The Future of Financial Services Industry: Embedded Finance
The Covid-19 crisis, the effects of which have continued since 2019, caused businesses to reevaluate their digitalization strategies. Especially the developments in the fintech sector are one of the most obvious examples of digitalization. Let’s remember the word that Bill Gates said in 1994; “Banking is necessary, banks are not.” Although the majority of financial services are provided through banks today, after 27 years, this situation is no longer the monopoly of banks. Embedded finance is the future of financial services industry.
Embedded Finance is that a non-financial service provider provides services such as payment processing, loan facility or insurance. Market analysts predict that Embedded Finance has an estimated market capitalization of over $138 billion in 2026, and that the Embedded Finance market will reach more than $7 trillion in less than a decade.
Embedded Finance, which stands out as a Banking-as-a-Service model, allows companies to integrate banking software directly into their websites or mobile applications. Thus, a company can integrate payments into its website, offer installments for online purchases, insurance or their own credit cards to users. Users also do not have to re-enter their credit card information for each transaction.
Open banking not only liberates the financial industry, it allows financial services to expand into larger ecosystems. Until a few years ago, providing these services required a huge investment in resources, time and technological development. With the Embedded Finance model, which provides the integration of financial services through APIs, it is now much faster and easier to provide these services.
Impact of Embedded Finance on Users Switching Their Financial Service Providers
There are many reasons why users change their financial service providers. The most important one of these reasons is a bad experience with the current service provider. Unexpected fees that suddenly change and increase, delays in the system, etc. can be given as examples of these bad experiences. The fact that the campaigns and bonus programs offered in the Embedded Finance model are more attractive to users may also lead them to choose this financial service provider. In consumer behavior; trends such as the rapid transition to online shopping, a growing willingness and acceptance to use financial products even from businesses that are not part of the traditional finance sector are driving growth in Embedded Finance.
Embedded Finance Examples
It may be helpful to examine a few examples of Embedded Finance to see how it is being used and to better understand its growth potential.
Lyft and Uber offer their drivers their own bank accounts to get their drivers started with their billing systems as quickly and easily as possible and reduce transaction costs for both parties. Both Uber and Lyft offer further discounts at selected partners, but return about one percent of every credit card payment at participating partners. Samsung provides a virtual credit card as a payment method and a free account for payment. A buy now, pay later option called “Splitpay” is also integrated.
Amazon, the world’s largest online retailer, offers a credit card service to encourage its users to buy from its own online store rather than competitors. Customers receive points for their purchases made with their Amazon credit card and can use these points as credit on their Amazon purchases.
Announcing its own cryptocurrency Libra, Facebook named the currency Diem. The currency is accessible through the company’s own wallet, Novi. The currency will not only be used for solutions developed by Facebook itself, but will also be accepted by partner companies.
The banking sector is developing faster than ever in line with customer demands. The experiences of users in brands such as Apple, Amazon or Uber seem to shape this process.