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
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 is drastically changing when, where, and how people interact with financial services—and creates substantial opportunities for both financial and non-financial companies to serve a wider market. In fact, 88% percent of companies that implement embedded finance report increased customer engagement, and 85% say 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 the integration of financial services into non-financial offerings. Examples of embedded finance might include 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 easy way to make a payment.
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 can improve the customer experience and unlock a huge market opportunity for businesses, and is projected to rise dramatically in the coming years. It’s estimated that embedded financial services will produce $384.8B in revenue by 2029—a nearly 17x increase over the $22.5B in revenue generated 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 in multiple industries.
Examples of embedded finance
Embedded finance brings financial services to the exact moment it's needed, instead of being an entirely separate part of a consumer’s life. As a result, there are many different types of embedded finance products and services. The most common examples of embedded finance include fintech, banking, payments, credit cards, lending, investing, and insurance.
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. 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.
2. Embedded payments
Taking out a credit card and entering the number is a friction point that can cause consumers to abandon a digital purchase. Embedded payments make this process easier by 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 long been able to get branded cards from their favorite department stores. However, fintech has expanded companies' ability 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 use personal cards for business expenses or provided them with a company credit card 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.
4. Embedded lending
Embedded lending is a type of embedded finance that allows users to access more favorable loan options at the point of sale. Before embedded finance, a consumer had to use their credit card or take out a traditional loan from a financial institution—both of which can carry high interest rates. Embedded lending increases consumer access to lending and helps companies increase sales.
“Buy now, pay later” (BNPL) is one of the most visible forms of embedded lending seen by online shoppers. It appears during the online checkout process, at the moment consumers are contemplating their available funds, and offers to split the payment up over time. 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.
Embedded lending allows companies of any size to easily offer their customers more payment options. This is great for consumers, who often prefer to split payments up over time, and for companies looking to increase sales and customer engagement.
5. Embedded investing
Embedded investing allows non-investment service companies to offer investment options that enhance customer experience and open additional avenues of revenue for companies. Traditionally, investing required consumers to open a new account with a legacy financial institution, like Fidelity or Goldman Sachs.
With the rise of embedded investing, consumers can now buy cryptocurrency from other platforms they already use, including Venmo and Paypal. While this is a newer use case for embedded financial services, it's ripe for growth as consumers come to expect the sites they use to offer additional services. In the future, this might include being able to discuss stocks in a chat room and then easily buy shares or allowing users to buy stocks in their checking account app.
6. Embedded insurance
Embedded insurance at the in-store checkout is nothing new, but fintech has facilitated its spread to digital marketplaces. Embedded insurance allows users to purchase insurance on online purchases at the point of sale. 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:
7. Embedded fintech
While most embedded finance refers to embedding financial services into non-financial business processes, embedded fintech integrates fintech solutions into a financial institution's website, app, or other business processes. For example, a bank might also offer to help consumers get rid of unused subscription services or invest in cryptocurrency right in their banking app—rather than downloading a new app or signing up for a new service.
Embedded fintech provides a way for financial institutions to offer a wider range of services, engage their customers, and deliver more value. Historically, if a bank wanted to offer a new product, say a new type of investment or a different type of loan, they would need to spend months, if not years, developing, building, and launching a new product. With the rise of embedded fintech, they can embed these offerings in their current products. This lowers the economic risks and allows traditionally slow-moving banking companies to become more nimble and adjust to changing customer needs.
Plaid's 2023 Fintech Effect Survey
Navigate the latest consumer trends, create lifetime customers, and grow your business
Embedded Finance Startups
As the popularity of embedded finance has grown, startups have begun to offer consumers and companies many options. These startups offer a range of services including banking, investments, and insurance. Some examples include the following:
Walnut is modernizing the insurance industry by making it easier for fintech companies to embed insurance options in the purchase process. For example, a mortgage company might use Walnut to provide home buyers with a homeowners insurance quote during the mortgage approval process. If the customer accepts the quote, Walnut, a licensed insurance broker, facilitates the purchase. This improves the customer experience by streamlining the insurance purchasing process.
Unit is an embedded finance startup offering companies an easy way to store, move, and lend money. Using Unit, businesses can build custom offerings that allow their customers to request cash advances, get a branded credit card, or track expenses. By handling the backend building side of embedded finance, Unit helps more businesses leverage the power of embedded financial services.
Checkout.com is a payment gateway that makes it easier for businesses to accept payments online. Instead of dealing with the complexities (and regulations) related to online payments themselves, Checkout.com allows online companies to easily accept payments, prevent fraud, and keep payment secure. The company supports many different payment options, including credit, debit, and digital wallets, and also handles currency exchange, allowing businesses to transfer money from customers all over the world.
Embedded finance is a growing, multi-trillion-dollar market
Embedded finance presents 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. 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 carts.
Fintechs that offer embedded finance products are also gaining significant ground. In 2021, venture capital investments in embedded finance were triple those of 2020 (see above). In 2022, the overall embedded finance market was valued at $65.46B, and is expected to see a compounded annual growth rate of 32.2% from 2023 to 2030.
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.
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. This will increase competition for traditional finance companies and may result in better products and better customer service.
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. This may include newer types of embedded finance, like embedded investing.
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. This includes the rise of niche neobanks, like tribal neobanks, and neobanking for employees, which allows businesses to offer banking to their employees to increase retention.
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.