Embedded finance gains global momentum, study finds

A new report by the Mobey Forum predicts that by 2026, 15 percent of European finance will be embedded, and U.S. embedded finance, which currently accounts for $2.6 trillion and 10 percent of GDP, will rise to $7 trillion that year. Published Dec. 18, 2023, Embedded Finance: Transforming The Banking Value Chain examines how integrated financial services are boosting profitability and enhancing the customer experience.

Elina Mattila, Mobey Forum executive director, noted that outsourcing has long been an issue for financial institutions. "Today, banks typically produce the financial products and set up the distribution channels, but they don't own all the interfaces, especially in ecommerce," she stated. "The result is that customers need to leave retail settings to visit the bank channels, adding huge amounts of friction."

Mattila also mentioned that embedded finance solves for this issue by enabling banks to integrate financial products and services directly into retailers' sales channels. As a result, she added, participating banks can own the customer experience from end to end while providing trusted financial services in a convenient, familiar environment.

Optimized profit, engagement

Noting that the report highlights embedded finance growth, Mattila pointed out that banks can leverage deep integrations to optimize customer engagement and actively participate in the broader retail value chain. In fact, she stated, embedded finance is becoming an integral and frictionless part of everyday products and services, offering the following stakeholder benefits:

• Instant customer access: Customers can access tailored financial solutions instantly and directly within retail apps and in-store kiosks and POS.

• New revenue streams: Business owners can recognize new, recurring revenue streams of between 10 and 100 percent of total value, depending on how broad a role the organization plays in the value chain.

• Reduced costs: With embedded finance, integrated financial services as well as customer services scale infinitely, as they are distributed digitally and at marginal cost.

• Customer value, retention: Businesses that execute a well-defined embedded finance strategy can gain and retain customers.

New revenue opportunities

Tuire Mäkelä, strategic commercial manager at Nordea and co-chair of Mobey Forum's Payments Expert Group, pointed out that embedded finance offers significant revenue opportunities for banks that are willing to adjust their thinking and capture more of the value chain. Participating financial institutions, for example, can set up marketplaces and become distributors for retailers of financial and non-financial products, which, she suggested, could help them access a larger share of revenue within or across verticals.

"By connecting directly with customer-facing third parties, they can scale up quickly and potentially realize additional revenue opportunities of anywhere between 10 percent and 100 percent of the total value created within the value chain," she said in a statement about the study.

Strategic options may include incorporating financial and non-financial products into a platform, creating a verticalized offering, using APIs to create banking as a service, or partnering with a provider to license a solution. These options can be combined or pursued individually, Mäkelä noted.

The Mobey Forum report, based on input from Mobey Forum members with expertise in banking and payments, is available at mobeyforum.org/embedded-finance-transforming-the-banking-value-chain/

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