Tech Translated: Embedded finance

  • June 18, 2024

What is embedded finance? 
Embedded finance is the seamless integration of digital banking,
along with other financial products and services, into nonfinancial companies’ platforms or applications. It enables these nonbanking businesses to offer their customers—and additional stakeholders, such as suppliers, partners, and employees—a wide range of financial services, including lending, insurance, and payments, without having to build the underlying financial infrastructure or hold the relevant regulatory approvals themselves.

What business problems can it address?

Embedded finance represents a shift away from traditional banking models in which consumers must seek out separate providers for their various financial needs. Instead, “it brings these services directly to customers within the context of their existing digital experience with a particular brand or digital platform, reducing friction and enhancing end-user convenience,” says Eugénie Krijnsen, PwC’s Global Financial Services Advisory Leader, and a partner with PwC Netherlands. This means embedded finance can address several business problems for nonfinancial companies effectively—and open up a number of new opportunities:

  • Improving customer (and employee, supplier, or partner) acquisition and retention by offering financial services as an added value within the existing customer journey, thereby reducing friction and increasing convenience.

  • Increasing the lifetime value of customer relationships and creating new revenue streams within the existing user base through financial product offerings and transactions.

  • Enabling data-driven insights and personalized financial experiences by leveraging user data, behavior patterns, and contextual information to tailor product and service offerings and recommendations.

  • Fostering loyalty by creating a frictionless, integrated experience that meets multiple needs within a single platform or ecosystem, which reduces the need for customers to seek out alternative providers.

“For banks and financial institutions, embedded finance can seem like a threat to their visibility to and relationship with end-users, who may increasingly interact with the bank on another company’s platform,” says Alex Price, a director in PwC UK’s customer strategy and experience practice. “However, with a considered, customer-focused strategic approach and the development of appropriate underlying digital capabilities, it has the opportunity to enable new business models for banks as platform and service providers.”

How does it create value?

The embedded finance model is closely associated with e-commerce companies and also, increasingly, with large tech firms. For years, both types of companies have sought effective ways to integrate a wide variety of financial products and services into their ecosystems. Embedded finance opens up monetization opportunities for these nonfinancial firms by allowing them to earn a share of financial transaction fees, charge for premium financial services, and cross-sell complementary products, all while fostering long-term loyalty as customers become more deeply integrated into the company’s ecosystem.

By offering financial services within their existing ecosystems, companies can provide a more convenient experience, reducing customers’ need to navigate multiple platforms and increasing their engagement with the primary platform or product. In the developing world and emerging markets, embedded finance can even lead to the expansion of banks’ customer base and the development of entirely new business models, as unbanked individuals’ first interaction with banking services may be through an experience that’s embedded in smartphone applications.

“The rise of nonbanking platforms has created a new reality for the banking and capital markets industry, where customers are increasingly looking for seamless, personalized experiences,” says Charles Richards, a senior manager with PwC UK. “Nonfinancial platforms serve as the primary touchpoints for customers, while banks provide the infrastructure and regulatory approvals.”

Who should be paying attention?

Embedded finance is not just for big tech or financial services providers—more and more, it is also being adopted and explored by retailers and telcos, as well as real estate, hospitality and leisure, media and entertainment, and automotive and transportation firms. Given the rapid rise of API banking, which is facilitating the spread of digital banking products and services, all banks and financial service providers—as well as their regulators—will need to continue to adapt as embedded finance evolves. Across industries, CTOs, COOs, CISOs, and chief data officers, along with product and service developers and customer experience leads, should keep a close eye out for emerging opportunities and inspiration.

How can businesses prepare?

“Monitoring the evolving landscape and seeking examples of best practices is essential for any business in which ongoing payments are currently—or could potentially become—part of their business model,” says Krijnsen. “This is a fast-evolving area, with new approaches appearing all the time that could lead to new sources of revenue and value, with the right strategy and response.” To enable rapid adaptation in this environment, it’s important to focus on building the right underlying digital infrastructure and data architecture—something most businesses are already undertaking as part of their ongoing digital transformation and modernization efforts.

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Tom Archer

Tom Archer

Global Technology Consulting & Alliances Leader, Transformation Platform Co-Leader, PwC United States