The FinTech movement continues to revolutionize the financial world, powered by machine learning and other high-tech innovations. The concept of embedded finance serves as the latest entry in this parade of technology. In fact, some financial and tech pundits even describe it as the next wave in digital banking.
Simply defined, embedded finance allows banks to encapsulate financial functionality into another business’s product. It offers that business’s customers with a more seamless user experience while providing banks a new revenue source. It’s a promising and innovative concept any financial institution needs to explore to grow its B2B opportunities.
Is Embedded Finance The Next Big Thing?
A High-Level Definition of Embedded Finance
Understanding the concept of embedded finance becomes easier after describing a simple use case. It basically involves a non-financial business, typically a retailer, providing financial services to its customers. Consider a music instrument shop offering a bank’s installment credit product to someone hoping to buy a new guitar. As a result, the customer purchases an expensive instrument because of receiving a 3-year “same as cash” credit option.
It effectively results in the music store making a sale, probably because of the embedded finance offering. The bank enjoys increased revenue and also a new customer, albeit in an indirect fashion. Embedded finance serves as a useful method to increase sales for retailers. As such, it becomes an important competitive differentiator between businesses serving the same market.
The Expanding Market of Embedded Finance
Embedded finance applications typically leverage a service-based architecture known as Banking as a Service (BaaS). This concept remains easy for many in technology to grasp, considering similar Cloud services approaches, like SaaS and PaaS. Notably, the BaaS market is predicted to expand in a near-exponential fashion throughout the rest of the decade.
As an example, a market research company forecasts the BaaS market to grow from $356 billion to $2.3 trillion by 2028. This massive growth results in a CAGR of 26.23 percent from 2021 to 2028. Obviously, copious opportunities abound for financial companies in this space with the technical chops to build embedded finance platforms. Gartner notes that 62 percent of banks plan on creating new products and services in this emerging space.
Needless to say, embedded finance appears to be deserving of its status as “the next big thing” in FinTech. Companies in the sector need to pay close attention to its growth over the next few years.
