Embedded finance can be defined as the integration of financial services, such as payments, lending, insurance, or banking, directly into non-financial products and platforms. Over the past decade business models in this category have proliferated, fundamentally
changing how consumers and businesses interact with money, and providing fintech and financial services firms with the tools to make their products more accessible and user-friendly.
The introduction of the Revised Payment Services Directive (PSD2) in September 2019 was a key turning point. It was the transformational change that mandated Open Banking, and allowed third-party providers to securely access bank account data. This shift
created a new wave of innovation led by fintech disruptors and resulted in the rapid growth of embedded finance. We’re now seeing embedded finance maturing as mainstream solutions.
With UK fintech continuing to attract major investment, the sector remains a powerhouse for innovation. According to HSBC Innovation Banking’s
latest report in partnership with Dealroom, fintech was the UK’s most-funded sector in 2024, attracting $3.9 billion in venture capital. The potential of embedded finance has been
a key driver of consistently high levels of fintech investment, with firms like
McKinsey estimating that European embedded finance could account for revenues of over $104 billion by the end of the decade.
Today, the embedded finance landscape is populated by numerous players, ranging from well-established names such as Klarna, Checkout, and Stripe, through to newer entrants such as Modulr, Zego, and GoCardless.
The ‘Uberisation’ of payments
Within the wider embedded finance universe, embedded payments have emerged as a core driver of adoption, investment, and innovation. Simply put, embedded payments refer to products that enable businesses to integrate payments into their own client journey.
Allowing users to make purchases without leaving the app or website. This provides a more seamless user experience, creating a near frictionless journey and one which brands control.
The one-click convenience and end-to-end integration of embedded payments can be seen as an ‘Uberisation’ of payments. Just as Uber provides a fully integrated experience where riders pay with one click, with the driver’s fee processed as soon as the journey
is complete, the rise of embedded payments is allowing more and more businesses to offer comparable experiences to their customers.
The transformative effects can be seen in sectors like e-commerce. By using embedded payments providers, merchants can not only boost conversion rates and user experience via a ‘one click’ checkout, they also gain the ability to access better data. Merchants
can also seamlessly embed optional additional services such as insurance protection into each transaction, without the cost and complexity required to build a bespoke, piecemeal solution.
By unlocking more sources of data, reducing overheads, and enabling businesses to extract value from the complete value chain inherent in a transaction, the return on investment in these integrations really plays out. As a result, those businesses who have
taken the lead in this space are tapping into a massive addressable market.
Crucially, although embedded payments are being adopted at pace, there is plenty of room to run. Beyond e-commerce, the business models and services that are starting to factor in specialised embedded finance and payments products are extensive. Anything
that involves a transaction potentially represents an opportunity to create value via embedded solutions, and as providers mature and new sectors are unlocked, the growth potential is vast. Fintech will be embedded everywhere.
The lifecycle and growth trajectory of embedded payments
As embedded payments companies continue to mature and attract greater investment, an interesting trend has developed as they scale; companies that initially gained market share by offering one highly specialised use case – think Klarna and BNPL, PayPal and
payments – are increasingly expanding their offerings to transition into full-service embedded finance companies.
As these companies mature, they tend to tap into their wide customer base and unique ability to oversee the full payments value chain to offer more and more services. Over time, a once ‘simple’ financial product can ultimately come to resemble embedded banking
or banking-as-a-service businesses, offering everything from lending and insurance to full-scale banking solutions as a one-stop-shop.
This is testament to the opportunity in the sector but also shows the importance of scale. By leveraging their network effects, technological and regulatory know-how, and the trust that their brands have accumulated, these market leaders have a real advantage,
necessitating a unique proposition to compete. While also significantly disrupting legacy players.
Overall, this growth is fostering a new level of credibility within the wider fintech industry, and we’re even seeing the reverse trend, as more traditional players including established banks, integrate embedded finance tools into their business models.
This shift is driving innovation as newer fintech entrants adopt unique approaches, reshaping the way financial services are delivered.
Challenges and opportunities
Despite the rapid growth and potential of embedded payments, challenges remain that could determine the winners and losers in this space. The first is the intensification of competition that big tech firms have brought.
Apple, Google, and Amazon all offer widely used embedded payments solutions, leveraging their massive userbases to drive adoption. So far, their focus has primarily remained on payments, but the sector needs to be alive to greater competition in other areas
of embedded finance.
Secondly, embedded finance is not immune to dynamics like network effects and the resultant winner-takes-all structure that characterises many tech industries. As the space matures, and early market leaders bolster their propositions to become one-stop-shops,
early-stage businesses will need to offer something unique if they are to identify a path to scale.
Fortunately, the range of businesses and use cases for embedded finance remains vast, and there is plenty of room for innovation and disruption. Although e-commerce checkout providers have matured, areas like B2B sales remain relatively nascent, whilst certain
industries may demand more specialised solutions. Founders who can identify untapped markets and solve unaddressed pain points will be primed for success.
As the space develops, cybersecurity and anti-fraud measures will continue to grow in prominence. As these companies become increasingly central to the economy and come to more closely resemble banks or payment service providers, compliance will grow in
both rigour and complexity, necessitating robust anti-money laundering (AML) and fraud prevention mechanisms.
With the rise of financial crimes, the costs associated with staying compliant and secure are significant. Therefore, firms will need to implement effective strategies to manage these risks, whilst ensuring that user experience remains frictionless. From
a retail customer experience, any fault associated with fraud or cyber-attacks will have significant brand and reputational consequences.
Securing and maintaining consumer trust, particularly amongst generations who are accustomed to relying on legacy household names, is key to success. The counterpoint to this is that younger generations, who may be less inclined to rely on traditional financial
institutions, represent an opportunity. Consumers may feel more comfortable using embedded finance services from platforms they already trust for other services.
Looking to the future of financial services
Despite many challenges, embedded finance holds huge potential to transform the way consumers and businesses interact with financial services.
Fintech is integrating everywhere. The ability to seamlessly integrate financial products into everyday transactions, whether through payments, lending, insurance, or banking, will redefine the user experience, making financial services more accessible,
and convenient than ever before.
It’s a truly exciting part of the market which has and will continue to revolutionise the way we as consumers and businesses consume services.