What is Embedded Finance?
The embedded finance market is set to reach $7 trillion by 2030, rapidly transforming financial technology. Many people already utilize embedded finance - such as making purchases through retail apps - often without realizing it. This approach integrates financial services into non-financial platforms, altering how businesses operate and how customers engage with financial products.
This post explores how embedded finance and APIs are revolutionizing traditional banking through digital innovation, covering solutions like payments, lending, and more. You’ll learn about the benefits and challenges for businesses, including new revenue streams and improved customer connections that are shaping the future of digital banking.
What is Embedded Finance?
The digital age has transformed how financial services reach customers. Embedded finance integrates financial services naturally into non-financial platforms, applications, and ecosystems [1]. Users can now access banking services directly through their everyday apps and platforms.
Definition and key concepts
Embedded finance continues revolutionizing traditional financial services as non-financial companies integrate banking capabilities into their platforms [2]. Your favorite ride-sharing app processes payments automatically after your trip, and retail apps let you make purchases directly - these are prime examples of embedded finance at work [3]. This seamless integration makes standalone financial apps and traditional banking institutions nearly obsolete [1].
How embedded finance is different from traditional banking
Traditional banking requires customers to find separate providers for their financial needs. Embedded finance takes a better approach by integrating these services into existing digital experiences [2]. The fundamental distinction comes from service distribution methods. Traditional models work under direct bank supervision. Meanwhile, embedded finance enables non-financial platforms to deliver banking services through partnerships [4].
The role of APIs and technology in enabling embedded finance
Application Programming Interfaces (APIs) are the foundations of embedded finance and create secure bridges between different software applications [5]. During a transaction, APIs make these processes easier:
Live processing and authentication of payment data Secure transmission between the merchant and bank Immediate feedback on transaction status [5]
The technology stack supporting embedded finance has strong identity verification, risk assessment tools, and compliance mechanisms [1]. This system keeps your transactions secure and provides a continuous user experience on all devices and platforms [1].
Embedded banking and payments
At the time you access your favorite apps or platforms, embedded banking provides direct access to financial products like bank accounts, debit cards, and payment services. The platform's integration makes money transfers quick and uninterrupted, and users no longer need to switch between multiple applications [6].
Benefits and Challenges of Embedded Finance
Embedded finance continues to reshape the financial services landscape with fresh opportunities and key considerations that affect businesses and consumers. This technology brings remarkable possibilities to the market and demands our attention to address potential challenges effectively.
Advantages for businesses and consumers
Embedded finance integration helps your business grow by a lot. 88% of companies reporting increased customer participation and 85% acquiring new customers prove the value of these solutions [10]. Businesses see impressive financial results, and their revenue grows 2-5x per customer through fintech integrations [11].
Improved customer experience and participation
Businesses that integrate embedded finance directly address their customers' changing priorities. Research shows that 52% of 25-34-year-olds prefer using financial products from their favorite brands over conventional banks [12]. This smooth experience delivers multiple benefits:
Lower transaction friction and abandonment rates
Customized financial offerings
Strong brand loyalty through combined services
Immediate financial solutions [10]
Potential risks and regulatory considerations
The regulatory landscape creates important challenges, especially when embedded finance crosses traditional banking boundaries. Currently, sponsor banks are nine times more likely to receive regulatory enforcement actions than non-partner banks [13]. This increased scrutiny drives up operational costs and demands robust compliance frameworks.
Data privacy and security concerns
Data security plays a significant role today. Recent studies reveal that 15% of data breaches in organizations stemmed from third-party vendors. This represents a 68% increase from the previous year [14]. Organizations should prioritize these key areas:
Security Challenge Solution Approach
Data Protection —> Implement end-to-end encryption
Third-party Risk —> Adopt zero-trust architecture
Compliance —> Deploy automated compliance tools
Identity Protection [73, 85] —> Enhance authentication systems
The Future of Embedded Finance
Global valuations of the embedded finance market reached $83.32 billion in 2023. Market analysts expect it to stimulate at an impressive CAGR of 32.8% between 2024 and 2030 [15].
Emerging trends and innovations
Embedded finance continues to evolve faster as solutions shape your future banking experience. Key trends include:
Integration of AI and machine learning for intelligent customer analysis
Boosted API capabilities for smooth data sharing
Expansion of Buy-Now-Pay-Later services
Advanced security measures for data protection [16]
Effect on traditional financial institutions
Traditional banking has changed dramatically. 46% of millennials want to open checking accounts with new providers like Amazon [17]. Banks must adapt quickly because approximately 70% of small to medium-sized businesses in both the EU and the U.S. now prefer software platforms over traditional payment providers [18].
Opportunities for fintech startups and non-financial companies
The market evolution creates new opportunities every day. Non-financial companies are finding fresh revenue streams through embedded finance, with 88% reporting increased customer involvement [17]. Recent developments show the sector attracts the most important investment, as seen in Railsr's $24 million funding to expand its embedded finance offerings [15].
Financial services have changed beyond their traditional scope. Embedded payroll, tax preparation, and identity verification have become vital growth areas [19]. Your business can now access sophisticated financial tools and services that combine smoothly with your existing platforms and workflows.
Conclusion
Embedded finance is leading financial breakthroughs and changing how businesses and consumers use financial services. Non-financial platforms now combine smoothly with banking, lending, insurance, and investment solutions. This creates great opportunities that will reach $7 trillion by 2030. Companies using these solutions have seen 88% higher customer participation rates, and their revenue has grown through expanded services.
The market shows strong confidence in embedded finance, with a projected 32.8% CAGR from 2024 to 2030. Businesses of all sizes can now improve their service offerings and build stronger customer relationships through integrated financial solutions. [90, 116]. Contact Basis for further guidance and support on how your business can implement embedded finance solutions.
References
[1] - https://toqio.co/insights/the-technology-behind-embedded-finance
[2] - https://www.pwc.com/gx/en/issues/technology/tech-translated-embedded-finance.html
[3] - https://vodeno.com/embedded-finance-explained-the-ultimate-guide/
[4] - https://dashdevs.com/blog/embedded-finance-vs-traditional-distribution-of-financial-services/ [5] - https://em.bank/blog/fintech/the-role-of-apis-in-enabling-embedded-payments/
[6] - https://www.unit.co/guides/a-complete-guide-to-embedded-banking
[7] - https://hesfintech.com/blog/buy-now-pay-later-software/
[8] - https://www.munichre.com/en/solutions/reinsurance-property-casualty/insurance-consulting/embedded-insurance.html
[9] - https://upvest.co/solutions
[10] - https://neontri.com/blog/embedded-finance-customer-experience/
[11] - https://www2.deloitte.com/content/dam/Deloitte/us/Documents/finance-transformation/us-the-ecosystem-imperative--embedded-finance.pdf [12] - https://www.marqeta.com/blog/how-embedded-finance-improves-customer-loyalty-and-acquisition
[13] - https://www.alloy.com/guides/understanding-embedded-finance
[14] - https://finezza.in/blog/embedded-finance-security-challenges-and-some-emerging-solutions/
[15] - https://www.grandviewresearch.com/industry-analysis/embedded-finance-market-report
[16] - https://www.xoriant.com/blog/a-closer-look-at-emerging-trends-in-embedded-finance
[17] - https://plaid.com/resources/fintech/what-is-embedded-finance/
[18] - https://www.paymentsjournal.com/the-u-s-is-leading-the-way-in-embedded-finance/
[19] - https://thefinancialbrand.com/news/fintech-banking/embedded-fintech-makes-innovation-a-two-way-street-for-banks-182328/