Embedded finance simplifies financial services, provides products and services closer to the point of need, and can ensure banks keep competitive challengers at bay. In the past, customers would have to physically go to a bank for a product whereas now,
with this integrated model, the product comes directly to them through the platforms they already use and online sites they visit.
Take the buy-now-pay-later (BNPL) scheme as an example. Many e-commerce sites and retailers offer BNPL options at checkout, allowing customers to split purchases into interest-free installments, without needing to leave the merchant’s website to consult
their bank.
At first, traditional banks, with a few exceptions, were falling behind or at least losing some business to the likes of challengers such as Klarna. But in the last couple of years, most banks have revamped their own propositions, expanding beyond traditional
card-based products to include flexible credit lines or split credit payments with no charge and other embedded-finance capabilities. It is therefore no surprise that the embedded finance market is set for rapid growth, projected to
increase at a 21.3% Compound Annual Growth Rate (CAGR) from $82.7 billion in 2023 to $240 billion by 2033.
Convenience Above All
The main factor driving this increased adoption is convenience, with customers looking for finance offerings to be made simpler and easier to access, but also competition for their business. This shift is also enabled by improved technical capabilities,
which make it far easier to embed financing directly into point-of-sale systems, websites, and apps.
When it comes to customers, they increasingly desire financial services propositions to be seamlessly embedded into an interconnected customer journey, whether these are in the lend, finance or lease spaces. Even if it’s not a customer’s known desire for
this, then it is certainly convenient to have different payment or loan options to complete a purchase. This demand has been fueled by the increased digitisation, enhanced speed through 5G, cloud technology and application programming interfaces.
As this demand for a frictionless experience intensifies, new distribution channels and propositions, coupled with technologies such as generative artificial intelligence (GenAI), Web3, blockchain, digital assets and others, will only amplify the potential
innovation.
Managing Challenges
While enthusiasm for embedded finance will continue to grow, it’s important for banks to keep all risks in mind and take on the right technology to protect them from threats. The most obvious one is data breaches, with embedded finance tools managing and
sharing huge amounts of sensitive data which could open them up to breaches or cyberattacks. There’s also a need to be credit conscious and do the right thing by the customer. In this way, banks’ should have an advantage of knowing the customer better and
knowing what is a suitable or best solution for them.
Removing strenuous manual processes and choosing more sophisticated technologies incorporating AI will help add extra layers of protection including identity verification, and streamline anti-fraud checks and credit assessments. Tokenisation is another way
for further protection,with this technique replacing sensitive financial details with non-sensitive “tokens”, reducing the amount of raw data the platform needs to handle and store.
With this, banks should also consider data protection regulations such as GDPR and reporting, with AI and automation tools making it easier to remain compliant by automating processes, ensuring all parties stay on top of their regulatory requirements.
Embedded finance will continue to grow in the years to come, redefining the interactions between financial services and customers. This integrated model offers a more efficient, seamless and speedy experience but risks still exist. Banks play an important
role in not just making this a reality but also ensuring safety and compliance along the way, making it critical to employ the right tools for protection and streamlined operations.
