Embedded finance is rapidly expanding, particularly in recent years. Google reports that searches for embedded finance have spiked in the last two years, partly due to funding for startups introducing new embedded finance solutions and big banks wanting to explore this new market.

Interest in embedded finance is increasing for various reasons. Juniper Research predicts that the market will exceed $138 billion by 2026. Another reason for this growth is that the pandemic has encouraged businesses to rethink their offerings and explore new fintech solutions. While there are opportunities, the development of embedded finance comes with new challenges, particularly concerning data privacy and complying with current regulations.

If a non-financial organisation provides a financial service that enables a seamless customer journey and no platform movement, it is considered an embedded finance solution. The concept is closely related to open banking. British and EU regulations mean big banks and other financial institutions must share consented customer data. Smaller businesses can utilise these data feeds, and as a result, it empowers startups to offer better financial services.

While there are talks in the fintech industry about how successful open banking has been, several startups have tapped into this market over the last few years. Embedded finance expands on the idea of open banking, expanding the service beyond fintech businesses.

Reports from BaaS provider, Vodeno suggest that over 50% of retailers and eCommerce companies in Europe will increase their services or plan to start offering embedded finance solutions in the coming year. Innovation in customer experience is the primary driving factor behind developing embedded finance.

Traditional retailers and eCommerce companies recognise that their customers expect a seamless shopping experience. Processes like taking users to an external payment portal are not acceptable anymore.

The challenge, however, is these solutions can be costly, and many smaller companies cannot purchase their financial solution. Most companies utilise fintech startups for these solutions. Most traditional financial interactions were often controlled by banks. Today banking-as-a-service (BaaS) means all businesses have access to innovative embedded financial solutions that are cost-effective and simple to integrate.

However, there is growing competition from larger industry businesses attempting to capitalise on the embedded finance industry. Big companies like JP Morgan intend to use some of their tech investment budget towards developing embedded financial services. Rival business Goldman Sachs recently announced its banking-as-a-service portal for developers.

Barclays recently announced its Rise Start-Up Academy, a digital skills programme for fintech professionals. The first project for developing new ventures focuses on embedded finance. The pandemic has increased the adoption of embedded finance solutions.

While startups have dominated the industry, incumbent businesses are starting to explore the market. Lower interest rates have made it more difficult for big banks to compete on price. A further factor relates to the global health crisis and how this has changed opinions toward alternative financial service providers.

While there have been significant changes, reports suggest that the average customer remains reluctant to shift their money from traditional institutions. It’s becoming clear that non-traditional financial service providers are acquiring the trust and attention of customers. In response, larger businesses need to be more creative with their products and services. The result has been increased availability of new services, including embedded finance solutions.

Embedded finance enables established financial organisations to reach out to existing clients via different channels. There is a rising demand for embedded finance solutions. Businesses looking to introduce these services have several challenges before moving forward with this option.