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What’s driving the rise of the £16bn embedded finance sector?
The pandemic is turbocharging change in people’s financial needs and expectations, writes Keith Grose, Head of International at Plaid.
The rise of digital finance has established a new generation of financial services, transforming the sector to put people first. Consumers are finding financial services exactly where they need them, whether that’s on their Peloton through its partnership with Klarna or allowing a gig economy worker to access a loan through their driver app when they need it.
Fundamentally, people are looking for easier ways to manage and access financial services, and thanks to innovation in financial infrastructure, they can. New models meet people where they are and empower them to manage their money on their terms at ease and at speed.
Embedded finance is powering this revolution. Put simply, it enables businesses to seamlessly integrate financial services into their business models through APIs. It’s reshaping the distribution of financial services, such as payment processing, and it will become ubiquitous in people’s lives as a result.
For instance, a recent report by Lightyear Capital estimates that embedded finance will grow to £164bn in revenue by 2025, a dramatic >10x rise from £16bn in 2020.
The pandemic has turbocharged a change in people’s financial needs and expectations. Meanwhile, neo-banks and digital wallets are transforming the payment process. Both have created a renewed demand to improve user experience across financial services.
The adoption of embedded finance has only broadened competition, allowing companies that are not just in finance to compete with incumbents - and who may have never been considered as a major player in the market previously.
This is an exciting development and creates a new opportunity to create new and better user journeys, deliver greater flexibility and fundamentally greater choice.
A harmonised approach is vital here. Banks and fintechs alike must ensure the interoperability of people’s accounts to allow them to integrate their accounts into their favourite apps and brands.
By opening up their data and working together with non-financial companies, they will be able to retain the loyalty of their existing users and attract new users that they may have never interacted with before.
And by being able to expand their own products in line with new demands, or partnering with innovators, they can continue to cement their relevance in a changing world.
However, embedded finance does not mean the end of traditional banks and finance as we know it. Instead, it should be viewed as an opportunity for financial institutions - both traditional and fintechs - to increase agility and keep up with rapidly changing demands, instead of working alone. The joy of embedded finance is that it is an integration rather than a replacement.
There has been a proliferation of companies, like Plaid, that make it simple for any company--including banks--to take advantage of the embedded finance opportunity.
Banking-as-a-Service platforms like Railsbank are primed to help businesses integrate a financial service into their offering. Its API can be embedded directly into an app or any part of the customer journey to switch on that offering.
We are yet to see the true potential of embedded finance unlocked. But the benefits are already clear with fintechs and non-financial companies increasingly using it to deliver great user experiences in more places.
With greater adoption, and a harmonised approach across the financial services industry, we will be one step closer to making an open financial system that is easy to navigate, a reality.
Keith Grose is head of international at Plaid. The views and opinions expressed are not necessarily those of AltFi.