Embedded finance is revolutionizing how consumers engage with financial services, driven by a desire for simplification and speed. The transition fostered by devices like the iPhone and the proliferation of internet services has created a new expectation: the ability to manage payments and services from a single device.

This paradigm shift has evolved embedded finance from a novel concept to a cornerstone of the digital economy, particularly benefiting startups. Its scope now extends beyond simple payment systems, allowing businesses to innovate their entire models and uncover previously non-existent revenue streams.

Factors Fueling Embedded Finance Adoption

Convenience stands out as the primary driver of growth in embedded finance. Historically, managing financial transactions involved tedious processes, including paperwork and physical visits to banking branches. The digital evolution has fundamentally changed this narrative. Today, consumers expect seamless integration of financial services within their daily-used applications.

Statistics confirm this trend. A report by Bain & Co. forecasts that revenue from embedded finance platforms will soar from $21 billion in 2021 to an anticipated $51 billion by 2026. Furthermore, transaction volumes are expected to reach $7 trillion, constituting 10% of all U.S. financial transactions.

Technological advancements have further accelerated this shift. A decade ago, integrating financial services necessitated substantial IT resources and extended timelines. Nowadays, startups can effortlessly connect with financial platforms through Open APIs within mere days, courtesy of solutions like Stripe and Revolut. This accessibility has significantly reduced operational costs.

Additionally, revenue generation plays a pivotal role. For many non-financial entities, embedded finance serves as both a value-added service and a vital monetization strategy. For instance, Shopify derives nearly half of its revenue from financial services beyond mere subscription fees, illustrating the win-win appeal for startups looking to enhance customer engagement and profitability.

Challenges for Traditional Banks

The evolution towards embedded finance poses challenges for traditional banking institutions. Many continue to operate on outdated legacy systems developed in the 1980s. Transitioning to modern, API-friendly frameworks is fraught with high costs and operational setbacks. The task of migrating extensive databases across large workforces is complex and daunting.

While some top-tier banks are investing billions into Open API technologies, many older institutions are lagging behind. Internal pressures, combined with rigid regulatory environments and growing cybersecurity concerns, hinder agile adaptation. Consequently, several banks still rely on in-person interactions for essential functions, leaving them trailing behind more nimble fintech competitors.

Adapting to Customer Expectations

Today’s consumers demand more than basic banking services; they seek “super apps” that combine an array of financial and non-financial functionalities within a unified platform. Contemporary digital banking options provide users with comprehensive visibility into their finances, real-time insights, and immediate services. In contrast, traditional banking experiences often feel antiquated, as illustrated by lengthy waits for currency conversion rates.

While complete in-house development isn’t necessary, banks must strategically pursue partnerships to curate a cohesive user experience within a single application. Institutions that successfully create integrated marketplaces will likely thrive, while those that do not risk diminishing their market presence and revenue.