The fintech industry has a new buzzword, and it’s worth billions of euros: embedded finance. “The idea of embedded finance, often referred to as contextual banking, is to embed financial services directly in the products of non-banks. In this way, the financial service is available exactly when and where it is needed, ”says Roland Folz, CEO of Solarisbank. The Apple Card, Amazon Pay, Buy Now Pay Later from Klarna – all embedded finance.
The idea is actually an old one. It was invented for the auto industry when it began to boom at the beginning of the 20th century and consumers were faced with the question of how they should now pay for the desirable new types of vehicle. The Ford Credit Bank was founded in 1926 in order to be able to give car buyers the right credit right away. Today the idea is being rehashed and people read more and more often: “Any company can become a fintech”.
Banking-as-a-service (BaaS) providers such as Solarisbank, Stripe or Railsbank are positioning themselves as those tech players who have everything in their luggage, from credit cards to loans and digital assets to banking licenses, that is regulatory of embedded finance and technical basis required.
Banking as a Service: Now comes the second wave of neobanks
E-commerce with the greatest potential
In the US and China, embedded finance is already a big thing. According to Lightyear Capital, the market for this is expected to grow from $ 22.5 billion today to $ 250 billion in 20225 – at growth rates of 60 percent per year. Bain Capital is even more optimistic and estimates that the total revenues that will come from embedded finance in the US in 2030 can reach around 3.6 trillion euros. Insurance, loans, consumer credit, asset management, everything packed right into apps and online shops – the virtual tills should ring like never before.
The corona-driven boost in online shopping, an increasing willingness to use financial products, and a growing willingness to pass on personal data to companies – this is what Embedded Finance is supposed to be, according to one current study from Solarisbank to the topic power. Obviously, there is a lot to be gained, especially in the retail sector. Furniture retailers, hardware stores, electronics retailers, fashion shops – the bigger the shopping cart, the more potential for embedded finance.
Will banks become partners or opponents?
The question now is which big brands and companies jump into embedded finance and how. Retail giant Walmart wants to do it itself and has a partnership with Ribbit Capital (Investor in Robinhood, Credit Karma and Affirm) in early 2021 own fintech started to develop its own financial products in addition to the existing ones. Other companies will not be able to manage this on their own and will turn to BaaS providers like Solaris.
The big question: where are the banks in the game? In the USA, the major bank Goldman Sachs Apple has caught up as a partner for the implementation of the Apple Card (and probably an upcoming BNPL offer), in the EU BNP Paribas is working with Bitpanda. In Europe it will now be exciting to see how banks react to the attack by the BaaS services and neobanks, which are increasingly penetrating their core business.
Apple is working on “Buy Now Pay Later” service in response to Klarna and Affirm
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