What is embedded finance?

Embedded finance was by far the most discussed topic at the 2022 Fintech Talents London event. From a dedicated stage to the topic to discussions on the main stage about Super Apps, it was all anyone could talk about.

It’s not surprising. According to McKinsey embedded finance sector hit $20bn in revenue in 2021 in the US alone and the market is set to double in size within the next three to five years. Despite the many discussions, one thing stood out to us: There’s no common understanding of what exactly embedded finance is and what it can deliver.

“If a business has the wrong expectations of what embedded finance actually is and what it can achieve, they set themselves up for disappointment,” says Charlie Platt, President, EMEA at SAP Fioneer, “but with the right expectations set, businesses can go out there and meet them.”

The message is clear — the right definition makes all the difference.

We asked Charlie and our Head of Embedded Finance, Vishal Shah, to clear things up by answering:

• What is embedded finance?
• Who are the main players?
• What are the benefits?
• What does the future of embedded finance look like?

Find out their answers below.

What is embedded finance? And what is it not?

Embedded finance integrates financial services directly into non-financial products or ecosystems with the goal of providing the smoothest possible customer journey.

To do this, businesses partner with banks or financial service providers to integrate their offerings via APIs. This enables the business to deliver financial services directly at the point of need without having to become a regulated financial institution itself. It also allows businesses to ensure a consistent, on-brand experience for their customers.

But it’s not just about integration.

“For embedded finance, the motivation should not be integration,” says Vishal. “It should be how can I make an experience frictionless for the end user? How can I eliminate the unnecessary?”

Embedded finance is more than digital finance. It’s not just about offering services online or via an app. It’s about eliminating unnecessary steps and embedding financial elements into the customer journey naturally.

The three stages of embedded finance 

Traditional financial products used to live in silos. Each had its own qualification criteria for customer access and limited personalization options. They were often disconnected from the customer’s true needs.

Data followed these silos. Customers had to re-enter the same information repeatedly across different products, even within the same organization. Processes were slow, fragmented and impersonal.

Digital innovation and the rise of big tech and challenger banks improved things — but not enough. Many customers still ended up facing generic and fragmented experiences.

Embedded finance aims to revolutionize the experience of financial services. It follows a simple but successful three stage recipe for creating optimized and personalized journeys in financial services. This can be also spotted in behavioral banking. 

Stage 1: Context

This is about finding out who the user is and what their goals are.

For example, if someone is looking for a loan, the loan itself is not their goal — it’s making a big purchase like a car or renovating their house. The loan is simply part of their process.

But it’s not just about the transaction.

It’s about understanding the context from the moment the customer is aware of their problem through to them using the financial product or service and even beyond.

Knowing the context helps you understand the whole customer journey and therefore tailor their experience to fit.

Stage 2: Eliminate

With context in hand, you can now eliminate any unnecessary steps.

“Start with what the customer is trying to do and build everything around it,” says Vishal.

Before embedding a financial service into a non-financial journey, you first need to ask: What steps in the customer journey does the customer not care about? What do they not need to see?

Then eliminate those steps to create a smoother experience.

“By eliminating all the unnecessary steps, you can then decide what is the best integration model that supports that customer experience,” says Vishal. 

Stage 3: Personalization

Once you’ve eliminated the unnecessary steps, you can build a more personalized experience around the ones that remain. For example, with insights into customer purchasing behavior from open banking, you could inform better credit decisioning and offer hyper-personalized loans. 

You’ve got your context. You’ve eliminated the unnecessary steps. Now, you can build a personalized experience.

This is done by utilizing data to tailor an experience for each customer. Open banking provides insights into customer purchasing behavior that helps inform and improve credit decisions and enable hyper-personalized offers like loans.

The embedded finance ecosystem 

Embedded finance is not a piece of technology, or just about integration. It’s a way of operating.

To succeed, it requires collaboration between the key players in the ecosystem: embedders, financial service providers, and orchestrators. 

• Embedders: Businesses like retailers, software companies, marketplaces who integrate the financial services into their products to benefit their customers. 
• Financial service providers: Banks, fintechs and other financial institutions that offer access to their services. They allow embedders to integrate them into their own products. Their technology needs to be open to integration, meaning an open core that embedders can connect to via APIs. 
• Orchestrators: Experts in service design, and well versed in the regulations and intricacies of providing financial services. They help stitch the embedded finance ecosystem together. They look at the customer journey to provide insights into where steps can be eliminated or personalization can be added.

The benefits of embedded finance

Benefits for the end-user

Embedded finance will eventually benefit everyone. It will pave the way for a future of finance that is frictionless, hyper-personalized and near real-time.

It creates a seamless, real-time and hyper-personalized experience for end users. Customers no longer need to shop around for financial services. They’re built into the journey.

New use cases like virtual rent-to-own and lease-to-own models are also emerging, creating further opportunities. In B2B, embedded lending helps small and medium enterprises access capital quickly, enabling them to better manage cash flow and scale up.

Benefits for businesses

Embedded finance provides higher customer engagement and retention and opens up additional revenue streams.

One clear example is the rise of buy-now-pay-later (BNPL) solutions. In B2C markets, BNPL has increased conversion rates by 20-30%. In addition, the ease of integration allows businesses to accelerate time to market and scale at pace.

Beyond the consumer benefits, embedded finance also enables operational efficiency in the B2B world. BNPL and working capital financing products help companies serve customers who need short-term liquidity for day-to-day operations rather than purchasing equipment.

For banks and financial institutions, embedded finance provides new ways for them to serve existing clients more efficiently. It reduces costs and increases revenue potential. As global trade becomes more digitized, and companies operate through electronic trade networks, the financial industry is positioned to unlock the power of instant payments and just-in-time credit.

It also opens up the opportunity for banks and financial institutions to serve their products through new distribution channels. They will be able to reach clients they previously couldn’t access, expanding their market and reducing risk. With embedded finance, banks gain access to contextual data (like order volumes and transaction frequencies) that helps them assess whether a business is creditworthy.

Instead of waiting days or weeks to evaluate a business, they can instantly understand a business’s financial health. By leveraging this data, they offer personalized financial products to thin-file customers while minimizing exposure to risk.

Building the future of embedded finance 

Looking ahead, the future is shifting from “Know your customer” to “Understand your customer”. Finance will be more context-drive, hyper-personalized and fluid. It will react to and shape consumer behavior.

Imagine a train fare being automatically deducted immediately after a journey. Or a B2B payment automatically triggered as soon as goods are delivered to the warehouse and the receipt digitally signed.

Technology enables this, but strategy defines it.

Start with the customer’s goals: What do they want to achieve? What’s the quickest way to make that happen? Then remove the friction. With this, you can figure out what financial tools and data are necessary to build the experience around their needs.

And to bring it all together, partner with the right orchestrator to realize the full potential of embedded finance.