Embedded Finance Trends: What’s Working and What’s Not

By integrating financial services within non-financial platforms, companies are looking for new ways to enhance customer experiences and create new revenue streams. But what exactly is embedded finance, and why is it so significant?

What is Embedded Finance?

Embedded finance isn't an entirely new concept. Financial services have been integrated into various platforms for years, but recent technological advancements have significantly accelerated its adoption. Initially, it was limited to simple payment integrations, but now it spans lending, insurance, and other services.

Growth Drivers

The proliferation of fintech and the increased consumer expectations for seamless digital experiences have played a crucial role in driving embedded finance. The growing importance of data analytics and machine learning also cannot be overlooked. The U.S. embedded finance industry is projected to grow 10.8% annually, reaching US$30.82 billion in 2024. With a CAGR of 23.8% from 2024 to 2029, revenues are expected to increase to US$89.59 billion by 2029.

Embedded Finance: Key Trends

Embedded Payments

Embedded payments are perhaps the most recognizable trend in embedded finance. The segment has dominated the market with the largest revenue share of 28.14% in 2023 and will continue to do so over the next decade. 

For years, companies like Uber and Lyft have seamlessly integrated payment systems into their apps, allowing users to pay conveniently, without worrying about exchanges with drivers. The payment process is transparent, predictable, and seamless. Most importantly, payments are completed without leaving the platform, keeping customers engaged and active—a crucial advantage for platform-based businesses. This convenience is becoming the standard, with retail platforms like Shopify and Amazon adopting embedded payment solutions to make transactions effortless for customers and merchants, and this trend is only getting stronger.

Embedded Lending

Embedded lending is transforming how consumers and businesses access credit. For example, Amazon offers small business loans directly to sellers on its platform, while consumers benefit from Buy Now, Pay Later options at checkout. The result is a seamless, efficient, and personalized lending experience that is different for each borrower. With open banking and shared financial data on the rise, embedded lending is going to significantly impact the lending experience for both businesses and consumers. By simplifying the borrowing process and services, businesses can positively boost revenues even as inflation impacts consumer spending. 

Embedded Insurance

Embedded insurance is also gaining traction, particularly in the travel sector. Companies like Expedia and Booking.com offer travel insurance options directly at the point of sale, allowing customers to protect their trips without leaving the platform. For instance, an airline might offer customers the option to purchase travel insurance during the flight booking process. This not only simplifies travel protection for customers but also enables the airline to earn a commission on the sale of the insurance product. Having the opportunity to secure that coverage at the point of sale opens up new revenue streams for businesses and their partners.

What Are the Benefits of Embedded Finance?

Enhanced Customer Experience

The main advantage of embedded finance is its ability to improve the customer experience. According to a recent study by BaaS provider Vodeno, approximately 36% of users who engage with embedded finance products revisit the brand three to five times a month. This frequency is notably higher compared to users who don't utilize such products. Additionally, the research revealed that around 40% of consumers consider Buy Now Pay Later (BNPL) and cashback services crucial for maintaining their brand loyalty.

Increased Revenue Streams

Embedded finance opens up new revenue streams for businesses. By offering embedded services through APIs and strategic partnerships, companies can diversify their income sources and capitalize on the growing demand for integrated solutions. For instance, e-commerce platforms that provide lending services can earn interest on loans issued to their customers by an integrated partner. This not only generates an entirely new revenue stream but also meets the consumer demand for convenient, integrated financial options.

Better Data Insights

Integrating financial services allows businesses to gain deeper insights into customer behavior and preferences. This data can be leveraged to improve decision-making and develop more effective business strategies. For example, Uber Eats can work with restaurants to understand consumer behaviors, develop personalized offerings, improve stock management, or launch targeted marketing campaigns. Ultimately, better data insights lead to more informed business strategies and enhanced customer engagement.

How to Enable Embedded Finance

Tackle Integration Complexity

The integration of financial services into non-financial platforms involves connecting different systems, databases, and APIs. This process can be highly complex, requiring significant technical expertise. For example, a retail platform adding payment services must integrate with various payment processors, banks, and financial gateways. Each of these entities has its own protocols and standards, making the integration process intricate and prone to issues if not managed correctly​.

Role of API Management: Provide standardized API interfaces that abstract the complexities of integrating multiple systems. This standardization means businesses can connect with various financial service providers through a unified API, reducing the technical burden and expediting the integration process. By offering a single point of integration, interactions with multiple financial entities are simplified, each having its own unique protocols​.

Security and Compliance: Robust security features, including encryption, authentication, and access control, are essential for protecting sensitive financial data. Additionally, compliance with regulatory requirements, such as those set in motion by the Consumer Financial Protection Bureau (CFPB). API Platform tools for monitoring and auditing API usage can help businesses maintain compliance with data privacy and security regulations​

Efficiency and Scalability: API management is designed to handle high volumes of API requests, making it suitable for businesses with fluctuating demand. Scalability features allow businesses to expand their operations seamlessly, ensuring that their embedded finance solutions can handle increased transaction volumes efficiently without interruptions. This flexibility is crucial for maintaining reliability and performance during peak times​.

Real-Time Data Synchronization: Ensuring real-time data synchronization across multiple systems is a significant challenge in embedded finance. API Platforms, like Sensedia, provide real-time data integration capabilities, ensuring that transaction data, customer information, and other critical data points are consistently updated across all connected systems. This real-time synchronization is vital for providing accurate and up-to-date information to customers and for making informed business decisions​ 

Regulatory Landscape

Navigating the regulatory landscape is one of the most unpredictable challenges in embedded finance. The Consumer Financial Protection Bureau (CFPB) is constantly shifting in its role in this regulatory environment in the United States and has proposed an aggressive compliance timeline for larger institutions. 

Data Privacy and Security: The CFPB's Section 1033 rule proposal addresses data privacy and security. For detailed information, check out our comprehensive post on Section 1033 guidelines here.

Fair lending practices: The CFPB is targeting lending practices, to prevent discriminatory practices. This includes strict scrutiny of lending algorithms to ensure they do not inadvertently discriminate against any group. 

Junk Fees: The CFPB also continues to emphasize its ongoing work to save households billions of dollars a year by reducing exploitative junk fees charged by banks and financial companies, impacting various financial products.

What’s Not Working in Embedded Finance

Lack of Awareness

Despite its growing popularity, many businesses remain unaware of the opportunities embedded finance services offer. Effective leadership is key to recognizing the strategic value of embedded finance. This involves setting clear goals, allocating resources, fostering a culture of innovation, and a better internal understanding of APIs and integration workflows, along with their impact on the business.

Overcoming Trust Issues

Businesses may hesitate to integrate financial services into non-financial platforms due to concerns about security, data privacy, and reliability. Collaborating with well-known and trusted financial service providers, and building a track record of successful integrations is essential. Exploring case studies and references from reputable companies serve as powerful endorsements. By addressing trust issues head-on, companies can unlock the full potential of embedded finance.

Technology Adoption Barriers

Not all businesses are equipped to adopt embedded finance solutions. The integration of financial services requires advanced technology and infrastructure, which may not be accessible to all companies, especially small and medium-sized enterprises. Finding the right technology partner can help in overcoming these technology adoption barriers.

Embedded Finance Resources

For over a decade, Sensedia has partnered with financial institutions and platform businesses to implement innovative embedded finance and ecosystem banking solutions. If your organization has questions or needs materials to support your internal discussions, visit our website and explore our detailed resources:

Click here to learn more about Sensedia’s Embedded Finance projects

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Sources:

 Grand View Research, Preceden Research, ElifTech, The Fintech Times, Payrix, Yahoo

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