Dealroom Talks: the rise of embedded finance

The rise of embedded finance

This week we hosted a virtual forum on the rise of embedded finance. With the help of industry experts, startup founders and our own Intelligence Unit, we took a deep dive into the opportunities, threats, and impact of embedded finance on the financial services landscape.

Report - The rise of embedded finance

How has embedded financing become so popular?

The COVID-19 pandemic has accelerated the transition to online operations for many industries. Embedding fintech into digital platforms is now streamlined and the first wave of digitalization brought financial services online (e.g. online banking, online lending). Also, the fintech infrastructure has matured massively, from banking-as-a-service (BaaS) to open banking, making it easier to offer embedded financial services to businesses and customers.

Embedded finance is a multi-trillion dollar opportunity

Forecasts predict a total market value for embedded finance at $7.2T by 2030. To put this number in perspective, it is more than current value of all fintech startups and the top 30 global banks and insurers, combined. Where will this value be created? Fintech experts anticipate three areas of value growth: insurance, lending, and payments.

Embedded finance and BaaS have attracted billions of dollar in funding and grew 3x last year

Embedded finance and BaaS startups have already attracted huge funding in the last year, ranging from $0.3B to $3.1B, growing more than 3x compared to 2020.

The customer’s journey

Looking at the customer journey, embedded finance brings financial services where and when the customers need them. Financial services are not offered anymore as standalone products, but instead, more personalized solutions are being offered to customers by non-financial partners. While financial products have been offered by non-financial companies for decades, the difference now is that these products are directly integrated into the partner (digital) platform and allow a smooth and coherent experience, while taking advantage of context and data.

"It's important to build a product that serves as a common denominator for all platforms. Make the platform engaged to the customer. The platform is only happy when the customer is happy."

Jens Roehrborn, CEO and founder, Banxware

For the financial sector, there’s an opportunity to have a better distribution of the products, leveraging the network, customer relationship, and data of the partner. For non-financial companies, it helps attract and keep users and open new revenues stream.

The embedded finance custoemr journey: bringing finance when and where the customers needs it

A higher marketplace valuation

One of the biggest opportunities, cross sectors, is marketplaces embedding financial services. The lines between marketplaces and fintech are blurring into what is called, fintech-enabled marketplaces. These marketplaces expand their addressable market adding new revenue streams, while also lowering their customer acquisition cost and improving retention.

"It’s great to put out our brand because it gives credibility, and it maintains an engagement from the client. The cross-selling is quite significant with these clients; we onboard more clients in the end."

João Cardoso, CEO and founder, Lovys

From analyzing the biggest fintech-enabled marketplaces, it’s clear that embedded financial services command a premium in their valuation compared to their counterparts, as well as financial services providers. Suggesting that private and public investors alike see fintech as a key leverage for marketplaces.

Marketplaces which embed financial services command higher valuations than their peers

What role banks can play

"For banks, it can be challenging to have a long-term commitment, even if there’s a specific niche they have. We’re not a software company. It’s a big fight to take on. Better to fight together than each other."

Hugo Bongers, Head of ABN, AMRO Ventures

Embedded finance is not just an opportunity for fintech startups, banks can also play a big role. The risk for banks and insurers is losing control of the customer relationship and becoming more of a supplier of commoditized services. But there is also a huge opportunity to improve the distribution of the services and expand the addressable market.

The key to success for the embedded finance ecosystem will be collaboration among all players, especially between startups and incumbents.

The role of banks in embedded finance

"We believe financial services are the lifeblood of the economy, moving beyond old fashion products and moving towards customized products. It's a coming-of-age for embedded financing."

Matthew Jones, Managing Director, Anthemis

Report - The rise of embedded finance