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Embedded Finance – A lucrative growth opportunity for banks to cash on for driving revenue and growth

Embedded Finance – A lucrative growth opportunity for banks to cash on for driving revenue and growth

Embedded Finance – A lucrative growth opportunity for banks to cash on for driving revenue and growth

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In the banking sector, embedded finance offers one of the most lucrative growth opportunities. The digital revolution over the last decade meant that the majority of the transactions, which used to occur in physical banking locations, have now migrated to digital channels. However, going forward, these transactions will originate outside the banking network altogether. The growing shift towards open banking and embedded finance means that brands and retailers will increasingly embed the transactions within customer journeys.

Notably, the presence of embedded finance is already widely felt. Lending services and online marketplaces are a few of the sectors which are already offering embedded finance solutions. Over the next few years, it is set to become an even more integral part of the consumers’ lives. Consequently, banking institutions that can embed their offering across different customer contexts are expected to see an increase in their revenue and growth over the next three to four years. 

The global embedded lending market is projected to grow eight times from US$14 billion in 2021 to reach nearly US$120 billion in 2029. Whereas, the market size for embedded finance is expected to increase from US$13.5 billion to reach US$89 billion in the United States alone by 2029.

This trend will be also visible in the B2B space, where payments are projected to rise three-fold over the next 7-8 years. Consequently, for banks to capitalize on this growing embedded finance market opportunity, banking institutions must start to look beyond their traditional processes and embed financial services within the customer journey.

Notably, to capitalize on the growing embedded finance opportunity, banking institutions can consider a super app strategy. This is because, embedded financial services also include insurance and wealth management, along with banking. Digital banks, such as Revolut, have been long using embedded finance to launch new products and services, thereby targeting an increased market share.

Traditional banking institutions can also consider strategic alliances with consumer-focused brands to grow their presence in the embedded finance space. This strategy will allow them to grow their revenue without giving up their branding. For instance,

  • The branding of their institution remains visible to consumers when shopping from e-commerce marketplaces. This is similar to payment giants and BNPL providers, such as Mastercard and Afterpay, who display their logos to consumers on the payment checkout page of e-commerce marketplaces. Furthermore, under the alliance, these firms can also share consumer data to create a more personalized customer experience.

Apart from this, banking players can also consider a tie-up with big tech firms that are offering financial services. This will allow them to access millions of customers, thereby further bolstering their revenue. For instance,

  • The partnership between Goldman Sachs and Apple is a prime example of this. Under the partnership, Goldman Sachs gained access to Apple's loyal consumer base and offered them Apple Card and Apple Pay Later services.

Furthermore, banking players can also seek to capitalize on the growing opportunity in the embedded finance space for corporate payments. Notably, more and more banks are considering expansion into the embedded payments space. For instance,

  • Notably, in September 2022, Goldman Sachs also forged a strategic alliance with Modern Treasury to make further inroads in the embedded finance sector. Under the partnership, the firms are bringing embedded payments to their joint corporate customers.

With the demand for embedded finance solutions projected to further increase among consumers and corporates, PayNXT360 expects more and more banking institutions in the United States to enter into the space over the next three to four years, as they seek to capitalize on the growing market opportunity. 

To know more and gain a deeper understanding of the global embedded finance market, click here.

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