Embedded Finance: The Catalyst for Modernization in the US

Embedded finance, a burgeoning trend in the fintech industry, took center stage at Fintech Nexus USA 2023 as two industry experts explained its pivotal role in driving modernization.

Marqeta CEO, Simon Khalaf, and Allen & Overy partner, Alex Touma, shared insights during their joint appearance. Touma, specializing in intellectual property and technology, including fintech, payments, and cryptocurrency services, shed light on the growing significance of embedded finance.

With the embedded finance market already valued at $20 billion in the United States in 2021, experts predict it will double by 2026. The key to this exponential growth lies in eliminating friction, as doing so unlocks a $213 billion opportunity.

Khalaf’s strategic focus on embedded finance comes at a pivotal time. Assuming the role of Marqeta’s CEO in January, Khalaf’s extensive business experience and prior CEO positions position him well to guide Marqeta beyond its startup phase. Recognizing the need for more structured approaches in mature companies, Khalaf prioritizes operational efficiencies.

Although he acknowledges the challenges that come with leading a company in the current climate, Khalaf emphasized that this period presents the ideal time to build fintechs and financial services firms. Recent events such as bank failures, rising inflation and interest rates, and near collapses in the cryptocurrency sector have prompted industry players to reevaluate their business relationships and carefully choose their partners. Marqeta, for instance, supported its customers in finding alternative working capital solutions following the collapse of Silicon Valley Bank, while also assessing the stability of its own banking relationships.

Embedded finance, according to Khalaf, refers to companies whose primary business lies outside the realm of financial services but offer them to their customers. Instead of redirecting customers to a bank, these companies bring banking services directly to their clientele. More than 50% of Marqeta’s sales stem from embedded finance initiatives.

The next frontier for embedded finance appears to be accelerated wage access. However, Khalaf emphasizes the importance of designing such initiatives correctly to ensure a mutually beneficial outcome. Accelerated wage access enables workers to receive their wages earlier, while companies can retain funds on their balance sheets until they are spent, allowing for optimal capital allocation.

Marketplaces also offer promising opportunities in the realm of embedded finance. By leveraging credit and debit cards, companies gain insights into buyer behavior, extending credit to sellers and facilitating immediate transactions. For example, Uber drivers can receive fares on a card, with funds only transferring upon expenditure.

While the crypto industry has faced challenges in disrupting traditional financial networks, Khalaf believes it is far from over. He criticizes the American payment system, deeming it «embarrassing,» and emphasizes the need for leaders and confidence to drive innovation. Although the killer application for crypto is yet to be discovered, Khalaf draws a parallel with the early days of the internet, where it took time to find groundbreaking applications. He anticipates that the next phase of the internet will involve instant access to money, making him optimistic about the role of crypto in this evolution.

Contrary to the notion of banking disappearing, Khalaf suggests that embedded finance and crypto innovations are transforming the banking system positively. The banking system is not vanishing but expanding its reach across various sectors.

Khalaf also highlights the potential of generative AI in revenue generation. Large learning models represent the starting point for models that comprehend user intent and act as a «brain» for service and support. These advancements will aid in underwriting transactions with sub-second responses, providing valuable assistance in critical decision-making.

Embedded finance is driving modernization in the USA, with its potential for exponential growth, operational efficiencies, and transformative impact on the banking system. As the industry continues to evolve, the collaboration between fintech and traditional financial services will shape the future of finance in the United States.

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