Thursday, Oct 6, 2022
International Finance
Banking and Finance Magazine

Charting the course for embedded finance

ifm-march-2021-opinion-embedded-finance
BaaS providers and other agile fintechs have built the foundation for the emerging embedded finance trend that will take off this year

In the pre-Covid pandemic period, the way that people bank was changing. Bank branches have been closing as people move away from in-person banking towards online and mobile, forcing banks and businesses to adapt. The pandemic accelerated this shift even faster in 2020 pushing everyone online and spurring unprecedented demand for online services. The legacy financial services infrastructure that supports the world’s banks simply can’t keep pace with this new level of digital demand. Amidst these challenging conditions for the industry, Banking-as-a-Service (BaaS) providers and other agile fintechs have built the foundations for the emerging embedded finance trend that will take off this year, allowing businesses with and outside the financial sector to compete with the banks.

Embedded finance is all about abstracting banking functionality into technology, and enabling any brand or merchant to integrate financial services into their suite of products and services via APIs provided by the BaaS platform. Ambitious brands including start-ups, social media platforms, and supermarkets can now do this rapidly and at low cost. According to industry research, embedded finance will be worth $3.6 trillion by 2030, but with a wider addressable market of $7 trillion. What does this mean for individuals? Well, it is enabling their favourite non-financial service brands to provide financial services on their terms, any time of any day. It’s a game-changer.

A boost in use cases
While embedded finance is not new, it began largely to help existing financial services providers offer new products. Now a glut of the world’s leading brands outside of financial services is adopting embedded finance, with pioneers like Apple launching Apple Card and Apple Pay, and Grab launching a buy-now-pay-later option. Many others are following suit. One well-known example is paying for an Uber ride. Customers don’t need to get out a credit or debit card at the end of a journey, because Uber product designers, working with a BaaS platform, have enabled payments to be embedded into the experience. This benefits both customers and the company’s drivers, who get paid the right amount at the right time.

Another trend we’re seeing is social media platforms embracing embedded finance—think about Instagram’s Checkout feature in the US where people can buy goods directly through a businesses’ Instagram account.

The concept of these ‘social payments’ has been brought sharply into the spotlight by Covid-19, with a global study by Kantar reporting social media engagement has increased by 61 percent and 58 percent of consumers in the age demographic between 13 to 37 years are interested in purchasing items directly from their feeds. And FIS’ 2020 Power your Payments report, which surveyed 33,000 people across 12 countries, found that over half, or equivalent to 53 percent, had paid through a social media site. This makes a lot of sense.

What’s next on the horizon?
Embedded finance has huge and far-reaching potential for all parties. For individuals, it will transform the way they access services that would traditionally only be available through a bank—resulting in better solutions for them from businesses who want to compete to offer the best customer service. For the businesses that do adapt, it can improve customer engagement and loyalty, and also offer them better insight into their client base. And for financial services providers, the opportunity lies in partnering with BaaS providers to reach even more customers through a third-party agreement.

At HUBUC, we are trying to take the embedded finance revolution one step further. We are working with our clients on a range of different use cases, for example, corporate cards for on-demand delivery for riders and drivers that only approve transactions at set merchants, through to allowing businesses to integrate banking transactions within their bookkeeping process for accounting and employee expense purposes. But unlike other embedded financial services providers, we offer clients access to an extensive network of banking and fintech providers including Currency Cloud, Mastercard and IDEMIA which can be adapted to suit their needs—whether they want to receive money, hold money and make payments, or issue cards. We also handle all compliance on behalf of clients—making it even easier for smaller businesses to access and democratising the ability to access BaaS.

Embedded finance is here to stay, a fact illustrated by the recent explosion of VC interest in the burgeoning sector. We expect 2021 to be a pivotal year as it moves out of financial services into even more markets, allowing bold businesses the opportunity to get involved with a previously closed world and become a one-stop-shop for their customers and users.

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