What Is Embedded Finance? 5 Eye-opening Reasons Why You Should Know

What is embedded finance? Illustration

Embedded finance is now a hot topic for those who know at least something about FinTech and are seeking to expand their business and further monetize their customer base. Knowledge of what it is may be essential to prepare them for the future and get solid revenues. Let’s start with the answer to the question of “what is embedded finance?” and then continue with reasons why you should learn more about embedded finance and analyse whether it can improve your business. 

This article may be interesting for business owners who may want to join the embedded finance movement and FinTech companies like those with the electronic money license in the UK that are exploring new business models and business opportunities.

What is embedded finance in simple words?

In a nutshell, as the name suggests, embedded finance is the incorporation of a financial service/product into a non-financial product or service. However, the clearest answer to the question “What is embedded finance?” is the following: embedded finance is when non-financial businesses and organisations include financial services — such as payments, credit, insurance, savings — as part of their offerings. 

Of course, a definition is not enough to understand a concept. That is why we have prepared a series of articles about embedded finance. In this article, we explain why non-financial companies choose to embed financial services into their products.

Reason 1. Embedded finance fits perfectly our “Right Now” world

You may have heard that laziness drives progress and embedded finance confirms this statement. Humans strive to make their lives more convenient and time-efficient. For example, I have installed hundreds of productivity apps, and plenty of apps that can ease my life from banking apps to apps that help me to find a taxi driver, get food, find and watch movies or songs. I don’t have to go to a physical branch to make a payment. During rainy days I don’t go outside to eat food in my favourite Portabello Road restaurants which are within 10 minutes walking distance. However, it is not enough. I became so lazy that instead of using multiple apps I prefer to use one that is fast and convenient. For instance, I use Revolut not only for payments, investments, and travel insurance but also for booking hotels (sorry Booking and Amex, your rewards do not compete with the 10% cash-back offered by Revolut). If I buy Tesla, most likely I will use the insurance Tesla offers on its website (and I am not the only one).

Most people like to access products without extra hassle. I believe that you as much as I hate entering payment card details (I don’t use iCloud Keychain for security reasons), and prefer those companies allowing to checkout with Apple Pay/Google Pay or any other “Pay.” Our laziness incentivises more apps to become so-called “super apps” and “embed” financial services into their platforms. Customers often prefer to use an embedded service rather than logging into a separate banking app or going to a local physical branch. For instance, there is an app that was created to have a possibility to pay for car taxes, parking, road tolls, city charges and MOT within one app. Recently, the added possibility to choose a car insurance policy and pay for it, amend it and make a claim directly from the app. What has this company done? It improved the value of its app by allowing customers to access insurance without leaving the app.

The amount of time a user spends on the platform and its Product Stickiness Ratio and Retention Rate are important metrics to determine the company’s success. By offering financial services, a non-financial business can improve these metrics by providing more incentives for customers to use the product without the hassle of needing to find an appropriate solution elsewhere.

If you ask me, “What is embedded finance?” I’ll reply that it is a way to make sure customers get what they want without leaving your platform.

Reason 2. Embedded finance is a competitive advantage

If you care about improving customer experience you should definitely research the opportunities that embedded finance can provide to your business. Happy customers tend to spend more of their money and time and become more faithful and loyal. In addition to that, by introducing embedded finance products, you can attract new customers. More and more companies are pushing into providing a service that competitors in the same space don’t provide. By delving into embedded finance, you may find new potential competitive advantages for your business.

If I was a taxi driver and had a choice between being paid monthly or being paid after each ride after opening a taxi app E-wallet, I would choose the second option. Similarly, I would choose an e-commerce SAAS with merchant advance service rather than SAAS without one (if other product features are comparable). Many users deliberately choose merchants that offer the Buy Now Pay Later checkout option.

Let’s look at the data. According to Plaid’s and Accentures’ research 87.5% of the non-financial companies that have begun to offer financial solutions had increased engagement levels and 85% said they had attracted new customers.

Reason 3. What is embedded finance? Embedded finance = extra revenue streams by monetisation of brand strength and data

Embedded finance is also about monetisation of brand strength, customer base and data to get extra revenue streams. If you have plenty of loyal customers, why not offer them financial services? If they believe in your brand, they may believe in your company more than in a traditional financial service provider. 

What is embedded finance? It is a different mindset that requires a willingness to rethink a more traditional angle of thinking about financial services. Any company can start providing financial service to their customers (think about Tesco bank), but leveraging data and using new technologies such as various Artificial Intelligence methods is the next level. For example, embedded finance pioneer Shopify uses machine learning to analyse data it has about its clients to provide financial services such as loans better than traditional lending providers. And you know what? According to Sophie Guibaud (the Chief growth officer of Banking-as-a-Service provider at OpenPayd), Shopify generates nearly half of its sales from financial services now (see Sifted Embedded Finance Report p4)

Why would you invest in a new embedded finance product rather than invest in marketing and attract more clients to get revenue from your existing products? It all depends on your situation. If you have a large user base and a significant market share in your niches, extracting more value from existing customers by getting new revenue streams and boosting profitability margin may be cheaper than attracting new clients. For some companies like Shopify, expansion to financial service resulted not just in “bonus” revenue but in a fully functional business line generating a significant amount of the company’s revenue.

Reason 4. Embedded finance is a fast-growing sector

What is embedded finance? It is a rapidly growing sector. To be honest I don’t believe in industry reports and various statistics. I read hundreds of reports about FinTech a year and the data they provide is never precise (you may have heard that there are lies, big lies and statistics). Nevertheless, I pay attention to positive trends, and, if more and more companies predict positive developments and it corresponds with what I see personally, I usually take the data into consideration. I see positive trends in the embedded finance market, and I want to present the data I found without commenting on it too much.

Firstly, let’s look at Google Trends. As we can see interest in embedded finance is rising as more and more people learn about it.

What is embedded? It is a worldwide trend

Then, let’s look at some forecasts.

According to the Lightyear Capital’ report predicts that embedded finance will grow to nearly 230 bln USD (in revenue) by 2025, up from 22.5 USD bln USD in 2020.

What is embedded finance growth
Source: Lightyear Capital

At the same time, according to Juniper Research, the value of the embedded finance market will exceed 138 bln USD in 2026, from 43 bln USD in 2021 driven by the increasing accessibility of APIs from financial firms (easy technical integration by using API technology will lower the barriers to entry for financial services establish a new revenue stream opportunity for providers of embedded finance).

embedded finance statistics
Embedded Finance Market Value ($m), Split by 8 Key Regions, 2026: $138 Billion. Source Juniper Research

Finally, some data about the willingness of consumers to use embedded products. According to Solarisbank (one of the most important players in the German embedded finance sector) and the Handelsblatt Research Institute, around 61% of online shoppers based in Germany could imagine purchasing financial services from an e-commerce provider.

embedded finance survey
Source: Solarisbank

Let’s sum the data you could find in this article. What is embedded finance? It is growing a trend that consumers are ready to try that can help companies to attract consumers, retain existing customers and increase revenue.

Reason 5. To embed a financial service, there is the option not to undergo through a complicated authorisation process. 

The idea of embedded finance is that even non-financial providers can offer financial services. It means that there are still ways you can provide something more to your clients without becoming a licensed company. For example, technically speaking if you add Buy-Now-Pay-Later payment to your checkout page, it can also be considered as a kind of embedded finance offer.

It is also possible to integrate an e-wallet and payment card service within your platform without a non-bank PSP license. For example, you operate a travel company. After reading our website, you realise that you want to offer a payment service in addition to your core service. E.g., you want to provide your clients with a travel payment card that they can use in their tour destination that offers cashback in selected restaurants, tourists shops, entertainment centres. Additionally, you want to offer a competitive exchange rate. Such service can be added to your core services without getting an Electronic Money License in Lithuania or UK and spending a lot of time connecting payments infrastructure. You can become a distributor of a Lithuanian EMI or UK EMI, save money and speed up your go-to-market strategy. Please, note that it is not an easy process, and it can take up to 6 months (currently, to get a license takes at least 12 months). For more information, we recommend you to read the following articles about e-money distributors and psd agents or so-called payment sub-license.

What is embedded finance? It is when so-called banking-as-a-service (BAAS) is offered to non-financial companies.

How PSP Lab can help

I am sure you have already received some help by getting an answer to the question “What is embedded finance?” from our FinTech consultancy PSP Lab specialises in payment service providers. We know all go-to-market strategies to provide payment services in the European Union and the United Kingdom. Whether you want to start offering payment services under your own license or you are interested in options without a license, PSP Lab is a company that will save you a lot of nerves, money, and time. Contact us if you already have a business idea to get a free consultation with our embedded finance experts and understand how to embed payment services and whether embedding payment services into your business model is feasible.