If fintech could be compared to a rapidly developing civilisation, we might argue that it’s currently living through its Age of Embedded Finance.
Such is the popularity and prevalence of this concept, which McKinsey defines as the placing of a financial product in a non-financial customer experience, journey or platform, that embedded finance accounted for nearly 5.6% of total US transactions in 2021, according to Bain.
By 2026, this volume is expected to exceed more than 10% of total US transaction value.
It can be seen in retail, with Shopify offering a balance account for its store owners and Klarna bringing lending to shoppers at the point of purchase. Even Lyft drivers can get paid instantly with its branded direct debit card.
For fintech, embedded finance represents an ideal opportunity to further disrupt traditional financial services, reduce costs and friction—and open up new revenue streams to entire industries and sectors.
One fintech working in the embedded finance space, Weavr, is a good example of the options currently out there.
Weavr claims its plug-and-play finance model enables digital businesses to launch and monetise financial services quickly, efficiently and cheaper than a traditional banking-as-as-service (BaaS) model.
Embedded finance is arguably an evolution of BaaS—the provision of banking products and services through third-party distributors.
But it is better than the traditional BaaS model, according to Daniel Greiller, chief commercial officer at Weavr. He explains: “To use BaaS you need to be an expert in banking. And it costs a huge amount of money.
“We make it faster, simpler and easier. We take away the compliance concerns. Everything is built in with us.”
“Faster, simpler and easier” succinctly summarises the key benefits of embedded finance and what it can bring to consumers and businesses.
Focusing on the cost benefit, Greiller continues: “A transaction with Weavr will be more expensive than a transaction with a BaaS provider.
“But if you layer in the transaction monitoring, the cost to maintain a data secure environment, the customer authentication system, the cost of Google Pay and Apple Pay, everything considered, we are considerably cheaper.”
Not only is embedded finance a potentially cheaper route into offering one or more financial products, it is a route that sidesteps traditional providers, namely banks, and comes with the added benefit of simplicity.
Nick Root, chief executive officer of another embedded finance player, Intergiro, which providers an all-in-one platform offering multi-currency bank accounts, card issuing and card acquiring across Europe, says: “The emergence of API-led banking services means that distribution is no longer an issue.
“That layer of friction has now been removed, with any digital company being able to offer a financial service without the headache and complexity that offering financial services used to bring. What WordPress did for the internet, fintechs are doing for finance.”
Alistair Cotton, chief executive officer and co-founder of Integrated Finance, a fintech infrastructure provider, thinks the delivery of financial services will be completely transformed thanks to embedded finance: “The high street banks will stop being accessed through internet banking.
“All of their services will be consumed through other pieces of software, where we increasingly spend our time. There may be an intermediary step like making payments via accountancy, but it’s all going to end up on your phone.”
Greiller comments: “What it should do and what its already doing is improving access. Most financial services are very vanilla. If you want to get an overdraft, you will be asked how much money do you earn, where do you live, and a bank will say whether you are worth an overdraft or not.
“With embedded finance you have a wealth of information around that customer, so you can make a richer decision. So, it’s easier to say yes to someone or something.
“If you think about where it is already well used, Amazon, Uber, Klarna, these are fantastic consumer experiences. Uber embeds finance in transport. Klarna provides it at the point of need, as opposed to a credit card which you have to go and get. People love these services because they are frictionless.
“Consumers should get the experiences they get with Amazon, Uber and Klarna across all of their software engagements.”
Cotton adds that the interoperability of embedded finance is one of its stronger points. “I think embedded finance will bring all forms of payments closer together. Most things on the internet are paid for by debit and credit cards.
“Embedded finance will allow different payment methods to become more useful. So cards, open banking or crypto or however you want to pay for something, it will be available to you.”
Embedded finance is reshaping the traditional financial services business model. How far that will go remains to be seen, but the benefits are clear and much potential remains.
Greiller concludes: “We are moving into a time with embedded finance where it is going to be really important to manage compliance. I think that is going to be the next stage of embedded finance.”
Cotton adds: “What Shopify has done for ecommerce, where you can do everything from one platform, that’s what will happen with financial services.
“Traditionally big institutions served a lot of customers. As the cost of the technology is coming down, it’s allowing many more small companies to be created, serving smaller audiences, but more niche and more tuned to their specific needs.”