The global market for embedded finance is growing explosively, presenting numerous opportunities for industry players. At the same time, new technologies and market trends continuously change the embedded finance landscape. Here’s what you should know to navigate through the ever-evolving sector in 2024.
Embedded Finance Market Growth
When you access a ‘buy now pay later’ option directly at the merchant’s checkout page or insure your trip at the ride-hailing app, you enjoy the privilege of embedded finance. As it comes from the name itself, embedded finance is integrating financial services (e.g. payments, insurance, investing, loans) into non-financial apps.
The vast majority of businesses that adopt embedded finance solutions (88%) witness increased engagement, while 85% say that it helps them acquire new customers. This way, such solutions open up new target markets and improve customer satisfaction levels.
Embedded finance has great potential. The market for such embedded services grows enormously each year. Its market size was valued at $58 billion in 2022, then $83.32 billion in 2023, and is expected to grow at a CAGR of between 29% and 33% within the next five years.
Different experts forecast the embedded finance market value to reach somewhere between $1 trillion and $7 trillion by 2032. Whatever the exact number will be, it is obvious that the sector has significant future prospects. If you don’t want to miss out on the opportunity, pay attention to the latest trends in embedded finance technology.
Embedded Payments Integrate Deeply Into Merchants’ Ecosystems
To provide minimum friction to consumers, many retail brands are developing their own in-house payment solutions and taking direct control over embedded payment experiences. Working with international banking partners, firms like Grab, Uber, Target, 7-Eleven, Starbucks and others have incorporated a digital wallet into their core apps. They enable customers to make in-app purchases, redeem rewards within loyalty programs, store some funds for later payments, and more.
Experiences like that differ greatly from relying on third-party services to cover the financial aspect. It brings added convenience to customers, requiring fewer transitions from one service to another and saving their precious time. Besides, in-house digital wallets can be highly customised and feature exclusive promotions.
Instant Credit Is in Demand
With the help of bridging technology such as APIs, embedded lending offers instant, personalised loan services directly at e-commerce platforms and apps. The credit limit can be personalised based on purchase history, transactional and other user data on the merchant app, rather than traditional credit scores. This way, sellers may target underserved customer segments.
Embedded loans at the point of sale are becoming increasingly popular, especially in emerging markets where traditional credit solutions are often inaccessible or too expensive to use. Therefore, flexible embedded lending alternatives are rapidly growing. Revenue from embedded ‘buy now pay later’ services is forecast to account for just over 50% of the embedded finance market in 2026.
At the same time, a recent PYMNTS study revealed that consumers in major global economies are expressing dissatisfaction with the existing credit options. Only 15% of the survey respondents have used an embedded lending product in the last 90 days, although 43% of consumers are highly interested in switching to a provider offering embedded loans. That might mean that embedded lending providers are missing the mark.
White-Label Embedded Finance Alternatives Set the Bar High
While high-end retailers develop their own embedded finance solutions, myriads of small businesses — the backbone of any economy — rely on third-party players (e.g. payment gateways and prepaid solution providers) to offer white-label alternatives.
Existing white-label solutions offer numerous advantages. They are easily scalable, seamlessly deployed, cost-effective, highly customised, and already compliant with local and international regulations. To small businesses, outsourcing their embedded finance solutions means a greater focus on core operations, no need to expand their personnel, and less risk of regulatory breaches and associated penalties.
However, today, offering a single embedded solution is not enough for a payment service provider that wishes to stay competitive. Visa research suggests that traditional FIs should now partner with third parties to provide bundled solutions since online merchants prefer to work with a single provider offering a portfolio of embedded finance options. The solutions suite may include both innovative and more traditional offerings to cater to different customer categories.
B2B Solutions Are On a Rise
It is predicted that by 2027, 35% of embedded payments’ revenue will come from the B2B segment. Moreover, embedded finance-driven business lending is projected to grow fivefold, from $200 million in 2021 to $1.3 billion by 2026.
Embedded finance solutions for the B2B market must be integrated with key B2B access channels, such as B2B e-commerce marketplaces and accounting software. If done properly, such tools offer flexible financing options and faster payment processing, helping businesses manage their cash flow more effectively. Today, they are increasingly expected for B2B purchases that have traditionally been handled offline.
Since previously many embedded finance providers focused on the consumer segment, there is great competition in this space. Meanwhile, B2B platforms are largely underserved which creates plenty of opportunities for embedded finance solutions. Large industry players like Stripe, Plaid, Shopify, Square, etc. have all created some B2B embedded solutions. As the number of providers offering embedded finance solutions for the B2B market grows, more competition will arise, so make sure to be one of the early birds.
Real-Time Payments Gain Momentum
Global real-time payments (RTP) volume has increased 42.2% year-over-year, reaching sustainable levels of 266.2 billion transactions in 2023. Nevertheless, these record numbers still mean that RTPs will presumably account for only 27.1% of all electronic payments globally by 2028. With much room for growth, real-time payments are taking over the embedded finance sector.
Embedded instant payments ensure that buyers and sellers get paid on their preferred terms and receive their money due almost instantly. For businesses, it means enhanced liquidity, better cash flow, and a speedier order fulfilment cycle. Buyers also benefit from quick and efficient payment processes, enhancing their overall shopping experience and increasing their satisfaction and trust in the service. Solutions like this are not yet too common and favourably differentiate platforms from their competitors.
Emerging Technologies Keep Expanding Their Presence
Artificial intelligence (AI) and machine learning (ML), as well as blockchain and Web3 technologies are slowly but steadily increasing their presence in embedded financial services. At this point, there are many challenges to their vast adoption. For instance, using AI for finance always involves collecting and analysing a lot of sensitive data, so fintechs and other industry players need to be very careful with compliance.
However, both AI and ML are sure to be increasingly implemented in corporate embedded finance. Lending, specifically, can benefit from well-informed alternative credit scoring that can be powered by AI. As AI tools get more sophisticated, they can also enable regulatory and compliance processes such as Know Your Customer (KYC) and Anti-Money Laundering (AML). Besides, AI algorithms can tailor financial products to individual needs based on user data and behaviour, providing utmost personalisation which is expected today.
Blockchain and distributed ledger technology (DLT) are often being leveraged in finance and e-commerce for utility purposes ranging from secure transactions to transparent supply chains. Today, scalable blockchain solutions are available as Blockchain-as-a-Service (BaaS). Potentially, blockchain can eliminate the need for intermediaries in embedded finance and provide more security and transparency to embedded payments.
These and other emerging technologies are still novel to the sector. Many individuals and businesses are still exploring how to utilise it effectively. The more benefits are discovered during early adoption, the more AI and blockchain we’ll see in the embedded finance of the future.
On a Final Note
Embedded payments are evolving. They are getting more sophisticated, enhanced by emerging technologies such as blockchain and AI. As the sector grows, there’s a need to fill the gaps in embedded finance solutions in the B2B space, as well as bringing more speed to transactions with real-time payments (RTP). Instant payments are just the beginning, as more instant credit solutions are entering the scene.
Besides, embedded finance becomes deeper integrated into merchants’ ecosystems, providing a wholesome customer experience. White-label solutions increasingly come in bundles since online merchants prefer to work with a single provider offering a portfolio of embedded finance options rather than looking for different partners for every financial tool. All in all, embedded finance of 2024 presents a vigorous landscape with robust collaboration and innovation.
