Embedded finance has become one of the biggest buzzwords of the 2020s in the fintech space. It broadens access to financial services, simplifies user journeys, lowers barriers to purchases—and of course has been a major growth driver for all kinds of companies.
Embedded finance—which essentially means providing financial services at the point of greatest relevance to the consumer—is not new. An early instance that lives in my memory is car dealerships offering insurance at the point of sale. Apple has also been
embedding third-party lending into its checkout journey for over a decade.
Now that embedded finance is becoming universal to user journeys across industries, it’s worth looking at some of the catalysts of its widespread adoption. In the short term, high interest rates are certainly an incentive for many use cases, but long-term,
demand is ultimately going to be driven by fundamental shifts in customer behaviour.
Here and now
Today’s consumer is impatient. They want their demands met as and when those appear and they are always on the lookout for opportunities that provide instant gratification. These consumers crave simplicity: one-click transactions and not a maze of processes.
They also do not have the patience for fragmented user journeys - they demand cohesive experiences within an app’s ecosystem that does not require leaving the app to complete a transaction.
It is this emerging cohort of digital native consumers that brands can’t afford to lose by tossing them into various journeys - one for product selection, one for expressing purchase intent, one for making payments, one for taking a loan etc. This is why
forward-thinking companies are embedding these traditionally separate financial services directly into their own customer journey.
The BNPL boom
Macroeconomic changes over the last few years such as the rise in inflation has squeezed consumer wallets. Enter Buy Now Pay Later (BNPL):
a timely solution in a cash crunch. Once a novelty, embedded loans seamlessly integrated into purchase cycles have now become mainstream, meeting consumers' urgent need for flexible financing options.
This introduction of micro-credit options at the checkout of most e-commerce platforms drove meteoric growth in the embedded finance sector. Between 2020 and 2023, BNPL’s share of e-commerce payments increased by
138%, boosting conversion rates for merchants and helping consumers to spread the cost of large purchases. The boom, however, is slowing with many BNPL lenders facing economic headwinds following global expansions and mounting regulatory pressure to protect
consumers during the cost of living crisis.
From loans to savings
The use case for 'embedding’ is now extending to other financial products— savings accounts, insurance and even charity causes. Merchants, banks, and technology providers recognise the value of keeping customers on their website or app through experiences
and offers they can control, and are turning to an increasingly diverse array of embedded finance products to help them do just that.
However, offering financial products isn’t simple for unregulated companies and non-bank financial institutions. In the past, these companies either had to work directly with traditional banks, whose tech and risk models were not designed to handle the complexities
of embedded products, or go to Banking as a Service (BaaS) providers, who offered better tech but were ultimately dependent on a bank to power their middleware.
This has opened up the market for regulated BaaS providers and purpose built challenger banks who have designed their modern core banking technology and APIs with embedded finance use cases in mind, and are now poised to capitalise on the next wave of adoption
and innovation.
The fickle role of interest rates
With major global interest rates surpassing 3% for the first time since 2012, licensed banks and their fintech partners have an unprecedented opportunity. Consumers are clamouring for options to grow their wealth safely, and embedded savings accounts with
competitive interest rates, that can be offered by various consumer-facing businesses, are meeting that need for the customer.
As with any trend driven by short term macro changes and shifting economic conditions, we can’t assume the opportunity will lead to long-lasting adoption. The central bank has also been clear that they aim to reduce interest rates from the current historic
highs to more stable rates for the economy. High interest rates are certainly catalysing a flurry of adoption right now, but it’s unlikely that they are here to stay.
Key catalyst: control of consumer eyeballs
Conversion rates are one of the most critical success factors for e-commerce companies, and moving the needle by even a few basis points can add significantly to their success. Failure of startups such as
Fast serves as a reminder that this is not an easy task.
Recent increases in e-commerce conversion rates have been attributed to more sophisticated embedded finance options at checkout, such as the direct integration of digital wallets into payment gateways. This makes sense on an intuitive level: if a consumer
has to navigate to an entirely separate app or website to access a financial service needed to make their purchase, the chances that they will return and complete the transaction are far lower. Every extra layer of friction is a moment where they could potentially
reconsider their decision or get distracted. Data clearly shows a correlation between high drop off rates in purchase journeys and these layers of friction. Embedded finance keeps the consumer locked into the journey—and ultimately this is the key catalyst
that will keep merchants and businesses keen to adopt this technology.
Both consumers and businesses benefit from embedded finance
Widespread adoption of embedded finance is good for both merchants and consumers. Merchants increase customer retention and loyalty by supporting the entire user journey within their own platform, and grow new revenue streams through a share of the profit
generated by their embedded finance providers.
Consumers get a smoother experience and more choice over how they pay, how they borrow, and how they save. Companies will also often bargain with embedded finance providers on behalf of their customer base to secure more favourable rates than what consumers
can get on the open market. A great example of this is Monzo’s partnership with investment provider Blackrock, enabling easy access to three tiers of funds within their banking app, leading to
astronomical adoption from the bank’s UK users.
So while embedded finance is not new, its widespread adoption has certainly led to an impressive period of growth for banks, fintechs and merchants, and offered better choices for the average consumer.
Capturing the consumers' undivided attention across the entire journey will continue to be a determining factor for businesses and the key catalyst for the continued development and adoption of embedded finance technology.