In September, a survey from fintech business OpenPayd showed that almost 75% of brands plan to launch embedded finance products in the next two years. If plans for the next five years are taken into account, the figure rises to more than 90%.
According to recent research from Sifted – the Financial Times-backed online herald of the tech and start-up scenes – the global embedded finance market is set to be worth an eye-popping $3.6 trillion by the end of 2030.
To those promoting embedded finance as the new big thing, it seems that Angela Strange’s prediction that ‘every company is becoming a fintech company’ may indeed be coming true.
For consumer-facing companies, the promises of embedded finance are clear and within reach. To understand how these companies might benefit, it helps to think of embedded finance as a process whereby a firm integrates a specially tailored financial infrastructure into its business model, enabling customers to carry out transactions with that company in a self-contained, frictionless way – without involving traditional banks. As such, embedded finance products tend to revolve around individual, ‘in-context’ accounts that customers will set up at the business in question.
There are numerous trends driving the adoption of embedded finance. Firstly, the growth in online banking and e-commerce has created demand among consumers for more integrated experiences. A customer buying a product on a major retailer’s website is now far more likely to expect a range of financing options, from buy now, pay later to access to other credit products.
Second – and a related issue – open banking is here – and spreading. As more companies develop and adopt application programming interfaces designed to increase the scale and sophistication of the interfaces between financial and non-financial institutions, the greater the range of products and services they can offer to customers, often through seamlessly embedded third-party apps.
And that is driving a further trend: the growing trust narrative, which has seen consumer trust in financial institutions eroded, while simultaneously firming up in other sectors. A 2018 survey by the World Economic Forum showed that just 28% of the millennial and Gen Z generations trust their banks to be fair and honest. Given that, it may be that the consumer is happier taking up financial services from their favoured brands than they might from traditional banks and others in the sector.
And that in part explains why banks themselves are waking up to the possibility of working with corporates to develop embedded finance services as a way of opening up new revenue streams.
Clearly, the consumer-facing benefits of embedded finance are rapidly evolving and making the case for corporates to investigate this area more compelling. And with a dizzying number of fintechs only too happy to pitch themselves to banks and corporates as the enablers of a new wave of ‘banking as a service’, the noise around this will surely increase.
With the pace of uptake gathering momentum (and costs in some areas beginning to fall), many treasurers will likely be asking how exactly embedded finance can work for them, and what opportunities it might present for their companies. The year 2022 will surely be one when many of the promises made for this new process will be put to the test.
In the next issue of The Treasurer, we are taking an in-depth look at this emerging process from the inside out, asking whether the claims being made for it really stack up.
Featuring comment from experienced consultants and the Association of Corporate Treasurers, the article will look under the bonnet of embedded finance to understand how it could change the way corporates interact with customers and to ask where the risks lie for treasurers.
