Despite it being a relatively recent concept, embedded finance has grown rapidly in recent years.

The trend is expected to rise further moving forward, with digital consulting company Publicis Sapient forecasting an annual growth rate of 41% in global embedded banking revenues from 2021 to 2025.

The predictions were shared in a new report released earlier this month which sought to give an overview of the sector, look at emerging trends, and share recommendations for incumbents looking to tap into the booming sector.

Embedded finance, which refers to the integration of financial services and tools within the products or services of non-financial organizations, has become one of the hottest trends in the fintech sector. It is a rise that’s been driven by customer demand for integrated experiences, expectations of openness and adoption of technology capabilities including automation and APIs.

Growing interest in embedded finance has translated into soaring venture capital (VC) funding into startups in the space, Publicis Sapient notes.

In 2021, embedded finance funding reached US$4.2 billion, up 180% from the year prior (US$1.5 billion). The sum represents 3.2% of all VC funding that went into fintech companies that year.

Banks dip their toes into embedded finance

While fintech startups and digital-native challengers have been early adopters of embedded, and are now leading in areas including embedded payments and buy now, pay later (BNPL), banks are starting to engage in the space, particularly in retail BNPL, but also with wholesale propositions, the report says.

In the US, Goldman Sachs is actively pursuing the embedded finance trend, having inked partnerships with the likes of Apple, General Motors and Nav Technologies, a financing platform for small businesses.

Similarly, HBSC has been looking to tap into the embedded finance opportunity, announcing last year plans to launch a new banking-as-a-service (BaaS) offering that would enable customers to create and provide business banking services through their own platforms.

In Sweden, SEB signed up in April 2022 its first customer for SEBx, the lender’s new BaaS platform. SEBx allows companies to offer financial services under their own brand, and its first client is Humla, a fintech startup part of the Axel Johnson Group. Humla said it will use SEBx to enhance its payment and loyalty offerings within the retail space.

In Australia, Commonwealth Bank launched last year its own BNPL offering called StepPay. StepPay can be added to a digital wallet or used with Mastercard partners.

Emerging applications of embedded finance

For banks, embedded finance has become a strategic priority given the size the market is expected to reach in the coming years. In Europe, embedded finance is set to account for more than 15% of the share of the revenue pool of retail banking, according to PwC.

While most applications of embedded finance have so far revolved around payments and e-commerce, many other opportunities exist in other industries. Across the travel industry, BNPL offerings are growing in popularity and attracting customers, PwC notes. Airlines, in particular, can leverage BNPL offerings to increase sales and utilization of airplanes, it says.

In mobility, embedded finance allows for new subscription solutions. Care by Volvo, for example, is a flexible subscription lease program with an all-inclusive monthly payment. This payment includes the usage of the vehicle, maintenance, and other common services related to vehicle ownership. Volvo also takes care of the insurance coverage.

Embedded finance can also be applied in the healthcare sector, enabling hospitals, for example, to offer patients solutions to finance major interventions. In these partnerships, embedded finance providers pay the hospitals upfront, while providing low interest options to the clients.

In agriculture, embedded finance can be used to offer pay-per-use solutions, enabling customers to shift away from traditional ownership of machines and instead pay only for the actual usage of the machinery.

Featured image credit: Edited based on image vector by upklyak via Freepik