Embedded Finance Overview

Embedded finance refers to the integration of financial services into non-financial products and services. Embedded financial products include payments, lending, insurance, banking, and card issuing. The integration can be seamless, making it easier for consumers and businesses to access and use financial services within the context of their everyday activities.

Embedded finance is already a booming field. For instance, 83% of Toast’s annual revenue comes from embedded payments and loans serviced through payment remittances. Across the industry, VC investment in embedded finance doubled between 2020 and 2021, reaching $6.7bn.

Major Players

Key Drivers

API Ecosystem

The proliferation of APIs in the last decade (Plaid, Stripe, Lithic, Modern Treasury, Marqeta) has made it easier and cheaper than ever for software companies to build financial products. Every slice of the fintech stack can be abstracted away to an infrastructure provider who handles the complexity of financial services. This creates a unique “why-now” moment due to the low barrier to launching financial products for the first time in history.

Consumer Preferences

The digitization of commerce and business management and the shift from brick-and-mortar to e-commerce have massively expanded opportunities to embed finance in nonfinancial customer experiences. 50% of card spending in the US takes place online and 80% of B2B payment volume will be digital by 2025. Thus, there is a large customer base acclimated to online payments and receptive to contextual, seamless financial products

Revenue Diversification

Embedded financial products are a zero-CAC, natural cross-sell for incumbents with large customer bases. The execution playbook is well-documented by software giants like Toast, Shopify, and Mindbody, providing product leaders with a low-risk channel to diversify revenue. Consequently, there is increasing demand from vertical and horizontal software players as they seek revenue uplifts after going multi-product.

Regulatory Environment

Open banking frameworks established by regulatory bodies in the US and EU require banks to provide qualified third parties access to consumer financial data, such as settled and unsettled transaction and deposit data through APIs. This creates new verticals of embedded financial products that are made possible by unifying siloed data.

Industry Landscape