Put simply, embedded finance is the placing of a financial product in a nonfinancial customer experience, journey, or platform.
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Despite the scale of this opportunity, many banks, payments providers, fintechs, investors, software firms, and potential distributors are unsure what embedded finance involves, how they can participate, and what it takes to win-questions we address in this article. According to our estimates, the market could double in size within the next three to five years. 1 The model is based on McKinsey’s Global Banking Revenue Pools, 2022 McKinsey’s Global Payments Map, 2022 consumer and merchant research surveys and data from the reports of embedded-finance firms. The value of this integrated experience for customers helps explain why embedded finance reached $20 billion in revenues in the United States alone in 2021, according to McKinsey’s market-sizing model. Sitting at the intersection of commerce, banking, and business services, payments has been one of the first use cases of embedded finance, and a large number of the aspiring embedded-finance providers originate from the payments industry. This new form of partnership between banks, technology providers, and distributors of financial products via nonfinancial platforms underpins what has been hailed as the embedded-finance revolution. Rather, they are software companies that partner with banks and technology providers to embed financial products into a single seamless, convenient, and easy-to-use customer experience.
The operators of these platforms are not usually banks. By logging into their e-commerce or accounting platform, they can open a deposit account, order a debit card, and meet most of their financing needs.
Small businesses starting up today may never interact with a conventional bank.
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