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Embedded finance: Payment apps are winning

Embedding financial services allows brands to effortlessly integrate financial transactions into their pre-existing payments technology stack.

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Quantumrun Foresight
September 18, 2023

Insight summary

Embedding financial services allows brands to effortlessly integrate financial transactions into their pre-existing payments technology stack. This process is accomplished through an easy-to-use application programming interface (API) that end-users can download as mobile apps. This new financial model is changing how companies, fintech startups, and end users interact.

Embedded finance context

Consultancy firm Bain & Co. covered in 2019 how fintech was transforming from a mere business model to becoming a vital part of the software platform stack or the so-called "fourth platform." This embedded finance (EmFi) has continued since then, with several new types of platforms emerging, including e-commerce (e.g., Shopify), food and drink delivery apps (Uber Eats, DoorDash), and wellness services (Mindbody). In 2021, financial services integrated into e-commerce and other software platforms accounted for $2.6 trillion USD of total US financial transactions, which is nearly 5 percent. However, by 2026 this number will exceed $7 trillion, more than 10 percent of total transactions.

EmFi allows customers to use financial services as a part of the software they use and the goods they purchase rather than through standalone services from banks. This shift is driven by fintech startups that help platforms deliver these products and services. As these offerings continue to grow, end users will prefer the convenience of payments, lending, insurance, and other financial features embedded in their day-to-day activities. Another term often interchanged with EmFi is Banking as a Service (BaaS). This business model is enabled by third-party providers creating customized payment gateways for companies, including credit cards, digital wallets, and even crypto wallets for non-fungible tokens (NFTs).

Disruptive impact

The increasing transition to EmFi will be brought about primarily by e-commerce evolving and the use of APIs along with banking as a service providers (BaaS). Through these tools, non-financial businesses can offer banking and insurance services to their customers at a low cost and through different pricing tiers. According to consultancy firm Accenture, there are several ways that EmFi changes how businesses operate and provide better value to their clients. Firstly, the technology creates a more collaborative and customized relationship between financial providers and companies, depending on the industry. EmFi also establishes new income streams, increases competition in the market, and launches new partnerships without businesses hiring additional personnel or building expensive infrastructures.

Accenture estimates that EmFi can facilitate innovation in financial services, leading to earnings of more than $140.8 billion USD by 2025. However, for this outcome to happen, there has to be a shift from a business-to-customer (B2C) to a business-to-business (B2B) model in fintech. According to a 2022 study published in the Asian Journal of Economics and Banking, a shift in business structure is only one of three critical factors that enable EmFi’s successful integration into a company's payment system. Primarily, the management has to understand why the business needs the technology and be willing to invest in making it happen. In addition, the existing technology stack needs to be updated or even rehauled for this transition, including establishing new capacity models and skill sets, and providing solid cybersecurity.