What is embedded finance? 4 ways it will change fintech

Embedded finance is drastically changing when, where, and how people interact with financial services—and creating substantial opportunities for both financial and non-financial companies to acquire new customers and increase customer engagement. 

The global embedded finance market was valued at $82.32 billion in 2023 and is expected to grow rapidly in the coming years. Companies looking to remain competitive must gain a deeper understanding of embedded finance's benefits and applications. 

In this article, we’ll explore what embedded finance is, discuss the different types of embedded finance, and consider how growth and future trends are likely to impact the industry.

What is embedded finance?

Embedded finance is the integration of financial services, like payments, lending, or banking services, into non-financial offerings. This allows users to access financial services seamlessly with tools they already use. An example of embedded finance is when a retailer’s app offers a “Buy Now, Pay Later” option at checkout. This allows customers to split their purchases into installments directly within the app without needing to apply for a separate loan or credit.

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. 

Embedded financial services aren't new—think about airline credit cards, car rental insurance add-ons, or in-store payment plans for high-priced items. But now, embedded finance is expanding online, with e-commerce retailers offering financial services directly on their websites, so customers don’t have to be redirected to a bank or financial provider.

For example, Target RedCard integrates payment options directly into its retail ecosystem, offering customers a seamless purchasing experience with benefits like a 5% discount on eligible Target purchases. 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 it is projected to rise dramatically in the coming years. It’s estimated that embedded financial services will produce $291.3 billion by 2033—a nearly 13x increase over the $22.5 billion 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

Embedded banking is the integration of banking services, such as a checking account, directly within non-banking platforms. A good example of embedded banking is the ride-sharing app Lyft, which offers an in-app checking account and associated debit card exclusively to its drivers. Drivers can use this account to receive earnings instantly, manage funds, and even access cash advances without a separate bank account. 

The terms ‘embedded banking’ or ‘banking as a service’ are sometimes used interchangeably with ‘embedded finance’. That’s because most embedded financial solutions, such as lending and payments, are typically offered by banks. However, it's more useful to view "embedded banking" as bank accounts and their associated debit cards and view payments and loans as separate types of embedded finance, as different platforms often provide them.

Embedded banking typically makes the most sense for sellers or service providers using a company’s platform to conduct business. It generally offers faster access to funds and perks that only platform users can access.

Another embedded banking 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.

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 leave to drive for Uber. 

2. Embedded payments

Pulling a credit card out of your wallet 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 and gives customers reward 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 money because ACH fees are usually less than those of 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. Both options have several disadvantages, 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 Bill, 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 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 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 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 revenue avenues for companies. Traditionally, investing required consumers to open a new account with a legacy financial institution, like Fidelity or Goldman Sachs. 

A good example of this is Greenlight, a debit card designed for kids and teens. Parents can easily send funds to their children on a branded debit card, but it also allows children to save money in an interest-bearing account or invest those funds—with their parent's permission. 

Consumers can also purchase 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 discussing stocks in a chat room and then easily buying 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 online at the point of sale; for example, when buying a laptop online, you might be offered insurance options. It's suggested 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 can embed digital insurance options in various ways, most notably through 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.

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 allows financial institutions to offer a broader 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, it would need to spend months, if not years, developing, building, and launching it. 

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. 

8. Embedded financial marketplaces

An embedded financial marketplace is a place where consumers or businesses can compare, choose, and access multiple financial services from different providers. It acts as a one-stop shop for financial services by directly integrating multiple options into one platform. 

For example, a consumer looking for a car loan might use an embedded financial marketplace to view their lending options from multiple lenders based on their budget and credit score. They can compare terms and interest rates, select their preferred loan, apply, and get approved in one platform. 

Embedded financial marketplaces simplify financial access for consumers by allowing them to compare options quickly. They can also streamline workflows for businesses because all parts of the process occur in one platform. 

9. B2B embedded finance

While B2C embedded finance options are designed to make purchases easier for consumers, B2B embedded finance platforms focus on catering to the needs of professional buyers, including procurement departments at large corporations. For example, a business using an inventory management platform might have access to lending options based on its sales history. This way, if a company needs a loan to restock products, it can apply directly within the inventory platform without needing to approach a bank separately.

Freshbooks is a good example of a company leveraging B2B embedded finance to serve its customers better. It teamed up with YouLend to offer its business customers flexible, revenue-based funding options. Some businesses can even receive same-day offers and approvals. Since YouLend is fully integrated into the FreshBooks platform, customers can apply for and receive funding from a brand they already know and trust to handle their business accounts.  

Embedded finance providers 

As the popularity of embedded finance has grown, embedded finance providers have begun to offer consumers and companies many options. These companies offer a range of services, including banking, investments, and insurance. Some examples include: 

Walnut  

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 

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 

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. 

Engine by MoneyLion

Engine by MoneyLion is an embedded finance marketplace that helps businesses acquire, engage, and retain customers. Companies can leverage Engine's embedded marketplace to offer relevant financial products—such as loans, credit monitoring, and investment options—precisely when customers are most likely to need them. Engine also offers AI-powered tools and detailed analytics to help businesses optimize the customer experience and drive revenue. 

→ Using Plaid IDV and Transfer, embedded finance startups can safely and securely gain access to the financial and identification data they need to onboard new customers and fund accounts.

How to offer embedded finance products and services

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. A recent study found 63% of U.S. consumers under 35 say they are open to financial services from non-banks.  

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; these 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 access the financial data they need to create and fund new accounts and gain deeper insights into things like balances and transactions. It’s as if Plaid turns on the stream of user-permissioned financial data for these companies and then transforms it into embedded finance products and services. 

Using Plaid Transfer, companies can seamlessly offer embedded payments by authorizing customers, analyzing risk, and moving money with a single API. Another example is YouLend, which we mentioned in an earlier section. By partnering with Plaid's Open Banking network, YouLend can offer 3X faster processing for insurance applications with a 90% approval rate. 

When a non-financial company decides to add checking accounts, lending, insurance, or another financial service, partnering with an embedded finance provider is usually the easier option.

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.

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