This April, The Fintech Times is focusing on all things embedded finance, the integration of financial services into non-financial products and services. As the space rapidly develops, we look to highlight the latest developments, initiatives and challenges embedded finance has to offer and overcome across the globe.
As time passes, consumers are seeing the number of embedded finance offerings increase across the wide range of products and services they use. Whether it be retailers, ride-hailing apps, super-apps, or other non-bank service providers, embedded finance appears to be making its way into every sub-sector.
According to the latest Juniper Research report, the global embedded finance market currently boasts a total transaction value of around $92billion. By 2028, it forecasts this value to hit around $228billion, estimating 148 per cent growth across just four years.
By now, all businesses have recognised the value of reducing friction and streamlining processes, when it comes to ensuring customer satisfaction and checkout conversions. With this in mind, it isn’t surprising to see these predictions of drastic growth. But how can the value of the embedded finance market more than double, particularly during tough macroeconomic conditions seen worldwide?
Banks entering the embedded finance space
According to Nirav Patel, CEO of Andaria, an embedded finance solution provider, he expects to see incumbent banks getting more involved with the embedded finance market: “I anticipate a surge in interest among fintech start-ups towards embedded finance, prompting regulatory bodies to exercise greater vigilance and implement stricter regulations.
“Traditional banks, often perceived as lacking in technological innovation and therefore vulnerable to being left behind, will begin to enter the embedded finance market. HSBC is among the latest to express interest in seizing opportunities in this sector.
“This trend suggests that the coming months may serve as a wakeup call for many payment intermediaries, as embedded finance threatens to disrupt traditional roles, potentially leading to the obsolescence of third-party intermediaries and consequent cost reductions for end users.
“The overarching goal for stakeholders will be to contribute significantly to advancements that drive the embedded finance industry forward in the year ahead.”
Adam Shapiro, co-founder and partner at Klaros Group, a financial services advisory and investment firm, also suggests the same and backs these banks to begin to fully embrace embedded finance.
“In order for embedded finance to scale fast in 2024, banks and service providers will need to develop additional operations, risk, and compliance-as-a-service capabilities.
“Unlike fintechs building on top of partner banks, most embedded finance clients don’t want to have to develop back-end operational capability for things like dispute handling or resolution of KYC exceptions. While technology can make these processes easier, it can’t entirely eliminate human operations. Expect to see more larger banks launching embedded finance platforms to take advantage of being able to expose existing operational capability, as well as more partner banks seeking to develop more in-house operations to serve the market.”
Bettering global financial inclusion
Kathy Stares, executive vice president of North America for Provenir, the AI-powered credit risk decisioning platform, explains that embedded finance is set to make financial services far more accessible.
“In 2024, the banking sector will witness the continued growth of non-traditional players such as fintechs and tech giants that are driving new digital financial solutions such as embedded finance, which turns every app, software, retailer, and business into a bank.
“Embedded finance is providing a key catalyst to increased financial inclusion by delivering personalised offers that consider individuals’ unique circumstances, such as their affordability, life stage, and geography. This tailored approach allows for a more inclusive and fair assessment of credit products, moving away from a one-size-fits-all approach.
“For embedded finance to be successful in 2024, providers will need to implement a cohesive data strategy by looking beyond traditional credit data as it is rarely enough to paint an accurate, holistic picture of a customers’ creditworthiness. Alternative data sources, including mobile/telco information, rent and utilities data, social media/web presence, and open banking information can help organizations gain a more comprehensive view of a potential customers’ financial health as well as their ability and willingness to pay.”
Improving the user experience
Johannes Kolbeinsson, CEO and co-founder of PAYSTRAX, the card transaction acquiring and payment solution provider, discusses the problem of user experience and authentication in embedded payments.
“One of the biggest trends has to be in the user experience, as successfully implementing embedded payments comes down to reducing friction for the customer.
“If you’re a retailer, you want to keep customers on the app to make sure people don’t just leave at the checkout or the online shopping basket empty. But right now, work needs to be done to smoothen out the tedious processes of flipping between platforms and services in open banking apps when validating payments, because even this extra step can push people away from completing purchases.
“Some people might not know their banking PIN or password or haven’t downloaded the banking app on their device, while others simply become frustrated that they have to prove the transaction is authentic, even if it only takes an additional minute. Payment methods that can streamline or even skip this stage while ensuring fraud doesn’t creep in will make embedded payments gain a lot more ground.”
Global growth and widespread adoption
For Sergiy Fitsak, managing director at software development company Softjourn, drastic global growth could cause challenges, especially when it comes to regulation: “The biggest trend in the embedded finance landscape will be the rapid uptake of embedded finance solutions across various world regions. This trend is transforming traditional business models by integrating financial services into non-financial platforms, thereby offering a seamless experience to consumers.
“From Asia, where super apps like WeChat and Alipay pioneered the integration of payment services into social and retail platforms, to North America and Europe, where companies increasingly embed lending, insurance, and investment services into their offerings, the global adoption of embedded finance is undeniable.
“This widespread adoption is driven by consumer demand for more convenient and personalised financial experiences, directly within the apps and services they use daily. For businesses, embedded finance presents an opportunity to enhance customer loyalty, increase revenue streams, and collect valuable data on consumer behaviour.
“However, this rapid growth also presents challenges, such as the complexity of implementing these solutions across different regulatory environments and the heightened risk of fraud associated with digital financial transactions. Despite these challenges, the benefits of embedded finance – enhanced customer experiences and new revenue opportunities – continue to drive its expansion globally, making it a defining trend in the financial services sector.”
The importance of partnerships
Adam Edwards, product and growth director at cash management firm Satago, suggests that partnerships will drive embedded finance evolution forward in the coming year.
“The embedded finance market in 2024 can expect to see significant emphasis on B2B players, such as banks and corporate lenders, looking to catch up with the consumer market, by offering a wider range of opportunities to their customers through embedded finance partnerships.
“Whereas banks such as Barclays have already been partnering with the likes of Amazon on the consumer side for a long time to offer a range of embedded finance options to consumers, we will now start to see a lot more partnerships starting to take place in the B2B space. This will allow larger providers to benefit from new origination channels, as well as enable customers to take advantage of the trust they have in their banking providers to access finance in a reliable way, with the benefit of a wider and more flexible suite of finance options.”
Karine Martinez, head of sales at Edenred Payment Solutions, an FCA-regulated electronic money institution (EMA), also discusses the importance of partnerships.
“In Q4 alone we saw; Adyen and Klarna doubling down on their existing partnership, ClearScore partnering with Plend to launch open banking-powered loans, Mastercard working with Feedzai to fight crypto fraud, Stripe partnering with TrueLayer for European open banking payments.
“This year, we’re seeing a bigger focus from Banking-as-a-Service (BaaS) companies and their customers on reliability and compliance capabilities.
“This will lead to clearer expectations of what partners need from BaaS companies and payment solutions providers, more reliable and compliant services, and ultimately better and more trusted partnerships between providers and their customers.”
