According to recent analysis, this is only the tip of the iceberg as revenue opportunities from embedded finance are projected to more than double from $21billion in 2021 to $51billion in 2026, and its transaction value is set to surge to $7trillion by 2026, accounting for 10 percent of US financial transactions.
As embedded finance gains popularity across industries, it’s important to understand its potential impact on the financial sector and why businesses should be paying close attention to the possibilities it may present for them.
While embedded finance wasn’t on the radar for many companies back in 2017, Hamed Arbabi was among the first to recognize it as the future of payments, leading him to build the VoPay platform in a way that allows any company to integrate financial services into their existing applications, products or services through a single, scalable API.
Now the platform’s CEO, Arbabi, conveys the various opportunities and challenges of extracting value from embedded finance:
Some believe embedded finance is still in its infancy or just a concept waiting to be realized; the rest of us recognize it is already here.
$1.91 trillion. That is the number the embedded finance payments market is expected to hit in the next five years. For businesses, this is make-or-break time. Embedded finance will be the norm. The link between this growth and the massive boom in an evolving API economy is undeniable. Non-financial companies have begun the race to integrate the technology into their offerings.
Let’s dispel the belief that embedded finance is just for fintech startups or financial institutions. Truth be told, it is for any organization with an audience with a need for financial services. In other words, it is for every business, regardless of industry or size.
Activities and strategies around embedded finance aren’t all that new. Airlines and retailers have been doing it since the ’80s. The private-labelled and co-branded credit cards many of us have become attached to work in similar ways.
The question would have been asked, ‘what can be monetized, and how do we gain a bigger piece of the pie?’ In this case, financial institutions could access broader distribution while, at the same time, retailers and airliners garnered a new revenue stream.
With the immense power of technology behind it, today’s embedded finance takes it one step further; it takes us to a future not yet imagined. Embedded finance is, at its core, the ‘horizontal integration’ of a financial experience to fit seamlessly into a consumer’s existing digital behaviour flow. It means providing customers with financial services – once only accessed via banks or a specific fintech company – inside the services they already use every day.
No one exhibits this better than some of our favourite gig economy platforms, such as Uber and DoorDash. Uber, already recognized for eliminating friction when it comes to payments, wades deeper into embedded finance opportunities by offering its drivers a debit card. By doing this and doing it well, Uber adds a new revenue stream to its core product, deploys a strategy to retain their workers and enhances the gig workers’ experience.
According to Andreessen Horowitz, embedded finance has the potential to increase revenues by five times per customer. It has become the expectation. The digitalization of finance and the various changes in consumer behaviour that have influenced it are deeply entwined with the platformification of finance and the growing shift towards a more service-provided approach in business model innovation. Customer experience is quickly becoming a core focus – now, more than ever; it is all about providing customers with a seamless user experience.
Every activity is an opportunity, and every business that connects users to products and services, such as payments, budgeting, and credit from across the entire financial ecosystem, has a chance to capitalize on that opportunity. Businesses that provide tailored financial services to their customer’s needs offer an easy-to-use omnichannel experience and keep their customers for the long run.
Embedded payments are part of a larger trend toward the unification of all technology, transforming how organizations interact with their customers. Businesses are increasingly taking advantage of embedded payments in an effort to scale their business. By merging the resources of a financial partner like VoPay with infrastructure, companies can harness the power of embedded technology to create more efficient and cost-effective financial solutions.
Call it plug and play, an embedded economy, or the world of embedded everything, new technologies merge to become one integrated system.
Embedded finance is not only the future but the present. It is the new way of providing financial services to customers. As technology continues to evolve, we expect to see more businesses and industries adopt embedded finance and unlock its full potential:
For example, John Deere, the world’s largest manufacturer of agricultural equipment, is already offering customers financing, leasing, and insurance options for their equipment. This allows farmers to focus on their core business, farming, and not have to worry about the financial aspect of their equipment.
Financial services are an essential part of the modern market, and they have become even more so with the advent of digital payment systems. Companies control the payment process from start to finish to handle every aspect of a transaction, from initial inquiry to receipt of goods or services, in one place.
By embedding financial services into their products, companies glean valuable information about their customers to better understand their purchasing patterns making lending and insurance writing more efficient. This streamlined experience delivers the valuable insights organizations need to offer more targeted services; a win for the business and a win for the consumer.
Embedded finance is a powerful tool for reaching new customers. It’s especially effective at engaging the underbanked or unbanked population. By incorporating financial services into products and services that these individuals already use, such as mobile apps or e-commerce platforms, embedded finance can make it easier for them to access the financial services they need. Strategies such as these will further push us toward achieving financial inclusion.
Embedded finance holds immense potential for us all, and it’s here to stay. It has the potential to revolutionize the way we access and use financial services, making them more convenient, personalized and accessible. As technology evolves and the boundaries between industries blur, we expect to see more embedded finance solutions in our everyday lives.
Ultimately, embedded finance is no longer a concept but a reality. It is the key to unlocking value in plain sight – the potential of embedded finance is right in front of us.
Originally published February 13, 2023, in the FinTech Times.