Embedded Banking: Trend or Fad?

There is overwhelming evidence that embedded finance - banking & payments - is real and here to stay.

 min. read
February 10, 2021

Embedded banking is all the rage and has been a favorite for VCs and startups alike. But is it right for you? Let’s examine the evidence:

Every company will be a Fintech:
Popularized by a16z and Bain Capital Ventures (BCV), the mantra that every company will be a fintech has taken root. Headlines of large retailers embedding banking & payments are becoming more common with Walmart partnering with Ribbit Capital for fintech embeds and  IKEA buying a stake in a bank recently. This mantra is proving successful as companies of all kinds are realizing the efficacy of fintech to increase the LTV of their loyal customer base.

Offers significant up-side:
The economic evidence is in favor of embedding banking and payments. BCV reports US card payments from embedded sources have attained an 8 % market share - growing 2X faster than the other cohorts and will be closing on to 40% of market share in short order. At a platform level, Shopify reported that a majority of its revenue comes from payments and the % contribution is only expected to rise.  Macro forecasts for embedded banking  (e.g., banking as a service) are forecast at  ~$230B of market revenues by Cornerstone Advisors. BCV estimates the potential market cap for embedded finance companies at ~$3.6T in the US by 2030.

Customer preference is clear:
Customers are demanding more convenient, simple, and contextual multi-product experiences from vendors. Companies that are not fulfilling that demand runs the risk of losing their customer base to new or existing competitors that do provide these services. For example, an embedded wallet within an e-commerce seller’s software will find greater take-up and seller utility than a standalone digital bank account for the same seller. For the first time, fintech is at par with banks in terms of customer trust, per a recent McKinsey survey. There is a clear mandate from the customers to the non-bank brands they like and trust - to also provide banking.

Barriers to entry are low:
Embedding banking into your core offering has never been easier than now. A myriad of providers from low tech effort integration ie. banking as a service provider - to moderate - to high tech effort providers e.g., core processors & payments processors are available. The provider choice truly depends on your appetite for initial investment, your level of domain expertise in banking & payments, and your tech resource availability. Getting into banking is no longer stepping onto the third rail.

Banks are enablers:
Banks are embracing the opportunity to enable companies to embed banking. Progressive banks are partnering up with fintech and others to offer banking as a service. Most companies see the embedded banking opportunity, but do not see themselves getting a bank charter, for good reason. That's where traditional banks step in - typically with banking as a service layer partner to offer API banking to companies that are seeking an embedded banking solution.

Bottom line:
There is overwhelming evidence that embedded finance - banking & payments - is real and here to stay. Companies - banks & non-banks should aggressively prioritize embedding & enabling banking into their core offerings.