Embedded Finance is the next big disruption in financial technology services and, more than everything, is the present and future of FinTech.
In a nutshell, it is the union between a non-financial service provider and a financial service with the goal to simplify financial processes and make shopping easier for consumers. While traditionally, financial services fell into one of three categories (the transfer of value in space, the transfer of value in time and managing risk), now, each and every one of these can be integrated into a non-financial program, delivered over a network.
The evolution has been made possible by a convergence of events that have transformed the world of financial services, just as alternate finance was created in 2008, the Covid-19 pandemic has been an important incubator and accelerator. If we add to this the PSD2, the European directive on digital payments, the introduction of mandatory e-invoicing and open banking we can see how the interest in the creation of this new integrated system has emerged
Embedded Finance allows organizations and enterprises to open up new revenue streams and reinvent the services they offer to their customers, implicating massive changes for the economy at large, and for the fintech industry.
It runs on marketplaces thanks to a flexible technology that allows financial services to be integrated into other business activities and enhance it by facilitating payments and financing. The subjects involved are the brand, the developers of the system and those who have the license to operate in the payment circuit.
The objective is to provide a unique solution that can be integrated directly into the company, facilitating and improving all internal analyses. In most cases, companies are leveraging embedded finance to provide extra products or services that are related to their primary product.
There are six major use cases: payments, card payments, lending, investments, insurance and banking.
To name a few applications, Tesla offers car insurance through its proprietary car sales program; apps like Klarna and AfterPay allow consumers to obtain loans at the time of purchase; Acorn invests people’s spare change by rounding up purchases.
As of today, Embedded Finance generates revenues for $22.5 billion but is expected to be worth over $7 trillion by 2030, doubling the market value of the top 30 banks in the world.
However, currently, only a few banks are getting ahead in this market. BBVA, with its unit ‘Open Platform’, announced this summer a collaboration with Google to offer consumers a digital bank account through Google Pay, and Goldman Sachs, through Marcus, its digital consumer bank, sealed deals with Amazon and Apple to provide lines of credit and credit cards, respectively.
Unlike banks, many Fintechs, BaaS (Banking-as-a-Service) start-ups and big companies are trying to find their position in this emerging market as they offer new financial solutions to their customers.
Stripe, for example, announced Stripe Treasury, a banking-as-a-service API that allows clients to provide bank accounts to their customers. An exceptional client is Shopify, which will use the product for Shopify Balance, where merchants can open their bank account to hold and spend money directly from their Shopify account, and Shopify Capital, for short-term business fundings.
Wise, (originally known as TransferWise) launched its new “embedded banking” product which consists of partnering with client companies in order to be a provider of bank accounts for their customers. This allows firms such as e-commerce platforms to integrate their offer with financial services, but without developing an entire banking user interface as the customers are redirected to Wise. Last October the London-based FinTech company raised a $12 million Series A round.
Banxware, a German company that offers embedded finance in the form of loans for SMEs, in partnership with marketplaces, payments providers and others, recently received $4 million in seed funding, proving the interest of VCs in this financial innovation.
Enel X — the Enel Group’s global business line — has just launched a project together with several FinTechs, including Workinvoice, to give its customers fast access to liquidity through a digital invoice advance service.
Also Uber, which made a push into embedded finance with its Uber Money, is offering a debit card and a bank account integrated into the Uber Driver App, and the Uber Card, a credit card for consumers.
As for the insurance field, Trov, the world’s leading On-demand Insurtech company, partnered with the self-driving tech company Waymo to offer automatic insurance to all the passengers of the autonomous company’s fleet, a solution that will ease the insuring process in a way almost invisible for customers.
Right now, mostly Fintechs and digital companies are embracing embedded solutions because of the more compatibility with their businesses, but the larger part of this market will be soon occupied by ‘traditional’ and ‘non-financial sectors. This is a threat for banks and insurance companies since they risk being set aside in this market with third parties able to deliver their core services.
Bocconi Students Fintech Society