Fact vs Fiction: Unveiling the Truth Behind Embedded Finance

Embedded finance solutions have erupted onto the finance scene, revolutionizing how organizations cater to their customers. Yet, within this fintech phenomenon, there lurk misconceptions and myths that persist even today.

Rachel Huber, the market intelligence lead at Marqeta, a modern card issuing platform, and The Fintech Times delve into and dispel some of the most pervasive myths surrounding embedded finance.

It’s widely acknowledged in the fintech realm that embedded finance is a pivotal force propelling payment innovation. According to Bain & Company, the US embedded finance market is projected to soar to $51 billion encompassing payments, lending, banking, and cards by 2026. Meanwhile, McKinsey estimates a $40 billion valuation for the space within the next three to five years.

Embedded finance solutions, which encompass financial services offered by non-financial companies, are facilitating businesses in catering to consumer and business demands for convenience.

These solutions simultaneously empower enterprises to explore new revenue streams, bolster cash management control, and enhance customer relationships. Especially in challenging business landscapes, embedded finance tools stand as key drivers of customer loyalty and enriched experiences, all while boosting revenue.

The enticing attributes and the numerous instances of successful implementations have propelled embedded finance past its infancy. The market has transcended the realms of innovators and early adopters, progressing into the mainstream market – a transition aptly described by the late Gordon Moore. This shift is about pragmatism and proof rather than mere buzzwords or experimentation.

However, misconceptions and misrepresentations about embedded finance can taint its journey. Huber addresses and fact-checks some of these common myths.

• Myth 1: Embedded Finance Introduces a Novel Way to Satisfy Customers

Fact 1: Embedded finance’s origins date back generations, where consumers have arranged financing and insurance during sales transactions. As far back as 1932, General Electric established GE Capital to facilitate customer purchases. Contemporary brands continue this legacy, deploying embedded finance to refine the customer journey and streamline user experiences.

• Myth 2: Consumers Lack Trust in Non-Financial Companies as Financial Service Providers

Fact 2: Embedded finance operates discreetly, with many consumers unknowingly reaping its benefits. For instance, 76% of US mobile wallet users have made purchases through a retailer’s embedded mobile app – a prime example. Despite this, when asked about obtaining financial services from non-financial entities, only 59% of respondents are open to the idea. This exemplifies the saying ‘Out of sight, out of mind.’ When the experience is seamless, consumers often remain oblivious to the embedded finance’s influence.

• Myth 3: Embedded Finance Targets Only Enterprise-Level Companies

Fact 3: Although Boston Consulting Group’s research highlights SMBs’ high demand for embedded finance, the focus should be on value creation rather than company size. Organizations with strong customer or user community connections can significantly benefit from embedded finance, as demonstrated by giants like Apple and Amazon, as well as emerging players like Vivian and Extend.

• Myth 4: Embedded Finance is Inessential in Uncertain Economies

Fact 4: Consumer preferences and behaviors continue evolving; thus, companies delaying embedded finance adoption risk being left behind. With a disjointed or complex customer experience, businesses can lose consumers to competitors. A 2023 Marqeta report revealed that 42% of respondents abandoned checkouts requiring new app or payment method downloads. Beyond new revenue streams, embedded finance’s true strength lies in simplifying financial processes to capture customer loyalty and convenience.

Embedded finance’s evolution has transcended its buzzword origins. As the mid-2020s approach, it stands as a business necessity. Notably, robust growth has been observed in e-commerce, food delivery, mobility services, and various other sectors. Gaming, construction, shipping, sports, and transportation have all felt embedded finance’s impact, with its influence projected to expand further across industries.

What unites all these diverse sectors under the embedded finance banner is the transformation of customer experience, a feat traditional financial institutions have struggled to achieve consistently.