US to see huge increase in embedded finance transactions

About $7tn worth of transactions will be processed by non-financial services businesses through embedded finance in the US by 2026, according to research.

This doubling in the value of transactions made using financial services embedded in platforms was revealed in a Bain & Company and Bain Capital research report, which mirrors research in Europe from banking-as-a-service (BaaS) supplier Vodeno.

In a survey of more than 750 European retailers and e-commerce companies, Vodeno found that 64% were planning to adopt technology to enable them to embed financial products in their services.

Non-banking businesses such as retailers, e-commerce companies and distributors are increasingly looking to offer financial products to their customers. This could be credit, loans or even debit cards.

According to the Bain report, payments and lending will continue to be the largest embedded financial services, but it added that take-up of “adjacent value-added services, including insurance, tax and accounting” would also increase.

The report said traditional financial services providers faced major challenges from embedded finance.

“The swift acceleration in use of embedded finance, and its transition into the financial mainstream, is being propelled as its proposition enhances customer experience and financial access, alongside cost- and risk-reduction benefits, for companies across the value chain,” said the report.

It also said there would be a market worth $51bn by 2026 for software suppliers that enable embedded finance, often referred to as banking-as-a-service suppliers.

Adam Davis, associate partner in Bain & Company’s fintech practice, said: “Embedded finance has quietly become a significant part of the way consumers and businesses make payments and access funding.”

He added that embedded finance removes friction from the sector and makes financial services more contextual, accessible and helpful.

Jeff Tijssen, Bain & Company’s global fintech head, added: “For businesses, this shift is an enormous opportunity. There will be no shortage of growth finance for the sector as platforms experiment with integrating everything from tax to payroll services in the years to come.”

According to interviews with 50 senior business executives and a survey of 1,600 more, carried out by financial IT software supplier Finastra earlier this year, 85% of organisations are already implementing BaaS capabilities or plan to do so in the next 18 months.

Finastra said people were changing where they source financial services and shifting to non-bank channels. “This trend will only accelerate as integrating regulated products into the customer journey becomes as simple as creating a social media account,” it said.