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Anyone who’s used the internet for their own shopping or banking needs has undoubtedly already seen examples of embedded finance (abbreviated as EmFi). And yet, the average consumer would likely have no idea how to define the term “embedded finance.” But EmFi’s growing popularity makes it more than just a simple buzzword or pop-up window, so financial service providers need to be on the forefront of understanding the tool.
According to McKinsey, the embedded finance industry saw $20 billion in revenue in the United States in 2021, and that number is predicted to double by the year 2028. This makes EmFi an unmissable trend—and one of our top five “Financial Services Trends to Follow in 2023.”
Here, we’ll run through what embedded finance really is, how popular EmFi is becoming, how advisors and consumers alike can use EmFi to their advantage, and everything else financial services pros need to know.
McKinsey summarized EmFi by calling it “the placing of a financial product in a nonfinancial customer experience, journey, or platform.” What’s special about this in 2023 is that these long-existing methods of finance are growing because of their presence in daily routines. Whereas older versions of EmFi might have only been visible to consumers during very specific tasks, the world interfaces with EmFi tools on phones and computers multiple times per day.
Think of embedded payments, for example. These were defined as payments “within a retailer’s mobile app, that allow consumers to make instant, contactless purchases with digital wallets or embedded lending products like Klarna or digital private label credit cards.”
And those outlets are being used more and more in daily life. “As much as 33 percent of global card spending—50 percent in the US—now takes place online,” McKinsey reported, “with a large portion of small and midsize companies in the US relying on software solutions for managing their business.” To summarize that simply, the EmFi capabilities have skyrocketed as our reliance on technology surges.
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Since EmFi is such a broad term, there are four categories it’s most frequently broken into. In this section, we will outline and define those specific niches of EmFi.
The first quadrant, embedded payments, is by far the largest of the list as it includes digital wallets and instant payments. Tools like Apple Wallet fall into this category, as they allow users to upload credit, debit, or bank data to use in a myriad of scenarios, like contactless payments.
An example of embedded insurance is an add-on that may be offered when buying specific products. For instance, someone purchasing plane tickets might select to add travel insurance on their purchase so that they’re covered in case something goes wrong. Purchasing third-party insurance through the airline’s checkout process is thereby embedded insurance.
Embedded lending is an umbrella term for services like Buy Now, Pay Later (BNPL) models like Klarna. These tools make it easy for consumers to purchase short-term loans through third-party companies so that they can pay those loans off over a longer time instead of putting down all the money at once. For instance, someone might be buying a $1200 couch online and see at checkout that they have the option to purchase through Afterpay. Rather than putting $1200 down on the couch immediately, they borrow from Afterpay to pay $300 a month for the next 4 months.
Embedded wealth management (also called embedded investing) is when investment products are available on non-traditional platforms. That could mean using an e-commerce app to buy Bitcoin, for example. This is becoming more popular—sites like PayPal offer crypto options on their homepage so users can trade cryptocurrency on the app the opened to make a payment through.
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As previously stated, the EmFi industry has already surpassed the $20 billion mark and is well on its way to doubling that within five years. Cloud technology leader Oracle estimates that EF will reach $7 trillion this decade, “making it worth double the combined value of the world’s top 30 banks today.”
Embedded lending tool Klarna’s revenue increased by over 32% from 2020 to 2021, and in 2021 over 147 million consumers used Klarna, 20 million of whom were in the United States. Similarly, embedded payment tool Apple Pay is forecasted to have over 48 million users by the end of 2023.
Financial advisors know that any market predicted to grow in such a rapid fashion is worth keeping an eye on when it comes to investment opportunities. Companies like Klarna, AfterPay, and Sizzle, who offer loans at checkout, are potential places to invest for both short- and long-term returns. The EmFi industry has seen an increase in Venture Capital funding—the sector received over $3 billion from VC firms in 2021, tripling from 2020.
Embedded investing, as mentioned earlier, could also lead to consumers using third-party tools for their wealth management, which is important for financial service providers to be wary of. NASDAQ reported that embedded investing is already becoming ubiquitous: “We now have trading capabilities within messaging platforms, payment providers, social communities, e-sports, news sites, and retail channels. We even see it in the workplace where some companies let customers and employees buy into their stock from employee portals.”
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Financial companies should remain on the lookout for EmFi tools that might help their own businesses, so that their customers have the same seamless experience that they’re used to in other parts of the online world.
Because consumer expectations around EmFi are growing as rapidly as the industry itself, providers will be far behind the curve if they do not adapt. This means incorporating things like Apple Pay into the status quo at major institutions. It could also mean looking into out-of-the-box places to find new customers—lenders can use embedded lending tools or investing firms can recruit new investors within shopping apps or online forums.
The rise in these third-party tools has the potential to lead to increased risk for consumers and companies alike. For instance, signing up for new lines of credit on an online checkout page might lead to a data leak or a forgotten bill that could plummet someone’s credit scores and personal finances. Providers should make their advisees wary of giving out information or taking on too many loans to mitigate the personal risks attached to EmFi.
Similarly, because EmFi is such a lucrative industry now, we might see new startups coming into the scene who haven’t fully vetted their software before implementing it. Companies should make sure that they thoroughly investigate new tools, especially ones that they might be investing in or using for their own sites, to avoid potential money loss or information theft.
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All of the benefits of EmFi—from investing in up-and-coming tools to increasing customer satisfaction and recruiting new users with the software—are worth keeping in mind when looking at your business’s future. In the coming years, the massive growth of this trend will make it unmissable for financial service providers.
Other critical 2023 trends include younger generations’ investment habits changing the marketplace, rising regulations on ESG investing and the ongoing impact of inflation. Read our full trend report to get a better understanding of the current shifts to be aware of and learn how you can use research to be best prepared for the future of investing.