The financial industry has undergone significant changes in the past two decades, greatly altering the understanding and tasks within the sector. However, compared to what is on the horizon, these changes were merely a prelude. Embedded finance is the driving force behind this transformation and could potentially cause banks to completely lose their traditional role.
Change is the only constant in the universe, as the Greek philosopher Heraclitus once said. This applies to nearly every economic sector, including the manufacturing industry, which is currently undergoing its fourth revolution: following the steam engine, mass production, and electronics, digitalization has taken center stage. The financial industry, too, is not immune to such changes, even though suitable buzzwords have been lacking. Few have spoken of "Finance 4.0."
Unjustly so, because since the turn of the millennium, our sector has regularly witnessed fundamental changes. After the era of traditional banking, at least two revolutions have followed. And now, another significant change is on the horizon: embedded financial services. This market could potentially reach several hundred billion US dollars in the near future. For customers, this means greater convenience in dealing with financial services, while companies engage in a competition for favorable positions in the new financial world.
The leap to Finance 2.0 occurred around the turn of the millennium. At that time, the primary focus was on simplifying processes by digitizing them. PayPal is a well-known example. Companies, particularly in the payment sector, demonstrated that there was no longer a need for banks to facilitate payments. Online payment became much easier.
The next revolution, known as "unbundling," began around 2013. Fintech companies drove this trend by focusing on specific subsectors where they outperformed the generalists of the traditional financial world. This led to the emergence of neobanks, which focused on current accounts and credit cards, neobrokers that offered stock trading through apps, and financial service providers that facilitated credit transactions for both consumers and businesses. Consumers realized that they were not necessarily dependent on established banks to borrow, manage, or invest money.
These two revolutions did not mark the end of the story but merely laid the groundwork for what is happening now. Embedded financial services already generate around 43 billion US dollars in revenue today. By 2025, this market could grow to 230 billion US dollars, and business consultant Simon Torrance predicts a market value of seven trillion US dollars by 2030. The current boom of "Buy Now, Pay Later" is only the beginning.
At its core, embedded finance means that any company can offer financial services, regardless of a banking license or experience in this field. In practice, this could mean applying for a loan with Amazon when purchasing a television, opening a current account with DM (a retail store), or taking out comprehensive insurance with BMW when buying a car.
The boundaries between the financial industry and other sectors are increasingly blurred. This is made possible by the increased use of APIs, open banking, and the emergence of banking-as-a-service (BaaS).
Unlike previous models, such as the captive finance companies through which Volkswagen or Daimler handle their vehicle leasing business, companies no longer require a banking license to provide such offerings, thanks to BaaS.
Customers benefit from increased convenience. With larger purchases, they can obtain financing directly from the retailer, possibly even in combination with suitable insurance offers, without involving separate providers.
Companies can strengthen customer loyalty and simultaneously increase their revenues. If customers receive a financing offer directly when purchasing a refrigerator, the likelihood of completing the purchase rises. Companies, especially online marketplaces that offer interim financing to their merchants, support them in scaling their business. By leveraging existing customer relationships, the high costs of customer acquisition are eliminated when providing financial services.
Investors have recognized the potential, and venture capital inflows in Europe have doubled compared to 2020. Companies like Rapyd or Mambu have already reached billion-dollar valuations. In the United States, providers such as Shopify Capital, Stripe, and Moov Financial are already established, showcasing the direction the industry could take in other countries.
Embedded finance is driving another revolution in the financial industry. There is a possibility that banks could lose their traditional role as companies from other sectors seamlessly integrate financial services into their offerings. Customers benefit from improved convenience and a wider range of financial services. Companies have the opportunity to strengthen customer loyalty and increase their revenues. Nevertheless, banks and financial institutions will continue to play an important role due to their expertise, experience, and established infrastructure. The future will likely involve a combination of traditional banks, fintech companies, and non-financial companies offering financial services. It remains exciting to observe how the financial industry will continue to evolve and what new opportunities and challenges will arise from it.