Embedded finance: A new horizon for financial services in the U.S.
The rise of and growth of the embedded finance landscape in the U.S. marks a new era of financial services - not just for financial institutions, but also for end users who have greater access to financial services than ever before.
Embedded finance has transitioned from a niche offering to a staple component in every successful platform’s stack. The likes of e-commerce platforms (eBay, Shopify), food delivery platforms (Uber, DoorDash) and digital banking platforms (Tide) have all embraced integrated financial services to create value-adding experiences for their merchants. End users are now increasingly reliant on payments, lending, insurance, and other financial services being embedded in their day-to-day software rather than through a traditional financial institution.
North America is the world’s largest market for embedded finance - with USA contributing more than 35% of total revenue for the industry.
Embedded finance accounted for nearly 5% of all U.S. financial transactions in 2021. The market is growing at a phenomenal pace, generating $22.5bn in 2020, and forecasted to generate over $230bn in new revenue in 2025.
Ten years ago, this was hard to imagine, but the last decade has seen a swift evolution in Software-as-a-Service solutions. It emerged due to the following reasons:
Traditional financial services were too outdated. Banks and traditional lenders were not able to extend financing to SMEs when and where they needed it - using outdated risk assessment models that locked out many applicants from accessing finance.
Platforms needed a seamless merchant experience because merchant loyalty could only be achieved via value-added services that their competitors could not offer. Hence, integrated embedded finance allowed merchants to access vital financial services within the same ecosystem of their platform.
Embedded finance market is growing quickly and is poised to become a $7 trillion opportunity in transaction value by 2026. With such a promising growth trajectory, it is certain that all forward-looking companies want to establish market share before the industry is saturated with too many players.
Bain Capital’s Embedded Finance Report identifies seven key embedded finance markets in three separate categories:
Payments
- Business-to-Consumer
- Business-to-Business
Banking and Cards
- Account Issuing
- Card Issuing
Lending
- Point-of-Sale Lending
- Buy Now, Pay Later
- Business Lending
Embedded lending: The emerging superstar
Lending represents a relatively small chunk of the embedded finance landscape, but it’s expected to grow more than seven times faster than payments in the next four years. Embedded lending can be defined as the extension of finance to merchants through non-financial institutions, such as e-commerce platforms.
Ultimately, it offers immense value to companies who serve a well-defined customer base and want to elevate their offering to diversify their revenue streams and bring in a new fold of customers.
Which businesses can benefit from embedded finance?
With the diverse range of services SaaS 3.0 enables, embedded finance providers can offer solutions for all kinds of American businesses. Here are examples from some of the biggest U.S. industries:
E-commerce platforms in the United States generated nearly $768bn in sales revenue last year, with more and more business shifting their operations online to adapt to the digital economy. Platform giants like Amazon and Shopify benefit greatly from embedding financial services into their platform as they offer a value-added service to their merchants. Merchants are more likely to stay loyal to their existing platform if financial services are available to them within the same ecosystem, and they witness a boost in sales due to new business financing options.
Commercial banking is a $838.5bn a year industry, and generates a majority of revenue through providing loans to customers and businesses. But regulation, unnecessary complexity, and old-fashioned ways of assessing credit risk can make it difficult for them to lend to many individuals and companies. Embedded finance provides a solution for traditional and challenger banks by making embedded lending an integrated part of their portfolio.
SMEs are the backbone of the American economy. They make up 99.9% of all businesses, and have created 62% of all new jobs in the last two decades - but they often struggle to access the funding they need in order to thrive. Traditional banks are ill-equipped to provide funding to young, digital enterprises without established revenue history or commonly accepted credit markers - but with alternative embedded finance they can supply simple, flexible financing to any business that can use it.
Key players in the embedded finance landscape
Although the North American embedded finance sector is growing rapidly, it’s still fairly small relative to other areas of financial services. As the sector grows, there’s ample room for new providers with improved solutions to enter the market. Here are some of the key U.S. players today:
Amount offers omnichannel solutions for banks, including end-to-end, mobile-first, credit cards, point-of-sale products, and more.
Cross River is a banking software suite offering solutions for banks and financial institutions including loan origination software, Open Banking API for the banking-as-a-service platform, payment solutions, and more. It also provides marketplace lending, savings accounts, and purpose-driven accounts.
Plaid is an open-source API for banking integration. It helps financial institutions to embed services such as personal finances, consumer payments, lending, banking, and business finances. It also helps institutions develop products for other markets such as investments and student loans.
YouLend helps banks and platforms overcome the many obstacles to effectively financing small businesses. Providing full white-label integration, revenue-based embedded finance solutions, and best-in-class infrastructure, YouLend has helped partners fund over 40,000 European businesses to date, and is now launching in the US.
Here’s how U.S. banks and platforms can leverage embedded finance
Banks and platforms in the U.S. have the same problems as their global counterparts. They can see huge demand for financing from the SMEs, but do not have the tools needed to effectively serve them. Embedded finance makes serving the SME market simpler and more beneficial in multiple ways:
Unlock a new revenue stream: Embedded finance allows platforms to adopt effective lending solutions at relatively low cost. White-label products can easily be integrated, providing scalability and a seamless customer journey that will open significant new revenue streams. As the Bain Report suggests, to make the most of this opportunity, platforms will need to choose their partners carefully. That’s why YouLend has created this guide for platform enterprises looking to adopt embedded finance.
Maximize retention: One of the key advantages of embedded finance is simplicity. SMEs operate with limited working capital, and when they need credit, they need it fast. Traditional routes to credit are complex and complicated, but YouLend’s embedded finance solution can see loans approved in minutes rather than weeks. Fully integrated white-label products allow platforms to provide a smooth, branded customer journey from application to approval, maximizing impact and reducing churn.
Provide financial inclusion to SMEs: Many young, digital businesses lack the established credit records that banks typically need to approve loans. That's where revenue-based embedded finance is more valuable than traditional forms of lending, as it can approve loans on the basis of non-traditional metrics such as online customer reviews and social media activity. YouLend’s embedded finance products help platforms serve large segments of the SME market by enabling multiple routes to credit.
Final thoughts
This is an exciting time for financial services in the U.S. as embedded finance solutions are becoming more mainstream. There are enormous opportunities for banks and platforms to serve the more than 30 million SMEs in North America. With end users wanting more flexibility and capital solutions due to the cost-of-living crisis, embedded finance emerges as the ideal solution for all U.S. stakeholders in the value chain.
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