Embedded Finance took on a life of its own last year as more platforms and applications began to provide multi-functional products such as Twitter, WeChat, and a whole-host more. 

Vishal Shah, Head of Embedded Finance at SAP Fioneer, writes for Payment Expert to share his embedded finance trends for the year ahead and what observations are likely to happen in this space. 

We’ve seen embedded finance grow tremendously, with McKinsey stating the industry reached $20bn in revenue in the US alone in 2021, and that this is expected to double in the next three to five years. 

Embedded finance integrates financial processes directly into non-financial products to provide the smoothest possible customer journey. By eliminating unnecessary steps, financial elements are only added where the end-user – whether that’s a person, business or even a machine – finds them instinctive. 

We expect 2023 to be an even bigger year for embedded finance as it starts to become more adopted by businesses and we have three predictions for the year ahead that we expect will further accelerate its growth. 

Embedded finance will take off in the B2B space

Embedded finance aims to revolutionise the experience of financial services, focusing on the digitalisation of models that are already being used around the world.  

We predict that Buy Now, Pay Later (BNPL) will see increased adoption across the B2B sector this year, as we see global trade become more digitalised. Companies will start to operate through electronic trade networks, meaning the financial industry will be able to unlock the power of “instant” payments and “just-in-time” credit.

We’re starting to see data and frictionless business processes through embedded finance, and this is the key to delivering next-generation innovation for companies. In the B2B context, Micro, Small & Medium Enterprise (MSME) lending is an area that presents huge opportunities. 

We anticipate businesses leveraging these data-driven innovations and improving their end-user experience with frictionless business processes, addressing the unmet needs of the sector.

Companies will use embedded finance to make more data-driven decisions

Data and its applications are key for embedded finance adoption and have the power to do two things. 

Firstly, respond to changing consumer behaviour and secondly, change consumer behaviour. Utilising data to drive contextual and hyper-personalised services like banking will benefit the end-user immensely. 

Contextualisation will also allow end-users to quickly and efficiently search for the best financial product or service to meet their needs. Additionally, hyper-personalisation will enable financial product features to be tailored to the end user as there is never a one-size-fits-all.

Embedded finance also allows for the addition of contextual data so businesses can check their own financial health. Rather than the usual days and weeks it might traditionally take to access a business’s creditworthiness, they can now instantaneously check the context, such as the volume of orders and how many transactions they’re making per hour. 

Adoption of the ecosystem model will become more mainstream

Currently, there is a lack of awareness and understanding of the embedded finance model and how it is different from the existing model of distributing and consuming financial services. Traditional financial services organisations should start to focus not just on the breadth of their digital channels, but also improve the depth of digital engagement with their clients. 

They can do so by adopting and embracing the ecosystem model and collaborating with innovators, fintechs and technology companies. In doing this, they’ll start focusing on delivering “experience innovation” rather than simply “product innovation”. 

In fact, integrating embedded finance into the financial services ecosystem will be hugely beneficial for all those involved. 

For example, traditional financial institutions, such as banks, would be able to serve their existing clients efficiently and effectively, thereby increasing their share of wallet and reducing costs. Over time, this would also allow them to acquire new clients and enter new markets, driving new revenue streams. 

Fintechs could achieve global scale and accelerate their time to market by partnering with well-known global Software-as-a-Service (SaaS) vendors to embed their propositions and deliver a frictionless experience. Furthermore, MSMEs would be able to grow their business profitably with ease of access to capital and manage their cash flow during uncertain economic times.  

Ultimately, 2023 presents a wealth of embedded finance opportunities for the likes of banks, insurers and fintechs, although it’s whether they choose to adopt and stay relevant where we’ll see them reap the benefits. 

At SAP Fioneer, we offer end-to-end solutions that seamlessly embed financial services within platforms and processes. Our approach is co-innovative with financial services providers to deliver embedded finance experiences that customers will love, but also benefit all participants in the ecosystem.