The hype surrounding embedded finance continues unabated: According to a recent study by private equity firm Lightyear Capital, the embedded finance industry will be worth $7.2 trillion by 2030. This corresponds to twice the total value of the world’s 30 largest banks. Integrated payment services will have particularly great potential in the e-commerce and healthcare industries, accounting for over half of the market.

Due to the great potential, a race for corresponding market shares has now begun: Thus, it is now important to be fast enough and to adapt to the changed environment. Companies that fail to adapt to these innovations in good time run the risk of suffering severe revenue losses and losing valuable customers.

Development and potential of the industry

The banking sector is undergoing a massive transformation process. As the financial industry opens up through Open Banking, more and more companies from outside the industry are entering the market and offering their customers integrated financial services in their portfolio. In addition to loans, these services can also include traditional banking services, payment services and insurance. In Germany, non-financial companies such as Lidl, MediaMarktSaturn, ADAC and Daimler Mobility are among the absolute pioneers in this area. Banks and other financial institutions have been very reluctant for a long time, seeing embedded finance primarily as a competitor to their business models.

But for some time now, there has been some movement: more and more banks now recognize that their deep industry knowledge, reach and credibility, as well as their strong balance sheets and direct access to low-cost capital, give them the opportunity to take a leading role in the creation of embedded finance models that work. In addition, they now clearly see the advantages of using integrated payment options to differentiate themselves from their competitors in the highly competitive financial market, while at the same time reaching new target groups with tailored and directly integrated services.

How financial institutions and brands can benefit from embedded finance

The benefits for embedded finance are clear: integrated financial services can increase customer loyalty, increase the number of customer contacts, and generate additional revenue streams. Branded credit cards are often used not only as a means of payment, but also to collect loyalty or cashback points from certain merchants. Companies with customer-centric business models can intelligently use the resulting customer data to offer tailored financial products of a quality indistinguishable from that of a personal financial advisor.

Financial institutions have the option of offering their integrated financial services via third-party providers: Instead of hoping that customers will come across their services directly, they are offered via the third-party providers at the point of sale. In this way, financial institutions are responding to changing customer behavior: According to a study by PwC on digital banking, more and more customers are tending to conduct their payment transactions exclusively digitally.

Brands are increasingly recognizing the growing awareness of the great potential embedded finance offers them: according to a recent survey by OpenPayd, 92% of corporate decision-makers said they planned to introduce corresponding services in the next five years. Asked about the main drivers for this project, the decision-makers primarily selected aspects in the area of customer interaction. A large majority of respondents see a significant benefit of embedded finance solutions in “improving the customer experience” (85%) and “increasing the number of touch points with the brand” (84%). For 79%, the ability to offer mobile wallets and checking account options also plays a major role, followed closely by “expanding cross-selling opportunities” (68%). 46% have the goal of offering customized financial services. Decision-makers cited the development of new sources of income as the main motivation for these activities.

Customers are ready for embedded finance

The proliferation of digital wallets and flexible financing and credit options at the point of sale is increasingly being driven by online retail and the associated digital payment boom. According to a joint study by Solarisbank and the Handelsblatt Research Institute, 61% of Germans would purchase financial services from online stores. In addition, more than a quarter of Germans (24%) said they would open a checking account with Amazon, followed by Lidl and dm.

So what is still holding companies back from integrating embedded finance offerings into their portfolios? Despite the enormous market potential and their willingness to participate in market growth, brands are currently still encountering major hurdles. Major barriers include the high time-to-market and cost, lack of experience in software development and payment processing, and the additional resources needed to develop in-house solutions.

To overcome these problems, more and more companies are cooperating with already established service providers of embedded finance solutions. In this way, they can draw on existing expertise and implement services more quickly than they could on their own.

How embedded finance has already been successfully implemented: Using the finleap connect white label solution as an example.

As the leading independent open banking provider in Europe, finleap connect offers embedded finance solutions in cooperation with Solarisbank and has developed a white label solution called “Digital Bank”. Two example cases for a successful implementation of embedded finance:

#1 Real Estate Market: Engel & Völkers Smart Money

The financial institution Engel & Völkers Smart Money offers a holistic wealth platform that combines banking with real estate. Engel & Völkers hereby provide banking services especially for real estate owners and investors. For this purpose, Engel & Völkers uses the white label solution developed by finleap connect. Engel & Völkers Smart Money is thus the first provider to focus its offering specifically on the customer needs of real estate owners and investors. Engel & Völkers Smart Money offers a free checking account and Visa debit card in cooperation with Solarisbank. The front end, including modern banking functions such as multibanking and Apple Pay, is provided by finleap connect.

#2 Traditional house bank: Volksbank Bad Salzungen Schmalkalden eG

In this case, the white label solution from finleap connect is used by a traditional representative of the financial sector: Volksbank Bad Salzungen Schmalkalden eG, which belongs to the Volksbanken Raiffeisenbanken.

Volksbank Bad Salzungen Schmalkalden eG has developed the “VR Perfekt Fankarte” in cooperation with Solarisbank and finleap connect. The “Decoupled Debit” product is offered by Solarisbank in the form of a soccer fan card, with the aim of strengthening fans’ ties to the club.

Embedded finance must become the standard

To best position themselves for the future, financial institutions and brands need to target opportunities for new growth away from their core business. In the area of embedded finance, this requires banks to rethink and adapt to new technical infrastructures. However, the benefits speak for themselves: banks that offer embedded services generate higher revenues. Embedded Finance is a unique opportunity for financial and non-financial service providers to gain a foothold in all markets and reach new audiences. To participate in this growth potential, platforms and systems are needed that are easy to set up and operate.

Solutions must fit seamlessly into existing customer ecosystems. To gain an edge today, financial institutions and non-financial companies need strong and established partners with banking solutions. You need partners with a proven track record and the necessary expertise in software development and payment processing. Even in the medium term, there will be no way around embedded finance.

About the author:

Katja Hunstock is an expert in open banking, embedded finance and internationalization strategies for financial products. She got her start at finleap connect as one of the first employees in the Madrid office. She has been Chief Product Officer of finleap connect since August 2021 and is responsible for defining and leading the product strategy and vision as well as controlling the company’s entire product portfolio.

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