Embedded finance, a concept that involves non-bank entities offering banking-like services, is significantly changing the landscape of financial services. This transformation is characterized by the seamless integration of financial transactions into various aspects of daily life, from ride-sharing services like Uber to mobile banking apps. These experiences are so intuitive that users may not even realize a financial transaction has occurred. The growth of Embedded finance is driven by several factors, including the increasing speed of transactions, digitization of commerce, and the ubiquity of mobile payments.
One of its primary use cases has been in the payments sector, with many providers originating from the payments industry. Estimates suggest that non-financial services businesses in the United States could process about $7 trillion worth of transactions through embedded finance by 2026.
However, this transformation is not without its challenges. In the United States, for example, the payments system relies on legacy systems that do not effectively communicate with one another. While efforts are underway to modernize these systems, it is a complex and time-consuming task.
The future of embedded finance depends on infrastructure and collaboration with incumbents. Infrastructure improvements are crucial to enhance the technology that underpins embedded finance. Legacy financial services firms and banks need to externalize their processes to allow distributors to seamlessly integrate embedded-finance products into their platforms.
Moreover, the collaboration between innovative FinTech startups and established incumbents is key. While FinTechs may address specific niche problems, partnerships with incumbents can help expand the reach and capabilities of embedded finance solutions.
The financial services industry is on the cusp of a significant transformation, and those who invest or partner in embedded finance are poised to be at the forefront of this change.