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By Martin Hegelund, Ageras Group

Consumers may be able to browse the aisles of brick-and-mortar businesses the way they could not do at the height of the pandemic, but that doesn’t mean e-commerce is going into a slump. In fact, it’s the opposite. Businesses and consumers alike have grown used to buying anything they want—and paying for it however they want—online. This is a trend that won’t reverse any time soon.

Embedded finance programs—or financial services offered alongside non-financial products and services—are becoming increasingly important in digital commerce. These programs accounted for nearly 5 percent of all financial transactions in the U.S. last year, to the tune of $2.6 trillion, with that figure expected to exceed $7 trillion by 2026, according to research from Bain & Co.

The growth of embedded finance is largely due to businesses of all kinds rushing to keep up with customer expectations and the various barriers-to-entry falling away. Businesses want to tap customers who don’t have bank accounts, and those who do but prefer not to perform every financial transaction through their bank. And the cost of integrating embedded finance with existing technology stacks has come down dramatically along with the time it takes to roll out services to the public or other businesses.

It all adds up to a steep growth curve for embedded finance that might not reach a plateau for years. So with this in mind, what’s next for embedded finance?

The Landscape

Embedded fintech is ultimately all about transferring and storing money. For this reason, its original home was in online marketplaces and business administration software. But new applications and use cases arise frequently. Here is a look at where this technology is adding value today, and the drivers that will help it to spread in the years ahead:

Payments: Embedded finance programs have been reducing the friction that has long plagued online commerce, including the difficulty of cross-border transactions and the fees that major credit card companies charge buyers and sellers. When it comes to B2B use cases, international procurement and trade will open up new possibilities for embedded finance. In some cases, the seller will have negative working capital as they have to produce the goods. In other cases, a buyer will need to finance a large purchase. There are also issues in procurement and trade surrounding escrow, currency fluctuations, insurance and international transfer of money. A variety of industry incumbents and FinTech startups are aiming to create products and services to help with these matters – and embedded finance will have a major role to play.

Lending: Buy-Now-Pay-Later, which combines aspects of both payments and lending, is a newer model that has taken online commerce by storm. Globally, these transactions are projected to increase by more than $450 billion by 2026. This follows the 400% growth BNPL saw from 2019 to 2021. Although regulators may be taking a closer look at BNPL programs, consumers have been increasingly using them as inflation rises. The spread of BNPL means the further spread of embedded finance.

Data harvesting: An additional use case for embedded finance that is gaining steam are platforms that use a customer’s financial data to deliver a service. For example, some sites want to calculate a consumer’s potential savings if they finance a certain product or service. Other sites use credit scoring or credit verification, which enables the customer to utilize their own financial data for specific purposes.

Cross-over: Sometimes a vendor embeds regtech or InsurTech tools, which deliver features adjacent to FinTech. Cross-over use cases will be another driver of embedded finance systems.

Embedded finance as a category can be expected to thrive because businesses of all kinds are looking to tie up less cash in their day-to-day operations. Embedded finance offers companies certainty about when money is coming in from customers, and more flexibility regarding the money they pay out.

Many companies are integrating with BNPL providers and other financial technologies to give their business—and their customers—the kind of flexibility that legacy financial institutions do not. They are finding that new financial technologies, including the embedded kind, are increasing sales, often while lowering transaction costs at the same time.

Future innovation will largely be driven by businesses looking to simplify the transactions they do with other businesses. But even if B2B use cases are the leading edge for innovation, it is consumers who will ultimately benefit.


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