Embedded finance predictions: Insights into a fast-evolving market
Four key themes emerge from this year’s paper around regulation, verticalization, incumbents’ increasing activity levels, and the widening scope of embedded finance
For our embedded finance predictions paper, we tried to source predictions across the many facets of embedded finance — payments, lending, regulation, wealth management, banking, insurance — from both start-ups and incumbents, and across key regions.
The consensus among all contributors is that this is a market that is at once nascent, very fast-growing, and evolving rapidly. Our own aperture estimates anticpate that the market for embedded finance will increase from less than USD70 billion in revenues today to over USD300 billion by 2030, a CAGR of 23%. Why? Because the logic is so compelling. For regulated services providers, it enables them to reach a broader market with lower customer acquisition costs, and for distribution partners, it boosts their customer lifetime value and loyalty.
Beyond fast growth and compelling unit economics, four key themes emerge from the report.
The embedded finance proposition is evolving
Embedded finance begun as transaction-based and narrow. That is to say, the services were chiefly offered at the point of sale and were siloed: product insurance, buy-now-pay-later, or one-click payments. But that is changing in three important ways.
The first, as pointed out by Pritesh Ruparel of Assure Hedge and Adrien Treccani of METACO, is that the scope of embedded finance is broadening. It is moving into, and by extension helping to democratize, more complex and heavily regulated services, such as derivatives, bringing these services to a broader customer demographic. It is also extending into the world of DeFi and Web 3.0, as consumers increasingly seek to access financial services natively in these channels.
The second, as highlighted by Christine Schmid of additiv and Melissa Wong of bolttech, is that embedded finance is moving from single products to bundles, driving much higher value-add. As Melissa says, “If we can educate customers that there are core things they’ll always need, then we can think about bundling, subscriptions, and membership — I think that’ll be a game-changer over the next couple of years in embedded insurance.”
The third is that embedded finance is moving into the realm of relationship banking. This is partly because embedded finance can be orchestrated around more complex requirements, but also because there are still very large areas of under-provision that can be addressed via embedded distribution, where needs are better understood, incentives can be improved, and costs lowered. Christine Schmid draws attention, for example, to the massive savings and pension gaps.
Embedded finance distribution is verticalizing
Another key theme is around the verticalization of embedded finance. As SaaS goes more vertical, so will embedded finance. The reason for this is that these hyper-focused platforms — like Toast for restaurants — have the data to personalize services and manage risks much more accurately. Or, as Paul Prendergast from Kayna eloquently puts it, the next phase of embedded “is about treating the platform not just as distribution, but as a source of data.” As Paul notes, this is extremely relevant for insurance since coverage can be tailored to each company, underwriting risks can be managed better, and policies automatically adjusted. But, as Jens Roehrborn of Banxware underlines, the same is true of lending. In fact, he predicts that merchant cash advances made through vertical SaaS platforms will boom in 2023 because better data will feed into better risk scoring, but also because in a worsening economic environment, in-platform lending will take up the slack from banks tightening their lending requirements.
Banks are getting more active
A rising interest-rate environment also provides part of the explanation for why banks are likely to become more active in embedded finance. As David Galbraith, partner at Anthemis Group, says, “With rates rising, balance sheets and net interest margin matter again.” Interest-rate rises confer a big advantage on incumbents, whose margins will grow as the increasing cost of capital squeezes growth-stage fintechs.
In addition, as Christoffer Malmer from SEB Embedded says, banks are increasingly alive to both the threat and the opportunity around embedded finance. He says, “You can ignore embedded finance, do nothing, and risk someone else doing it, so you lose market share. Or you build your own platform, partner with a fintech or merge with one.” And increasing numbers of banks are opting to proactively capitalize on the market growth, leveraging balance sheet, regulation, risk management know-how, reputation, and existing customer relationships.
It’s not just large banks who are getting in on the act. Kelvin Tan from Standard Chartered sees this as a land-grab moment, where “fortune favors the brave,” regardless of size. In fact, he is seeking to level the playing field by providing the technology developed by SC’s nexus to any bank looking to move into BaaS, overcoming the costs and complexity of building the technology themselves and allowing them to move quickly.
The importance of regulation cannot be overlooked
Regulation is critical to embedded finance in a number of areas. First, through open banking legislation, regulation is key to unlocking the potential of embedded finance. As Abdulla Almoayed from Tarabut Gateway points out, open banking regulation is not just being enacted in more jurisdictions, such as Saudi Arabia and Bahrain, but these regulators, in pursuit of building vibrant fintech ecosystems, are going further than early movers like the FCA — mandating higher levels of data-sharing to enable broader use cases.
The matter of regulatory scope is also important. As finance becomes embedded into more and more consumer channels, regulation also creeps into these areas, creating questions about accountability and also having a bearing on customer experiences. For Daniel Stuart-Smith from MatchMove, the embedded finance platforms need to step up, because the regulator won’t want to have to deal with multiple distribution partners, and because customers will want a smooth and seamless experience even when — or especially when — their requirements are met by multiple underlying service providers.
For Bob Wardrop from RegGenome, a more fundamental approach is needed. The issue is not just regulatory creep outside of pure financial services companies, but that technology is itself creating new regulations — around cybersecurity, for example. To allow all companies in the embedded finance ecosystem to be able to comply fully with the growing body of fast-changing regulations, “rule books need to become machine-readable and machine-executable,” so that compliance can be handled by applications and, to the greatest extent possible, be made automatic.
And why not join us for (or watch the recording of) our 4 x 4 Virtual Salon on 18 January with Paul Prendergast from Kayna, Christoffer Malmer from SEB Embedded, Kelvin Tan from Standard Chartered, and Christine Schmid from additiv?
