Embedded finance to lead the way in 2023 fintech innovation

“Every company will be a fintech company.” My friend and former colleague, Angela Strange, made this bold statement back in 2019. I believe she was right.

Financial services will change at a more rapid pace than we have seen in the past decade

We’ve seen a radical transformation in financial services over the past few decades, which, at its core, is meant to help companies, business owners and consumers better manage their cash flow and risk. But the next wave of fintech is going deeper and will happen faster.

Financial services will change at a more rapid pace than we have seen in the past decade given the significant levels of friction, high fees and underserved segments. The move to cashless transactions, the spread of technology such as open banking and blockchain and rapid growth of new entrants will all impact this pace of change. Financial services will continue to be more digital, embedded, accessible and decentralised.

At its core, embedded finance is the integration of financial services with non-financial business infrastructures, without the need to redirect customers to traditional financial institutions. It encompasses offerings such as embedded banking, embedded payments, branded payment cards, embedded lending and embedded insurance.

This technology brings huge value to customers as demands for an integrated experience increase – in fact, according to McKinsey’s market-sizing model, in 2022 embedded finance reached $20 billion in revenue in the US alone. Furthermore, the market is expected to double in size within the next three to five years.

An example of embedded finance in the real world is Apple adding buy now, pay later (BNPL) functionality into the iPhone. According to a report by Plaid and Accenture, 88% of companies that have implemented an embedded finance feature have shown increased engagement and 85% say that it helps them acquire new customers.

The fintech industry has experienced extreme growth over the past few years. In fact, according to Deloitte, it is worth approximately $180 billion and is expected to reach $213 billion in value by 2024 – to put that into context, in 2017, the global fintech industry revenue was approximately $90.5 billion. In 2023, we can expect digital platforms to continue to enhance their offerings and begin to roll out new value-add products and services that provide more actionable insights based on customer data and tailored experiences. Embedding financial services will only continue to be a value-add as these services tie into existing data sources to gather the customer information needed.

This is where the impact of open banking innovation comes into play. According to Statista, 24.7 million individuals worldwide have used open banking services – a number that is forecasted to reach 132.2 million by 2024. Driven by the European Union’s adoption of the revised Directive on Payment Services (PSD2) in 2018, open banking was designed to support three important principles – better consumer protection, secure payment schemes with strong customer authentication and innovative services and products accessible through the open banking concept.

Open banking is revolutionising consumer banking and redefining it as a customer-centric ecosystem for banks and third-party providers alike to put the control of financial data back into the hands of the consumer and small businesses – this is largely because it offers control of one’s own data, which in turn gives a clearer view of finances.

But, currently, in the US, open banking innovation is only market-led, as it’s hard to regulate US banks to specific standards given the thousands of banks in the country. However, with the CFPB pushing for new rules in 2023 – alongside industry associations like FDATA, ETA and FDX – we could see a new wave of financial tools and innovation for small businesses.

Core fintech products that have remained unchanged for two decades will be increasingly designed around customer-led experience and powered by data connectivity and open platforms. For example, open banking APIs are making it possible for banks and financial institutions to gather rich and reliable accounting information based on a business’ health and cash flow, to give lenders the confidence they need to provide capital and small businesses access to funds fast.

Especially as we enter this economic downturn, the importance of knowing cash flow cannot be underestimated – this helps to prevent more layoffs and business closings with small businesses’ bottom lines being pummeled by labour shortages, inflation and supply chain bottlenecks. In fact, according to data from Alignable, the number of small business employers laying off workers doubled in December 2022 and 41% of those businesses are having a hard time making rent.

With the potential to help small businesses access a broader range of financial services more easily for faster access to funding and seamless business workflows, these technologies are essential.