competitive options. Others offer singular-policy options at checkout, like Boost and Bsurance. Still others act as brokers and provide competing insurance options, like Matic and Branch. Companies like Extend, Mulberry, and Clyde offer extended warranties in ecommerce checkout flows, typically under a single policy option.

The future

As businesses compete to become more consumer friendly, these and other forms of embedded finance are growing quickly, propelled by venture capital and private equity. It’s a global opportunity that will include an increasing portion of transaction volume compared to traditional banks. Simply put, embedded finance will fundamentally change value chains, including fragmentation and consolidation. CEO Jamie Dimon acknowledged this in J.P. Morgan’s 2021 Annual Report, confirming that the role of traditional banks is diminishing and that the competitive landscape is changing dramatically.

With the promise of improving customer experiences and financial access, along with providing cost-reduction and risk-reduction benefits to companies throughout the value chain, demand continues to grow. In a recent report, Bain found that embedded finance already accounted for five percent ($2.6T) of total US financial transactions, predicting that it will exceed $7T in 2026, 10% of all transaction revenue. Early adopters stand to gain a competitive edge by understanding how embedded finance can impact their value propositions.

Invest in High Seas

For twenty years, High Seas has worked with financial institutions from concept to code to campaign. With clients including Wells Fargo, iMatchative, Arbinet, MassMutual, Mass Financial, Board of Trade Clearing Corp, and Fidelity, our seasoned designers and developers simplify the move toward fintech. We’ve immersed ourselves in a long list of startups and mobile apps, helping to navigate the fusion of financial services and emerging technology opportunities. 

Amy Skowronski & Bill Storage, High Seas
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Amy Skowronski & Bill Storage

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