The Shift to Embedded Finance.

A Transformative Force for Retail and SME Lending.

By 2030, Embedded Finance (EF) could account for up to 25% of retail and small-to-medium enterprise (SME) lending revenues, significantly reshaping how financial and non-financial companies interact. Even if the term itself isn't yet widely familiar, Embedded Finance—the integration of financial services like loans, insurance, and payments into non-financial platforms—has become routine for many consumers and businesses. For example, in 2023, 40% of European consumers preferred using online channels for car financing, while 30% expressed a desire to buy their next vehicle entirely online. Similarly, small businesses can now open bank accounts through their accounting software.

This momentum shows no signs of slowing. Regulations within the European Union, especially those supporting Open Banking, have enabled third-party fintech players to access consumer banking data, which is vital for developing EF innovations. According to McKinsey, EF revenues in Europe could soar to more than EUR 100 billion by 2030, up from about USD 30 billion in 2023.

Embedded Finance and Retail Lending.

Rapid Growth but Significant Risks

Embedded Finance has seen explosive growth in sectors like retail lending, where its volumes have tripled compared to traditional loans. However, along with growth come challenges. Non-financial platforms risk losing direct relationships with their consumers as EF continues to evolve. For businesses, it becomes crucial to address how they can leverage EF without losing their consumer base.

For non-bank companies—including retailers, business software firms, online marketplaces, telecom companies, and original equipment manufacturers (OEMs)—EF provides an opportunity to boost sales and enhance consumer loyalty. However, deciding the best way to implement EF remains a challenge. Broadly, companies face two strategic options:

1- Offering in-house financing options throughout the consumer decision journey, much like platforms such as Poland’s Allegro and Britain’s Very. While this approach retains all profit potential, it requires significant investment and expertise.

2- Partnering with specialized providers, such as ING’s collaboration with Amazon to offer loans to SMEs. This partnership model lowers costs and risks while leveraging shared data to make credit decisions more efficient.

Contextual Banking.

Meeting the Demands of a Digitalized World.

In today's increasingly digital world, customers expect financial services to be seamlessly integrated into their daily lives. Contextual Banking meets this need by embedding financial services—such as loans, insurance, or payments—exactly when and where customers need them, integrated within the flow of their everyday activities.

Embedded Finance goes even further, creating opportunities for financial services to appear in the right context, without the consumer needing to leave the platforms they are already using. For instance, instead of visiting a bank for a loan, the option to finance is presented when they’re about to make a purchase.

Financial Services Where They Are Needed.

Embedded Banking is the concept of integrating banking services—such as payments, loans, and transfers—directly into non-financial platforms. It offers banking services exactly where the user needs them, eliminating the need for a separate banking experience.

Example: A customer shopping on an e-commerce site is offered a loan during checkout. Instead of navigating away to a banking portal, the service is seamlessly embedded into the checkout process. The transaction is completed without disruption, offering a smooth and satisfying user experience.

Loans Tailored to the Customer’s Needs

Embedded Lendingintegrates financing options into platforms that customers are already familiar with. These personalized, context-aware offers make it easy for consumers and businesses to access loans without needing to actively search for them.

Example: A small business owner receives a loan offer based on real-time sales data from the e-commerce platform they use. The offer is integrated into the platform’s interface, allowing the business owner to apply in just a few steps.

Convenient and Seamless Protection

With Embedded Insurance, customers can easily secure protection for purchases or services directly during their buying process. This makes it convenient to get coverage without using a separate application or contacting an insurer.

Example: When buying a new smartphone online, the customer is offered device insurance at checkout. The insurance is activated instantly, starting from the date of purchase, and the customer can complete the transaction without any additional steps.

Simplifying the Transaction Experience

Embedded Payments eliminate friction in the payment process by integrating transactions into the platforms consumers already use. Payments happen seamlessly in the background, providing a smooth and efficient user experience.

Example: A user makes a purchase on a social media platform and pays directly within the app. The payment is processed automatically, removing the need for redirects or additional steps, which enhances the overall user experience.

Embedded Finance as a Catalyst for Digital Transformation.

Looking ahead, Embedded Finance will not only be a significant source of revenue for banks, potentially accounting for 10-15% of their total income by 2030, but it will also serve as a major driver for digital transformation. Non-financial companies that adopt EF will gain a competitive edge by creating personalized, convenient customer experiences that enhance loyalty and retention.

To succeed in this space, companies must rethink their approach, focusing on the entire customer journey rather than individual touchpoints. They will need to integrate innovations like instant decisioning and straight-through processing while continually refining their solutions based on customer feedback. EF will not only boost revenues but also elevate companies' digital expertise and strengthen their relationships with customers.

Conclusion: The Future of Financial Services is Embedded.

By 2030, Embedded Finance is set to play a crucial role in retail and SME lending, transforming the way financial services are delivered and consumed. Companies that can effectively implement EF solutions will be well-positioned to thrive in an increasingly competitive and digital marketplace. The integration of financial services into everyday activities not only improves customer satisfaction but also opens up new revenue streams for businesses.

Companies looking to succeed in the Embedded Finance space must start by building strong partnerships, investing in technology, and focusing on delivering a seamless, context-aware experience for their customers.

Stay tuned as we continue to explore the transformative impact of Embedded Finance in future blog posts!