Embedded finance: the next-generation opportunity

The modern e-commerce landscape has rapidly evolved to offer consumers faster, simpler and more secure payment methods. Rather than cumbersome bank transfers and checks, consumers can now make seamless transactions directly from merchants’ apps or websites.

Bolstered by increasing demand for more frictionless payments, embedded finance has grown drastically. According to McKinsey, the industry grew into a US$20bn market in the United States alone in 2021, and it is expected to treble in the following 3-5 years before becoming a US$7tn industry globally in the next decade.

Disruptive pioneers of embedded finance

One of the most common applications of embedded finance is integrated payments, which streamline laborious redirects between banking systems, but allow transactions to be processed simultaneously upon a deal.

This has built a mutually beneficial scenario. On the one hand, consumers can now pay by digital wallets or other in-app gateways with just a simple click. In some instances, they don’t even need to attend the payment process, but are automatically charged afterwards via Buy Now Pay Later (BNPL). Either way could save plenty of time and effort. On the other hand, businesses can generate revenue opportunities and brand loyalty – something we’ve seen in industries providing ride-sharing, food delivery and wider ecommerce.

Expansion into broader services will be key for the proliferation of embedded finance in the years to come. Embedded banking, where savings accounts can be opened by non-financial institutes, and embedded lending, which lets a consumer split an online purchase into instalments, are just two examples.

Steering for the next page

The application of embedded finance will increase in parallel with the advance of global ecommerce markets. According to Statista, the sales figure of e-retailers exceeded US$5.2tn globally in 2021 and is projected to continue soaring in the coming years.

As a result of this growth, we will see more productive cooperation between incumbent banks and new fintech entrants, the former with established credit and infrastructure while the latter can unlock diverse applications, increasing the flexibility of payment making and receiving (like Nucleus365).

Elsewhere, as the cost of living crisis – akin to rocketing inflation rates – leads more and more consumers to rethink their finances, embedded solutions will prove vital as they provide more feasible options. Legacy financial institutions are adapting to this change, working with companies using embedded finance technologies and helping to create more tailored finance solutions.

Businesses ranging from retailers and travel to software companies are also working to tailor their payment services for increased accessibility. As a result, embedded finance will become firmly interwoven into more industries, acknowledging ecommerce as the driving force in business growth and revenue streams.

What’s more, the ecommerce sector is booming in emerging markets, where business growth is primed and customer bases are expanding, generating greater possibilities for embedded finance technology. Considerable cross-border payment infrastructures are under construction, which will significantly reshape the rollout of real-time API functionality and create a more user-friendly foundation for embedded finance services.

Nevertheless, explicit ambitions of embedded finance will undoubtedly capture the attention of regulators. The risk management for faster, easier payments will be a barometer for global implementation rates. With consumer awareness of payment risk increasing due to a rise in fraud, financial flexibility can only be actualised globally if risk is appropriately and effectively managed. As such, efforts will not only be made to improve user experience, but for a more risk-controlled, regulatory-compliant manner.

Payment industry: an enabling middleman

To fasten sustainable growth, action should be taken to optimise daily financial practices, where the transaction process remains nucleus. As embedded finance is expanding across industries and regions, there is an increased need for more compatible payment options that can accommodate multiple currencies. This is the gap payment companies like Nucleus365 can fill.

Embedded finance can also leverage payment gateways as a new intermediary between corporate customers and incumbent financial institutions. They can prove economical and efficient by relieving businesses from examining regulatory frameworks and addressing paperwork with appropriate experience, systems and diligence.

Facilitated by technology and policy enablers such as open banking, payment companies can also gather critical customer information to distribute personalised products for their company partners, improve customer experience and serve unmet needs precisely.

Against the current volatile financial backdrop, embedded finance could be the hub for more innovative disruptors. Both financial institutions and companies from all sectors still have time to seize a piece of this dynamic industry.

About the author: Sophie Flynn is CFO of Nucleus365, a fintech platform that connects banking, FX and global payments through one simple interface.