Five Reasons why 2021 is the Year of Embedded Finance

In the past three years we have seen a new wave of challenger banks that have transformed the consumer banking landscape. Yet, this was just the beginning of what is set to be a true fintech revolution. This year is expected to be the year embedded finance - that is financial services integrated with a traditionally non-financial service – truly makes its mark.

Some of the world’s leading brands have already adopted embedded finance – many of which are not traditional financial services brands, such as Apple launching Apple Card and Apple Pay, and Grab launching a buy-now-pay-later option. Now, many others will soon be following suit.

Here are the key reasons I believe 2021 will be the year of embedded finance, shaping the future of financial services and transforming the ways individuals and businesses access them:

It is redesigning businesses’ value chain

The COVID-19 pandemic has shown the many different ways businesses can continue to effectively communicate and manage within a remote working environment. Having had to adapt on a scale and at a pace not seen before, many businesses have been forced to innovate or approach customer needs in new ways – ones which are likely to remain for the long term.

As businesses rethink their value chain, they’ll be looking to streamline operations, build new sources of revenue and reduce costs. The emergence of embedded finance, also known as banking-as-a-service (BaaS), enables them to do all three – saving the headaches and costs of hiring specialists to develop new services and ensuring they are compliant with regulations. The rise of third-party BaaS providers means companies can offer the financial services capabilities that suit their unique requirements and doesn’t require the same investment it would have done previously.

People’s behaviour has changed

Another key driver leading companies to redesign their value chains is a shift in individuals’ behaviour. The pandemic forced all of us to make lifestyle changes, which spurred unprecedented shifts in demand for online and digital services in 2020. The question in 2021 is which of these new behaviours will continue post-pandemic.

While it’s too soon to know what a post-pandemic world will look like, it’s clear some trends will be here to stay. The most prominent is the shift from physical to digital. Research by McKinsey & Company* suggests more people intend to make a portion of their purchases online following the pandemic – a change consistent across all countries surveyed.

Embedded finance therefore offers businesses an opportunity to engage new and existing audiences online while creating new revenue streams, for example by allowing the customer to make purchases ‘directly’ from the brand through embedded payments – such as Uber.

Humanising the digital experience

People are used to accessing financial services – loans, mortgages, credit cards – with the institution that instils the most trust and offers the most competitive product, but things are changing.

Now any brand can embed financial services into its product, they can offer customers relevant, tailored financial products when they need them. Using customer data, a business using embedded finance can offer a merchant or individual relevant financial services that meet their needs at the right time. Having deeper insight into their customers businesses are better positioned to price risk more effectively. This all means that financial services are shifting from being simply transactional, to something more personal. And in 2021, we’re going to see more brands capitalise on this capability.

Payroll is ripe for disruption

Embedded finance stands to shake things up not just for end users, but in processes at the beginning too. Businesses can integrate this technology into their HR processes, for example payroll, offering salary on-demand, salary advances or early direct deposits, enabling account holders to receive their pay cheques in advance. This also means they have the potential to become lenders to their employees, thereby creating employee incentives while generating additional revenue streams.

The banks’ race towards embedded finance will begin

According to 11:FS, the embedded finance opportunity will be worth $3.6 trillion by 2030. As the banking-as-a-service industry reaches maturity, businesses will rush to embed financial solutions into their offering.

However, that doesn’t mean the incumbent banks will become irrelevant. Far from it. In fact, many are already upping their game. They recognise that, rather than competing on digitisation and user experience, banks can become enablers for new market entrants. This is an emerging trend, but in 2021 we’re going to begin to understand the likely role banks will play in a much-changed environment in which financial services have been democratised.

The financial capabilities of banking-as-a-service go far beyond those associated with traditional financial services products. Businesses can create new revenue streams, lower cart abandonment rates and improve customer retention levels. But more than that, banking-as-a-service can play a pivotal role in furthering the broader objectives of an organisation. Many businesses have suffered as a result of the turmoil and devastation caused by COVID-19, but embedded finance provides an exciting opportunity for those looking to transform their business model and emerge stronger from the rubble.

* Source: McKinsey & Company