As we progress through 2024, the concept of embedded finance, incorporating financial services into other businesses in relevant contexts, continues redefining the financial services landscape. According to Capgemini’s 2021 survey, more than 70% of banking executives agree that embedded finance helps innovate banking products and services, expand the customer base, reduce distribution and acquisition costs, and diversify revenue sources. As per an estimate, by 2030, the market size of embedded finance services will rise to 588 billion USD from a modest 22 billion USD in 2020. This will make embedded finance a prominent channel strategy for banks.
The key to unlocking the significant market potential of this trend lies in its ability to integrate financial services seamlessly into various consumer and business platforms. Embedded finance enhances the user experience and opens new revenue streams for many industries – hotels, retailers, e-commerce, transportation, etc. In this blog, we will explore the embedded finance space, examining essential trends and technologies shaping the growth of this sector. We will also examine how banks, insurers and wealth managers can harness the opportunities within the embedded finance space by leveraging unified financial analytics.
Integrating financial services into everyday customer activities is more than just a convenience. It's about creating intuitive, user-friendly financial solutions that fit naturally into consumers' lives. Moving towards more accessible and engaging financial experiences is an overarching trend that has been around for a long time. While gamification uses game-like elements in non-game contexts to achieve better customer engagement, embedded finance makes banking and payments an almost invisible part of a non-financial experience.
Non-financial companies harness this trend and weave financial services into their offerings. Many more will follow – according to the recent EY survey, with more than 70% of financial technology executives believing that over 50% of financial services would be offered through non-financial channels. Going beyond traditional finance, the embedded finance trend allows brands to build stronger customer relationships by offering relevant financial solutions directly within their platforms. It implies a shift where companies not typically associated with banking become integral players within their customers' financial lives. Forbes highlights that embedded finance leads to a transformative phase in banking, where adaptability and responsiveness to new financial delivery methods become key to remaining relevant and competitive.
Furthermore, the embedded finance era would likely adjust the financial institutions’ product lines towards real-time financial products. From traditional, slower-paced financial services, the industry will likely transition to dynamic, instant solutions that meet the immediate needs of today's fast-paced consumer lifestyle. The collaboration between financial institutions and fintech companies, as Forbes points out, is crucial in this evolving landscape. These partnerships signify blending traditional financial expertise with innovative technological approaches to create more comprehensive financial solutions.
Technology is the driving force behind embedded finance. Versatile APIs enable seamless integration of various elements of financial services into non-financial industries’ customer journeys. For traditional banks, insurers or wealth managers adapting to the embedded finance trend, technology provides the means to offer new ways of delivering their services.
In his blog on embedded finance, Fredrik Davéus, the CEO of Kidbrooke®, covers various examples of its application, such as embedded payment processing, health insurance in the workplace, banking services via non-bank platforms, insurance at point of sale, and investment products in non-financial apps. Moreover, we examined embedded finance applications in wealth management over a year ago. From this extensive list, it is evident that embedded finance is a highly collaborative field. Financial technology will play an important role in facilitating partnerships between traditional providers of financial services and non-financial firms.
For example, financial analytics technology is essential to many applications of embedded finance. Consumers expect seamless, personalised, and engaging services, which in the realm of financial services heavily depend on the quality and reliability of the calculations powering them. Therefore, at Kidbrooke®, we adopted a unified approach between data and analytics, integrating various financial planning and asset management aspects into a coherent system. This ensures a uniform quality and accuracy of decision support powered by our Kidbrooke® One platform. Its core features include robust performance, forward-looking and retrospective analytics, an architecture which does not require the storage of end-customer data, and an API-first design for seamless integration. It is auditable, modular, and very flexible, with its balance sheet approach allowing users to construct any use case that requires financial modelling.
As the growth and evolution of embedded finance continues, the importance of technology like advanced financial analytics becomes increasingly apparent. These API tools are integral in delivering modern, efficient, and customer-centric financial solutions in a rapidly changing financial world.
Financial services are a highly regulated field, so it is unlikely that tech giants will take over embedded finance soon. However, financial institutions must adapt their strategies to thrive in the context of the embedded finance trends we've explored. This involves not only embracing technological advancements but also rethinking traditional business models. Here is a list of strategies that could help:
Adapting to Embedded Finance: Institutions should focus on creating business models that integrate their financial services within various consumer platforms. The simplest example of this strategy is a buy-now-pay-later model, integrating short-term loans in e-commerce. However, many untapped opportunities exist, such as integrating pension products into the employee portals. This approach requires financial institutions to think outside the box and ensure that their “invisible” service helps the non-financial business make their customer journey more valuable, engaging, or affordable to the end client.
Leveraging Advanced Financial Analytics Technology: Achieving short time-to-market in an environment of accelerating competition and legacy infrastructure challenges requires having an open mind about third-party analytical capabilities. Advanced financial analytics is essential for flexible, engaging, and personalised services, aligning with the trends of the demand for real-time financial products and seamless user experiences.
Navigating Regulatory Challenges: Embedded finance brings unique regulatory challenges, and today banks, insurers and wealth managers are best equipped to navigate them. Financial institutions must stay informed about the evolving regulatory landscape, as pointed out by PwC, and ensure compliance while innovating.
Fostering Collaborative Ecosystems: Emphasizing the importance of strategic partnerships, as noted by Forbes, institutions should seek collaborations with fintech companies and other non-financial businesses to expand their service offerings and reach. This not only generates new business but also allows financial institutions to shorten their time-to-market and provide leaner and more efficient services.
Embedded finance, a dynamic and rapidly evolving trend, fundamentally transforms the financial services industry. As we progress through 2024, integrating financial capabilities into non-financial platforms presents both traditional institutions and new players with unprecedented opportunities for innovation and growth. Banks, insurers, and wealth managers must strategically embrace advanced financial analytics and navigate the complex regulatory landscape while fostering collaborative ecosystems with fintech and non-financial businesses. As they adapt to this new paradigm, they can create more engaging, personalised, and seamless financial experiences for their customers, thus cementing their relevance in a digitally integrated world. The future of finance, marked by embedded solutions, not only enhances the user experience but also opens new avenues for revenue generation, making it a crucial aspect for institutions to consider in their strategic planning.