Strategy
December 2024 — 12 min read
Embedded Finance: Pioneering a Seamless User Journey
The Rise of Embedded Finance
The onset of the digital era has fundamentally altered the ways in which people interact with their products and service providers. Traditional barriers and silos between sectors are slowly disappearing and are now being replaced by a new age of integration. Today, consumers are demonstrating a clear preference for digital products and services that provide a unified journey, one where they can access multiple functionalities within the same environment. In other words, consumers are looking for a seamless, cross-functional experience: one that is easy, convenient, integrated, and, most of all, fast. As a result, service providers have been increasingly turning away from developing niche, single-function applications and have embraced collaboration, especially across sectors. This has led to an unprecedented wave of innovation in the realm of digital customer experience, marked by an important redefining of industry boundaries.
This shift has impacted all consumer-driven fields, including the financial sector. Historically, this industry has been marked by a distinctive brand of isolationism and has been slow to adapt to innovations in the digital realm (you can read more about the Canadian context and its impact on financial innovation here). However, recent changes in consumer expectations and the overall push towards integration has encouraged financial institutions to engage with other sectors to offer new ways for consumers to interact with financial services. This new wave of services is called embedded finance. Albeit a relatively new innovation, the market of embedded finance is rapidly growing; reaching a total value of $58 billion USD in 2022 and is estimated to grow to $730.5 billion by 20321.
At its core, embedded finance is the integration of financial transactions (payments, loans, banking, etc.) into non-financial service offerings. This is all possible thanks to the development of application programming interfaces, or APIs. APIs act as a connecting bridge between two parties, allowing them to communicate with each other and transmit information seamlessly. Think of it like a restaurant: here, a waiter will ask a customer for their order, relay it to the kitchen, and then bring out the meal once it’s been prepared. APIs serve the same functionality as the waiter; they relay the ask from one company to the other, then transmit the pertinent information back to the original requestor. These connectors are the technical backbone of embedded finance, as they enable nearly instantaneous communication between two service providers. As a result, processing financial transactions is no longer limited to banks and financial institutions - it is now available to anyone, in any industry.
Embedded Finance in Every Day Life
But what does embedded finance actually look like, in practice?
Let’s take Spotify, as an example. As a subscription service, Spotify leverages the concept of embedded finance by integrating the transactions and payments process directly within their platform. By leveraging partnerships with 3rd party payment service providers (such as Stripe or Paypal, for example), Spotify will embed an intake form directly within their platform to collect a user’s payment information, and will then rely on their partner to store and process it. In the background, Spotify’s service provider will then use a series of APIs to communicate with the appropriate financial institution to validate the payment for the duration of the subscription. This is an automated process, which allows Spotify to continuously collect payment from their users. With 252 million paid subscribers in 2024, the integration of transactions and the automation of payment collection is a key strategic initiative for the company as it allows them to automatically collect payments from users on time, every time2. There is a clear benefit for the user, too. Thanks to embedded transactions and payments, the user does not need to continuously monitor their payment method nor should they worry about an accidental interruption of service. From their perspective, the experience is continuous, hassle-free, and seamless.
Embedded transactions are nothing new; consumers have been able to make payments and store credit card details within e-commerce websites for years. In fact, by 2021, seven out of ten Canadians were already using e-commerce platforms3. Although this type of service has been on the market for some time, the rise of embedded finance is opening the door for new possibilities, like paying with a debit card or directly from a chequing account. These types of evolutions and their integration into digital services represent a monumental shift in the finance sector because it removes the need for an active, purposeful interaction with a financial institution from the user journey. Now, customers only need to interact with one entity: their primary service provider.
Innovations in Embedded Finance
Recently, other companies have begun to push the limits of embedded finance, with innovations ranging from embedded lending to embedded banking. Embedded lending allows for non-financial companies to extend a form of credit to their customers, thus entirely bypassing the traditional loan application process required from a bank. This often takes the form of buy now, pay later schemes found on e-commerce websites. In this case, service providers will allow their customers to delay payments and/or break it up into installments to promote the purchase of their product. A leader in this space is Klarna, who offer their services to e-commerce brands like Asos. Through this partnership, Asos can provide their customers a pay later feature during the checkout phase. When selected, the customer can then split their payment into four installments, over a six-week period, while still receiving the entirety of their order. This occurs because Klarna will pay Asos in full on behalf of the customer. In other words, Klarna is extending a short-term loan to the user. This is where embedded lending becomes interesting. Historically, receiving a loan would require lengthy applications and long delays. However, Klarna’s operating model embraces embedded lending and bypasses traditional processes to provide the end-user with a seamless and efficient shopping experience, tailored to their financial reality. Buy now, pay later schemes are proving to be popular with consumers. According to Juniper research, the value of transactions in 2024 that used buy now, pay later payment methods reached $334 billion USD, with a projected market growth of 105% between now and 20284.
Another interesting evolution in embedded finance is the emergence of embedded banking. Here, non-financial corporations are taking on the role of a financial intermediary by providing customers with integrated banking capabilities, such as chequing and savings accounts. Traditionally reserved for banks, integrating these types of functionalities into non-financial applications is revolutionizing the world of customer experience. A good example of this is Lyft’s driver bank accounts. Here, Lyft, through a partnership with Stripe, has created dedicated chequing and savings accounts for their drivers. Thus, drivers are now able to manage their finances directly within their employer’s digital environment, instead of having to interface with a 3rd party (i.e., their bank). Lyft has gone one step further by providing their drivers with a Lyft-branded debit card, allowing them to access their finances directly. This type of embedded banking is giving drivers additional agency to manage their finances by allowing them to request cash advances directly from their employer, receive earnings instantly after every ride, and earn personalized benefits, such as cash-back options for car-related expenses, like gas.
What does the Future Hold?
The rise of embedded finance represents a clear evolution in the ways that financial institutions are interacting with their customers, with one clear overarching trend: cross-sectoral integration. Thanks to the rise of APIs, the role of banks is changing from front-end service provider to back-end supplier. Embedded finance is truly disrupting the relationship between financial institutions and their customers, by breaking down traditional sectoral silos and encouraging collaboration. Whether it be through embedding transactions, lending, or even banking, companies like Spotify, Klarna, and Lyft are able to include financial services into their environment, and present a unified customer journey to their users. Embedded finance has redefined what it means to offer financial services. This, of course, begs the question of what comes next? How will companies continue to push the limits of embedded finance? But most of all, how will the role of financial institutions change over time? Their role in the financial sector is undeniable - they are at the core of the industry. Their safeguarding and compliance functions will remain critical for years to come. However, the rise of embedded finance does open the door to broader avenues for collaboration; where partnerships play an increasingly important role, replacing the need for end-to-end in-house development. This is particularly true for digital companies, which are changing the ways in which consumers are interacting with their finances. As embedded finance continues to grow and change the relationship between consumers and their finances, it will be interesting to see what forms the next financial innovations will take: will it impact digital assets, person-to-person payment methods, debit transactions, or something else? Ultimately, markets across the world are rife for disruption. Thus, here currently exists an excellent opportunity for new and upcoming fintech companies to propose new ideas and bring a fresh perspective to the finance sector.
1Wadhwani, Preeti. (2023, October). Embedded Finance Report, 2032. Global Market Insights Inc. https://www.gminsights.com/industry-analysis/embedded-finance-market / 2Spotify. (2024). Q3 2024 Update. https://s29.q4cdn.com/175625835/files/doc_financials/2024/q3/Q3-2024-Shareholder-Deck-FINAL.pdf / 3J.P. Morgan Chase & Co. (2021). Global E-Commerce Trends Report. https://www.jpmorgan.com/payments/global-ecommerce-trends-report / 4Purnell, M. (2024, January 22). Global Buy Now, Pay Later Market: 2024-2028). Juniper Research. https://www.juniperresearch.com/research/fintech-payments/ecommerce/buy-now-pay-later-research-report/.