Embedded finance and the future of banking

Jul 08, 2021 - 6 min read
Also Available in : Français
Mathias Mercier, Head of Market Intelligence at Sopra Banking Software

In a post-COVID-19 world, consumers expect digital services to be available wherever and whenever they need them. In terms of banking, the focus has shifted from the branch and perhaps even the banking app toward the service itself, and technology is making it possible to move those services ever closer to consumers.

In the last few years, embedded finance—a non-financial company offering financial services direct to consumers—has achieved buzzword status. And with good reason, embedded finance promises stronger customer loyalty, new revenue streams and insight into customers’ payment behavior. Indeed, embedded finance could shape the future of banking, and industry analysts project that companies using this model will reach an estimated market cap of $7 trillion by 2030.

Looking back, looking ahead

Although it seems new, embedded finance has been around for decades. Big box retailers like Walmart have long provided their own closed-loop credit cards. The only difference between then and now is the internet. Given today’s connectivity, it’s possible to offer a fully integrated banking experience at scale—and it’s something more and more companies are doing.

This is a threat to banks’ customer relationships and some of their core products, a fact that is underscored by the high-profile embedded banking success stories of the last year. For instance, Shopify teamed up with Stripe to process $14 billion through embedded payments in 2020. And Uber introduced Instant Pay, which is now used by more than 70 percent of customers.

Behind these market leaders, companies of all types are considering or preparing to launch embedded financial services—making every company a potential fintech company. And beyond that, blockchain-based financial services are also on the horizon, all of which means one thing: banks and insurance companies don’t have the guaranteed seat at the table they once did.


We’re now entering an era where trust has shifted, and according to one survey, more than 60 percent of consumers would use a financial service from an e-commerce provider. Despite the increased competition, there’s an opportunity for banks here as well. In conjunction with PSD2 and open banking, BaaS models have allowed banks to become primary players in embedded finance. Banks provide their license, infrastructure, product expertise and security guarantees, while the partner offers established distribution networks for banks to grow their customer base.

Another method is for banks to flip things around, incorporating financial products from fintech startups into their own platforms. Here opportunities abound. For instance, a recent study highlights some of the most promising use cases, which include subscription management, identity protection, wealth management and cryptocurrency investing.

While this all sounds great, BaaS has its challenges. Making this approach work requires digital flexibility that more than a few banks still lack. But some, like BBVA, have invested in and developed the technological capability to distribute services effectively via APIs. They’ve also got strong risk and compliance management processes in place for their partners, and they’re reaping the benefits.

Other financial institutions have been hesitant to go down the BaaS path due to co-branding and customer relationship concerns. There are some legitimate issues here, but the tide is already moving in this direction, and going against it is likely a mistake. Instead, becoming the engine that allows partners to distribute banking products can be a fixed-cost, high-volume business for banks.

Key considerations

While companies will continue to rely on regulated financial institutions to secure loans and settle transactions, banks’ public-facing role could change as more companies roll out white-labeled services. It’s therefore critical that banks carefully consider what this means going forward. Beyond choosing which model to pursue and assessing whether a bank’s IT infrastructure is prepared to support it, some other key questions include:

  • What advantages do we have compared to the integrated user experiences being created by the world’s major retailers and tech companies?
  • For what products should we extend a BaaS offering? What’s our position on white labeling vs. co-branding?
  • If we choose not to pursue BaaS, how will we retain market share against nimble digital competitors?

The evolution of embedded finance

Embedded finance is allowing non-financial companies to evolve into multi-market sellers or providers. And in doing so, it’s calling into question the position commercial banks have historically held. In some senses, this is a threat, but it’s also an opportunity for those willing to embrace change and adapt accordingly.

Currently, the number of financial institutions with BaaS offerings is a relatively small fraction of the licensed banks in the world. But in the next five years, given the modernization efforts of banks and the expanding demand for products like WhatsApp banking, there will likely be a much bigger and more diverse BaaS landscape.

We may be heading toward a future where BaaS is simply a channel that every bank must have. And in this case, differentiation becomes the challenge. But to reach those second order challenges, banks must adopt a forward-thinking approach. Rather than dig in and play defense, financial institutions can proactively form partnerships with service providers or work to plug more solutions into existing networks. Doing so will allow banks to stay ahead of the curve—reaching untapped corners of the market and maintaining a crucial role in the future of embedded finance.