Embedded Finance: The End of Traditional Banking as We Know It

The era of banks acting as intermediaries in financial transactions between customers and companies is about to end. Nowadays, you don’t need a financial institution’s intervention before purchasing. Want to pay for your Uber ride? Do it in the app. What about that particular delivery of fidget spinners? You can pay right in the app. That is the beauty of embedded finance.

Slowly but surely, traditional banks are phasing out; they’re no longer the face we see when we make financial transactions. Instead, we deal directly with regular non-banking companies, websites, and their apps. This is called embedded banking, just another name for embedded finance.

What is embedded finance?

Embedded finance integrates financial services with non-financial service or technology. It is when traditionally non-financial service providers, like ride-sharing apps, combine their existing services with financial ones like payments, insurance, etc.

For instance, a car company can offer you a range of insurance options once you decide to make a purchase or offer you the choice of paying in instalments. The bank or an insurance company typically renders these services.

Although it started slow, embedded finance is taking the world by storm, and the COVID-19 pandemic has added more wind to its sail. Insider Intelligence states that the U.S. embedded finance space will generate over $240 billion in 2025. This is in high contrast to its generated revenue in 2020, which was just shy of $22.5 billion—an increase of 922%. And that’s just America.

Embedded finance companies will reach a market cap of $7.2 trillion by 2030.

There are different forms of embedded finance. The most common use case is payments. You encounter this version whenever you pay for something without whipping out cash or a bank card. The process is made stress-free and as painless as possible. Other forms of embedded finance include insurance—we’ve given an example earlier—lending, which lets you apply for a loan at the point of purchase, and investments. The latter forms are not as prevalent as payments, but they’re becoming popular daily.

Since the popularisation of embedded finance, many companies/industries have benefitted from streamlining their customer’s financial experience. However, we shall look at a notable few.

The ride-share sector

Uber is a prime example. Uber customers pay their fares directly from the Uber app. Each driver also has a digital account credited with the appropriate amount at the end of a ride, without requiring the driver to divulge their bank details to their customers. Uber has other instances of embedded finance in fuel refunds and discounts. As of 2020, Uber handles over 70% of driver payouts using Instant Pay.

Online retailers

The online retail scene offers so many examples of embedded finance. From payments to lending and credit facilities at the point of sale. For instance, Amazon’s e-wallet option lets customers checkout their purchases within their Amazon account. Amazon also has branded credit cards.

All these convenient features improve user experience and help foster customer loyalty.

The “Buy Now, Pay Later” (BNPL) option is another rising use case of embedded finance—especially in retail. In BNPL, the purchase cost is converted into a loan from the retailer, and the customer is given a timeframe to pay off the loan. The money is usually paid off in monthly instalments with little interest. Companies like Amazon offer the BNPL payment option, and Apple seems to be exploring a BNPL path. Some other companies like Klarna and Afterpay offer loan services to consumers at the point of purchase.

Car dealerships, airlines, and travel agencies

The hospitality and transportation industries are a part of the embedded finance movement. Some companies in these sectors now offer insurance policies once you purchase their product or service. Tesla has embedded this insurtech into its purchase process, thus making insurance coverage almost instant.

Embedded finance is disruptive and profitable, but it’s also expensive. To provide these financial services, Big Tech companies often have dedicated resources and manpower whose focus is creating a stellar financial product. This is well and good.

However, some businesses need more resources to create their custom financial product. In this case, fintech companies specialising in providing these financial products can offer their services. These services are usually in the form of APIs which can be easily merged with the business’ payments process.