Embedded Finance Continues to Grow
By 2025, it is projected that embedded finance companies will grow 5x by the year 2025, from a $22.5B total market valuation to over $250B. Embedded finance allows businesses to deliver more tailored solutions that improve customer retention and maximize the value of any platform – so it is no wonder the valuation is so high. With financial tools built right into a specific set of services, users can experience a more seamless solution that allows them to transact and handle their business in a more modern and frictionless manner.
Despite the outstanding outlook for embedded finance that many professional projections have shown, it still has a ways to go until it reaches the level of value that has been predicted for it. For example, Uber announced back in 2019 it was going to be investing heavily in fintech upgrades that would include, among other things, UberPay. UberPay was an exciting announcement that was huge for the embedded finance trend. It would have ushered in one of the first mainstream embedded finance platforms that gave users instant payments, digital wallets, and other forward-thinking embedded finance tools.
Despite the hype, Uber recently announced that they had scrapped plans for this rollout, effectively putting a small, yet insignificant, road bump in the path to widespread embedded finance. While they have called it quits on embedded finance, for now, they are expected to re-establish these plans later on down the road when their finances get back on track.
Other companies such as Google, Amazon, Intuit, Shopify, and even WeChat have begun rolling out embedded finance features in the form of instant payments and more exciting features such as investments. These companies are pioneering the embedded finance landscape and have already shown that non-fintech companies can benefit from integrating fintech services into their user experience.
Where Did Embedded Finance Come From?
Aside from the logical integration of payments into various industries and their corresponding platforms, embedded finance was born due to the presence of interconnected technology companies.
This was a result of what is sometimes referred to as the unbundling of banks, which refers to the process of banking becoming more and more decentralized from a singular entity.
These companies, which include ecosystem builders, infrastructure providers, as well as infrastructure embedders, all contribute. All of these different providers consist of essential factors that all contribute to making embedded finance a reality.
One of the best examples of the fire-starters of embedded finance includes Plaid. Plaid was one of the most valuable startups ever with funding rounds, reaching $300 million, and recently they were acquired by Visa for a staggering $5.3B. Plaid was hugely important because it was one of the companies that enabled applications to integrate user’s bank accounts into their platform directly.
This enabled banking to be built into nearly any industry. With simple banking at your fingertips, any application or platform could allow users to conduct financial dealings within their walls more efficiently and minimize the steps necessary to transact within their platform.
Why is Embedded Finance So Important?
Embedded finance is critical because it allows for professional and safe financial operations to be directly inputted into any platform. There are a few key reasons this new trend shows no signs of slowing down anytime soon:
Building FinTech Payment Rails is Difficult
When a company brings in legal help, it does make that company a legal company. This is how financial tools work in embedded finance. They are not creating their own financial services (most often). In reality, they are embedding a tool designed to facilitate payments and financial processes on their platform. This is why companies such as Plaid have been able to experience such widespread success; they allow for deep and well-built financial solutions to be easily integrated into any platform. This makes it easier than ever for apps and platforms to offer protected and ready-to-go financial services.
Customer buying habits are changing with the new generation –
Between 2014 and 2018, Amazon’s consumer retail and total consumer spend tripled. This illustrates the influx of individuals into online marketplaces and their willingness to take advantage of more convenient and well-built digital platforms. A digital platform economy is emerging, one that is paving the way for radical changes in the way humans conduct work and create value.
Consumers under 55 are more open to new financial providers –
This point is critical – for the new generation’s willingness to use platforms other than banks to handle their money and pay for goods and services even further bolsters the valuation for embedded finance. According to research from Cornerstone Advisors, many Millenial consumers are willing to get a checking account from non-banking providers like Amazon, Google, and even Starbucks and Uber.
The Future of Embedded Finance
Many companies are already showing their deep interest in embedded finance technology and are beginning to deliver innovation and creativity in their approach. For example, Shopify is a platform that has always been ahead of the curve when it comes to fintech, but recently they have gone even further. They recently announced an embedded lending service called Shopify Capital that makes it easier for business owners to get loans and simply repay it through their online sales.
Other companies such as Intuit have begun deeply integrating their customer’s accounting experiences with embedded finance by creating a Quickbooks bank account for its users. This vertical integration of banking software makes it easier than ever before for users to handle all of their financial dealings within a single platform.
As we can see from these trends, embedded finance is a no-brainer development in fintech that was inevitable due to the extremely simplified workflow, convenience, and evolving habits of younger consumers. Embedded finance is allowing layers of tech-driven financial services to be built on top of traditionally non-fintech companies. As these embedded finance companies continue to unbundle financial processes, the hierarchy of unbundling that we observe will be replicated in ecosystems around the world and will continue to evolve as consumers’ habits do.