Global Embedded Finance Opportunity
In a nutshell, embedded finance is the integration of financial services/tools within the products or services of a non-financial organisation. By connecting fintechs and banks to their platforms through APIs, non-financial companies can provide services such as insurance, lending and payment solutions to their customers.
One of the key applications of embedded finance is embedded payments, an implementation which greatly simplifies the purchase process; for instance, Uber’s in-app payment allows customers to pay drivers seamlessly (rather than rely on cash payments), bringing a simplicity to ride-hailing services that has been widely adopted by competitors. (1) The future of embedded payments looks bright: payment-as-a-service providers such as Square and Stripe have made it very easy for companies to offer embedded payment options, and 96% of businesses are planning to offer it on their platforms over the next five years. (2)
Open banking (the sharing of data between banks and businesses) has been a key catalyst for the emergence of embedded finance. At the start of 2022, the number of open banking users in the UK surpassed 4.5 million (a 60% increase from Q1, 2021) (4). This uptake has paved the way for much greater transparency of financial data, and encouraged collaboration and partnerships across the ecosystem; embedded finance has built and improved upon these foundations, integrating services within each other to facilitate data sharing between multiple different services.
Tomorrow Cap, through our permanent capital vehicle, is looking to support bold new businesses within emerging markets (LATAM, SEA, Middle East, Africa) who are looking to foster financial inclusivity via embedded finance. We have 2 key areas of focus:
1) Embedded Lending: The integration of credit/financing products, allowing companies such as retailers or marketplaces to access deferred payment facilities at the point of sale without having to go to a bank or other lender. This is commonly known as buy now; pay later (BNPL), in which retailers give customers the option to pay for online purchases via instalments. Thus far, BNPL has primarily focussed on B2C, with major players such Klarna and Afterpay achieving huge success; on the flip side, there is a budding B2B market too, looking to enable businesses to access improved digital credit and remove the need for paperwork/lengthy approval times.
2) Embedded Insurance: The integration of insurance solutions: In the past, a buyer looking to insure a new purchase would have to manually find and compare different insurance packages for their products (a long and cumbersome process). With the advent of embedded insurance, a package can be added at point of purchase, eliminating the effort required to find and compare different options. A typical example of embedded insurance can be found in travel, where travel insurance is offered immediately whenever a train/plane ticket is purchased.
Embedded finance is an incredibly important space that is likely to take the applications and efficacy of fintech to new levels, and it isn’t going away anytime soon - the value of the embedded finance market is expected to exceed $7 trillion over the next 10 years, making it worth double the combined value of the world’s top 30 banks today. (3) These effects are likely to be amplified within emerging markets, with higher unbanked populations and poor financial infrastructure implying a greater susceptibility to technologies which try to solve the big problems.
In summary, the potential of embedded finance is huge; by finding and supporting the best businesses, there is an opportunity to make significant change.
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