Bain & Company | Matt Harris, Adam Davis, Blake Adams, and Jeff Tijssen | Sep 12, 2022

A completely new proposition for financial services customers

• Research Overview: We set out to quantify the size, growth profile, and economics of the key offerings powering the rise of embedded finance, focusing on the US market. Consisting of over 50 interviews with industry practitioners, market experts, and analysts, as well as a synthesis of published data, this research also draws on our collective experience working with software platforms, enabling firms, and license and regulatory services providers.

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• The rise of embedded finance marks a new era, not only for banking transactions but also for how consumers and businesses build and manage relationships with financial services more broadly.
  • In 2019, we wrote about the burgeoning movement of fintech from a business model unto itself to a key ingredient in the software platform stack—the “fourth platform.” Customers benefit from contextual, seamless experiences; platforms can unlock new use cases and often use proprietary customer data to improve financial access, while reducing costs for their end customers.
  • We found that embedded finance already accounted for $2.6 trillion, or nearly 5% of total US financial transactions, in 2021, and by 2026 it will exceed $7 trillion, or over 10% of total US transaction value.
  • Demand will grow because the proposition promises to improve customer experiences and financial access, along with providing cost-reduction and risk-reduction benefits to companies throughout the value chain.
• End users increasingly prefer the convenience of using payments, lending, insurance, and other financial services embedded in their day-to-day software, rather than accessing standalone services from traditional financial institutions.
  • Since then, the transition has been swift and unrelenting. Several platform archetypes have emerged, including e-commerce (such as Shopify), food delivery services and rideshare apps (Uber, DoorDash), and wellness (Mindbody). These offerings are supported by an army of well-funded fintech enablers, which help platforms deliver products and services.
• The new value chain favors platforms. The traditional, bank-driven value chain shifts to a new ecosystem that typically requires four main participants:
  • the end customer, platforms that own the customer relationship, software enablers that help meet complex regulatory and technological requirements, and a regulatory services or license provider. Firms can take on multiple roles and models.

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• Different sectors and services are developing at different rates. Adoption curves vary. While payments and lending will continue to be the largest segments of embedded finance, we expect to see growth in insurance, tax, accounting, and other services.
• Traditional financial services have reached an inflection point. Traditional institutions face the threats of shifting economics and adverse selection with this new value chain. Yet they can also tap tremendous growth potential, especially if they identify where to play across specific vertical segments. Investing in the right capabilities will ultimately lead to opportunities to serve the new value chain in multiple ways.

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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada’s Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org