Embedded finance, the integration of value-added financial services into software offerings, is set to redefine how consumers and businesses build and manage relationships with financial services, according to new research and analysis from Bain & Company and Bain Capital.
The swift acceleration in use of embedded finance, and its transition into the financial mainstream, is being propelled as its proposition enhances customer experience and financial access, alongside cost- and risk-reduction benefits for companies across the value chain.
The forecasts for the huge expansion of embedded finance, in a detailed new analysis of the fast-moving sector, show that revenue opportunities for software platforms and the enabling infrastructure providers that power these embedded offerings will more than double from $21 billion in 2021 to $51 billion in 2026.
The transaction value of embedded finance also will surge $7 trillion in 2026 and account for 10% of US financial transactions.
The factors driving the expansion of embedded finance space and its implications are clear:
Embedded finance can provide a much better value proposition
Businesses and their end customers benefit from contextual, seamless experiences; platforms can unlock new use cases and often use proprietary customer data to improve financial access while reducing costs for their end customers.
Platforms are partnering across the new value chain to deliver these benefits to customers and differentiate their core services.
In turn, this increases their ability to spur sales in their core business. For example, embedding payments into the native invoicing workflow improves accounting or business management software for the merchant, significantly reducing time spent reconciling payments and invoices.
Embedding financial services helps platforms drive superior economics, increasing customer lifetime value. With minimal incremental customer acquisition costs, platforms can raise average revenues per user, while keeping customers longer.
Market opportunity valued at $51 billion by revenues by 2026
The forecast jump in revenues will flow from the expansion in transaction volumes and value but also from increasing penetration of embedded finance in specific industries and gains in revenue multiples seen in segments such as business-to-business (B2B) payments as well as in the Buy Now Pay Later (BNPL) market.
Payments and lending will continue to be the two biggest segments of embedded finance.
Currently, consumer payments account for more than 60% of all embedded finance transactions and this is expected to reach $3.5 trillion by 2026. B2B payments have lagged with transactions expected to reach $2.6 trillion by 2026, marking a three-fold increase on levels today.
Smaller retail merchants will stand to gain the most from embedded B2B payments, helping these businesses to tackle challenges such as late or unpaid invoices.
Embedded finance-driven business lending, meanwhile, is projected to grow five-fold over the next five years, from a mere $200 million in 2021 to $1.3 billion by 2026, thanks to the rise of a range of new specialist providers.
While payments and lending will constitute a significant driver for the rise of embedded finance over the next decade, the analysis also predicts growth in compliance, HR and procurement among a range of areas.
Incumbent institutions confront threats
Disruptive digital first organisations, especially platform businesses, are best placed to take advantage of the embedded finance sector’s expansion.
Their access to more sophisticated technology, algorithms and data provides them with an edge in finding and targeting the most creditworthy customers.
Embedded finance poses a major challenge to traditional financial institutions, threatening to separate banks from their customers and leave them with the low growth, low margin role of a regulated entity.
However, there is still a significant opportunity for these institutions to use embedded finance to rethink their core business and drive growth through new services.
“Embedded finance has quietly become a significant part of the way consumers and businesses make payments and access funding. In the years to come it will have a transformative effect on the relationship we have with our finances, removing friction from the sector and making financial services more contextual, accessible and helpful,” says Adam Davis, Associate Partner in Bain & Company’s FinTech practice.
“For businesses this shift is an enormous opportunity. There will be no shortage of growth finance for the sector as platforms experiment with integrating everything from tax to payroll services in the years to come,” continues Jeff Tijssen, Bain & Company expert partner and leader of its global FinTech practice.
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