Embedded Finance: The Next Payments Revolution

In the battle to supply banking and payments infrastructure for embedded finance, winners are already emerging, but incumbents and new entrants still have time to capture a portion of this dynamic market.

FREMONT, CA: Today's startup small enterprises may never interface with a conventional bank. Going into their e-commerce or accounting platform, they can open a deposit account, request a debit card, and satisfy most of their financing requirements. Typically, these platforms are not operated by banks. Instead, they are software firms that collaborate with banks and technology providers to integrate financial products into a unified, convenient, and user-friendly consumer experience. This new form of collaboration between banks, technology providers, and distributors of financial products via non-financial channels supports the embedded-finance revolution. An essential number of prospective embedded finance providers have roots in the payments industry, which sits at the nexus of commerce, banking, and business services.

According to McKinsey's market-sizing model, the value of this integrated experience for clients helps to explain why embedded finance will generate $20 billion in sales in the United States alone by 2021. According to our predictions, the market could double in size in the next three to five years. Despite the magnitude of this opportunity, many banks, payments providers, fintech, investors, software businesses, and potential distributors need a clearer understanding of what embedded finance entails, how they may participate, and what it takes to succeed; this essay addresses these topics.

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What is embedded finance?

Embedded finance incorporates a financial product within a non-financial client experience, journey, or platform. In and of itself, this is not novel. Nonbanks have provided financial services via private-label credit cards to retailers, supermarkets, and airlines for decades. Other prevalent examples of embedded financing include sales financing at appliance merchants and vehicle loans from dealerships. These arrangements act as a conduit for the banks behind them to reach end clients.

Integrating financial goods into digital interfaces that customers interact with daily makes the next generation of embedded finance powerful. There are numerous options, including customer loyalty programs, digital wallets, accounting software, and shopping cart systems. For consumers and organizations utilizing these interfaces, procuring financial services becomes a logical extension of non-financial experiences such as online shopping, personnel scheduling, and inventory management. This embedded finance that is more deeply ingrained has expanded substantially in the United States in recent years.

Fundamental shifts in business, merchant and consumer behavior, and technology have facilitated the development of embedded finance. The digitization of commerce and company administration has vastly increased the potential for integrating finance into non-financial client experiences. Many small and midsize businesses in the United States rely on digital solutions for business management, with 33 percent of global card spending occurring online. In addition, as digital natives reached adulthood, they increased the number of consumers and businesses willing to receive all financial services via digital platforms. ng data and even the ability to perform transactions on their behalf.

Does anyone distribute embedded finance, and what products do they offer?

The concept of embedded finance is likely to arise whenever a sufficient number of end users (consumers or enterprises) frequently interact with the digital platform operator, referred to as the "distributor" of embedded finance. Embedded finance provides a solution for a nonbank corporation acting as a distributor to enhance the client experience and develop a new revenue stream without incurring the costs involved with operating a bank. Retailers, business-software enterprises, internet marketplaces, platforms, telecom providers, and original equipment manufacturers are well-positioned to offer integrated finance (OEMs). In the previous year or two, embedded financial activity and innovation have been high in each category.

Among embedded-finance distributors and their end consumers, demand for a variety of deposit, payment, issuing, and lending products is already maturing. In addition to these conventional financial products, new application scenarios are emerging. Some are supplying gig economy workers with just-in-time debit cards for making purchases for members of delivery-service platforms.

As customer onboarding and product-servicing processes are steadily digitized, and real-time risk analytics and services become more sophisticated, the embedded-finance product range will rise. Products that require case-by-case evaluation, in-person interactions, and regulatory approvals, such as commercial loans, are less amenable to end-to-end digitalization, which is likely to limit growth. Despite these limitations, we estimate that products amenable to embedded finance might account for up to fifty percent of banking revenue pools.