Why Does Embedded Finance Matter

Every company is fintech company

Today’s financial services have turned pretty much every company into a financial services provider or enabler. Even just a simple payment requires a complex chain of fintech actors to make it happen.

More than ever, financial technology infrastructure has become a critical utility that everyone wants to use, everyone wants it to be as frictionless as possible, everybody wants it to be secure but, in truth, most of us “just want it to work”. After all, when in the morning, we turn on our bedside lamp our first thought doesn’t go to the structural engineers who have built and are maintaining the dam used to generate that all essential electricity. It just has to work. After all, who hasn’t felt that slight moment of panic when their mobile device’s battery suddenly runs out of power?

Recent studies estimate that global embedded finance revenues are projected to reach US$776,731 million by 2029. As much as 33% of global card spending occurs online and yet, even though card payments are still on the increase, over time cards as we know them will progressively disappear. Our plastic cards have already been abstracted and have become virtual cards we use in our Apple, Android or Google Pay wallets. Open banking solutions now provide effective alternatives to expensive card products and with the rise of digital wallet solutions, the “top-of-the-wallet” choice for end user and consumers will no longer be the plastic card, but the open banking solution or a digital asset wallet where we hold our stablecoins, CBDCs or cryptocurrencies.

In the same way that the recent pandemic has accelerated the use of digital payments, the changing demographics continue to accelerate this trend. As the digitally native get older, they will contribute to a large pool of users and businesses who will expect easy-to-use and cost effective embedded financial services online. It’s the plumbing which makes payments and financial data flow. The wide adoption and use of open banking technologies will incentivize businesses, lenders and customers to embrace embedded finance.

Why embedded finance?

Embedded finance is the insertion of a financial product or service within a non-financial platform.

The concept is not new, but now embedded finance is being enabled for everyday digital user journeys through APIs and open banking.

The term ‘embedded’ suggests that embedded finance is not simply an add-on service. It requires a complex integration with the host journey or platform. It does not simply refer to the branding of in-app or embedded financial services as the brand’s own.

Interestingly, instead of becoming concentrated in the hands of just a few fintechs, these services are now part of a value chain which has become atomized.  A plethora of fintech providers of one ilk or another now supply the market with modular services that need no longer be built from scratch and in-house. From integration and transaction APIs, to CRM solutions, to secure customer authentication, to notification alerts, etc. everything is now provided by a technology firm integral to the ecosystem.

Partnerships between financial institutions and fintech companies, especially have become the norm, enabling players to collaborate and extend their respective expertise. Ironically, the specialization of services, increased competition, and advances in cloud computing are enabling every day better, faster and more cost effective solutions to bring the fintech utilities to everyone’s home, office, school and no farther that the ubiquitous mobile devices we’re all holding in our hands. Those engineers better be sure I get the power to charge my phone, lest I run out of juice.