What is embedded finance? 4 ways it will change fintech

Embedded finance enables every company to be a fintech company—and is creating a massive economic opportunity

October 03, 2022

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Tom Sullivan

Tom is a fintech industry writer who creates whitepapers and articles for Plaid. His work has been featured in publications like Forbes, Fortune, and Inc. He's passionate about the freedom that the union between financial services and technology can create.

Embedded finance changes when, where, and how people interact with financial services—and creates substantial opportunities for both financial and non-financial companies. 88% percent of companies that implement embedded finance report increased engagement, and 85% say that it helps them acquire new customers.

In this article, we’ll explore what embedded finance is, the different types of embedded finance, and outlooks for growth and future trends in the embedded finance industry.

What is embedded finance?

Embedded finance is non-financial companies offering financial products and services. It could be an e-commerce merchant providing insurance, a coffee shop app that offers 1-click payments, or a department store’s branded credit card.

Effective embedded finance solutions meet the customer where they are with a financial option they need, whether that be a loan, payment program, insurance plan, or something else.

Ben White, Policy R&D at Plaid says “One of the key elements that define embedded finance is that it’s a financial service offered outside of the traditional ‘going to the bank’ context. Embedded finance brings financial services to the exact moment it's needed, instead of being an entirely separate part of a consumer’s life.”

Some embedded financial services have been around for a while, like airline credit cards, car rental insurance, and payment plans for high-priced items. Now embedded finance is taking hold online, as e-commerce retailers are offering banking services directly on their websites without re-directing customers to a bank. This phenomenon is enabled by third-party ‘banking-as-a-service’ companies that use API integrations to embed financial services into the user experience of non-financial companies.

Embedded finance use has picked up in recent years, and is expected to exponentially rise. It’s estimated that embedded financial services will produce $230B in revenues in 2025—a 10-fold increase over the $22.5B in revenues in 2020.

By opening up new markets and improving customer experiences, embedded finance presents a significant opportunity to both financial service providers and non-financial companies.

→ New to fintech? Check out our article, “What is fintech”, to learn more about the six main types of fintech and how they work.

What are the types of embedded finance?

There are many types of embedded finance products and services. They can vary greatly based on the industry and use case. The most common embedded finance offerings include banking, lending, insurance, payments, and branded credit cards.

1. Embedded banking

The terms ‘embedded banking’ or ‘banking as a service’ are sometimes used as a synonym for ‘embedded finance’. That’s because most embedded financial solutions, such as lending and payments, are typically offered by banks. In this case, we’ll consider ‘embedded banking’ as only bank accounts and their associated debit cards, and leave other areas like payments and loans as separate types of embedded finance.

With embedded banking, non-financial companies offer their users a branded checking account to hold funds and make payments. Embedded banking typically makes the most sense for sellers or service providers using a company’s platform to conduct business. It likely offers faster access to funds and perks that only platform users can access.

For example, the ride-sharing app Lyft offers a checking account and associated debit card exclusively to its drivers. Using this account, drivers can get paid immediately after every ride rather than have to wait weeks to get a lump sum payment for many rides combined. They can then spend those funds from their Lyft debit card and get cash back and rewards not offered anywhere else.

Another example is Shopify Balance, which allows Shopify store owners to ‘skip the bank’ by getting paid faster and eliminating the need to open a separate business bank account. It also offers a debit card with exclusive rewards for purchases made towards growing a Shopify business.

In both examples, embedded banking is designed to increase platform loyalty through a convenient user experience and special rewards. When a Lyft driver has a Lyft checking account that gets them paid faster, it’s less likely they’ll also drive for Uber.

→ Need a faster account opening and onboarding flow? Plaid Auth provides account authentication in as little as seven seconds when users connect with their bank account credentials. 

2. Embedded payments

Taking out a credit card and entering its number is a friction point that can cause consumers to abandon a digital purchase should their card not be handy. Embedded payments make this process much easier, as no card is required.

Embedded payments are a way of connecting and saving a payment method for later use at the click of a button. The Starbucks app, for example, saves credit or debit card information for 1-click payments while customers earn points for using the app.

Embedded payments go beyond credit cards. Embedded payments can also give consumers the option to pay directly from their bank accounts while saving merchants on fees.

SmartPay Rewards, a mobile app for gas stations and convenience stores, offers customers discounts and rewards in exchange for using its embedded bank account payments tool. Using ACH for payments saves merchants on fees because ACH fees are usually less than credit cards. Discounts and rewards increase brand loyalty and keep customers coming back.

3. Branded payment cards

Branded credit cards predate fintech, as shoppers have been able to get credit cards for their purchases for their favorite brands for quite some time. However, fintech has expanded the ability of companies to offer branded credit cards and increased the use cases where it makes sense.

One area where branded payment cards are making an impact is in the B2B space. For ages, companies have either had their employees purchase business expenses on their personal cards or gave them a company credit card that came from their bank. There are several disadvantages to both options, such as employees fronting business expenses from their personal accounts or being given a corporate card that could easily be used to purchase non-business items.

Now, with fintech platforms such as Ramp and Divvy, businesses can more easily get their own business credit cards and offer them to all employees. These platforms typically make the sign-up process faster and easier, offer greater access to business credit than traditional banks, and allow companies to create as many branded business credit cards as they want, with both virtual and physical cards available.

Any business that offers embedded banking should also be able to offer a branded debit card, whether that be for consumers, employees, or even vendors and contractors. The Lyft debit card (mentioned in section one), is a perfect example as it’s linked to the embedded bank accounts that Lyft exclusively offers to its drivers.

→Looking to reduce payment risk? Plaid Balance provides an instant account balance check to ensure users have enough funds to make a successful payment. 

4. Embedded lending

Before embedded finance, a consumer needing to borrow money for a large purchase either had to use their credit card or take out a traditional loan from a financial institution—both of which carry high-interest rates. Embedded finance has changed that by enabling companies to offer more favorable loan options at the point of sale.

“Buy now, pay later” may be one of the most visible and common forms of embedded finance seen by online shoppers. It appears during the online checkout process, at the moment consumers are contemplating their available funds. These offerings typically provide monthly or weekly payment installments over a predetermined period with no interest. Popular companies offering buy now, pay later solutions include Klarna, Affirm, and Afterpay.

5. Embedded insurance

Embedded insurance at the in-store checkout has been around for some time, but fintech has facilitated its spread to digital marketplaces. Embedded insurance is useful because it’s offered when and where people need it, with no need for a separate engagement with an insurance company or agent—and sometimes with multiple competitive options.

Companies have various ways to embed digital insurance options, most via partnerships with fintech companies. These fintech companies build insurance options into the checkout flow, enabling consumers to choose insurance as an ‘add-on’ to their purchase.

There are three common types of embedded insurance:

  • Singular policy: Companies (for example Boost and Bsurance) underwrite the insurance policies themselves and then integrate them into purchase flows.

  • Multiple policies: An ‘agency’ approach where companies integrate multiple insurance options into the checkout flow. Examples include Matic and Branch.

Extended warranties: Companies like Clyde and Extend offer extended warranties in ecommerce checkout flows, typically under a single policy option.

Plaid's 2022 Fintech Effect Survey: Stability, impact, and building for the future

Download our free fintech report for insights on building the future of digital finance.

Embedded finance is a growing, multi-trillion dollar market

Embedded finance is a huge opportunity not just for fintech companies and businesses, but also for consumers. It gives consumers options to increase convenience and savings, like zero-interest point-of-sale loans, or rewards for using a brand’s e-commerce app.

Data shows that consumers are willing to adopt embedded financial services if it benefits them to do so. 46% of millennials say they would be interested in opening a checking account with Amazon, and more than 30% would be willing to do the same with companies like Starbucks, Uber, Facebook, or Google.

Convenience is one of the main reasons consumers are willing to adopt embedded finance. Shopify Pay, which allows users to save their payment information for later use, is a prime example. By making the checkout process four times faster, Shopify Pay increases checkout-to-order rates 1.7 times—showing that added convenience plays a significant role in preventing consumers from abandoning their cart.

Fintechs that offer embedded finance products are also gaining significant ground. Embedded finance fintech startups (like those mentioned previously) are seeing huge gains in venture capital investment rounds as the market grows. In 2021, venture capital investments in embedded finance were triple those of 2020 (see below). According to Dealroom, the embedded finance market has the potential to be worth over 7 trillion by 2030—which is greater than the current value of all fintech startups and the top 30 banks combined.

In a market expected to grow 10 times in value from 2020-2025, numerous players are looking to capitalize on the opportunity. Timing, execution, and market understanding will determine who gains the most, as businesses, fintechs, and financial institutions will surely compete to take advantage of this growing opportunity.

It’s estimated that embedded financial services will produce $230B in revenues in 2025—a 10-fold increase over the $22.5B in revenues in 2020.
Plaid + Accenture's Embedded Finance Report

How to offer embedded finance products and services

When a non-financial company wants to offer a new financial product or service, they have three options: build, partner, or buy. Before the onset of fintech and embedded finance providers, build and buy were the only options, and they are much more expensive and time-consuming than partnering.

The embedded finance revolution is all about partnerships. Embedded finance providers such as Unit and Checkout.com do the legwork of building partnerships with banks and creating APIs to help companies quickly add on services like banking and payment cards. Then, they partner with non-financial companies (their customers) to get them up and running with these embedded finance products and services in weeks or months, rather than the years it would take to build. They’re also a much cheaper option than buying an entire financial services company.

Plaid also plays a role in this partnership ecosystem. Third-party embedded finance providers like Unit use Plaid to safely and securely gain access to the financial data they need to create and fund new accounts, plus gain deeper insights into things like balances and transactions. It’s as if Plaid turns on the stream of user-permissioned financial data to these companies, then they transform it into embedded finance products and services.

When a non-financial company decides it’s time to add checking accounts, lending, insurance, or another financial service, partnering with an embedded finance provider is going to be the easier option most of the time.

What is the future of embedded finance? Four ways it will change fintech

According to Plaid and Accenture’s research report, there are four central ways that embedded finance could alter the way both financial and non-financial companies conduct business.

1. Rearranged relationships between financial providers and consumers. 

With more companies acting as financial companies, financial providers will need to become more accustomed to sharing customers with non-financial companies for services only they used to provide.

2. New revenue streams. 

By embedding financial services into established buyer journeys, many new revenue streams have already been established. Additional revenue streams are likely to continue popping up as companies find new and creative ways to add value through embedded finance.

3. New types of competition.

 As embedded financial services become widespread—and more non-financial companies start wading into these new waters—financial services companies will need to rethink business models as they compete for new frontiers.

4. A new era of partnerships. 

Financial providers and brands will forge lasting (and highly beneficial) partnerships. These partnerships will provide the experience and skill sets that brands need to offer embedded finance without hiring whole teams of financial experts and software developers.

The opportunity for financial services to expand into previously non-financial areas is unprecedented—and still in the very early stages. This financial transformation will continue to gain strength across nearly every sector as more companies adopt embedded finance and as consumers become more comfortable with these services.

For companies wishing to join the embedded finance revolution, the time to start building is now.

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