The value of the embedded finance market will jump 215 per cent to exceed $138 billion by 2026 from $43bn this year, according to a new study by market research company Juniper Research.
Embedded finance occurs when financial services are embedded within non-traditional financial services areas, such as banking services within a ride-sharing app, lending services within a buy-now-pay-later platform, or insurance services within an e-commerce checkout process.
The sector's growth will be driven by the increasing availability of application programming interfaces (APIs) from financial services vendors, Juniper Research said in its whitepaper, titled Why the Future of FinTech is Embedded Finance.
“The easy integration of these APIs will lower the barriers to entry for financial services and create a significant new revenue opportunity for providers of embedded finance,” it said.
Juniper Research identified five distinct segments as the main-use cases for embedded finance. These include embedded payments, embedded lending, embedded investments, embedded insurance and embedded banking.
Revenue from buy-now-pay-later services, which embed lending in the e-commerce checkout process, will account for more than 50 per cent of the embedded finance market in 2026, according to the whitepaper.
The BNPL business model, which allows consumers to make online purchases instantly and pay for them later, is booming, with services such as Sweden's Klarna, the US-based Affirm and Australia's Afterpay offering flexible financing to consumers, according to the 2020 Global Payments Report by payment processing company Worldpay Group.
In the UAE, the concept has also taken hold, with the likes of Postpay, Spotii, Cashew and Tabby all jostling for a slice of the region's burgeoning BNPL market. In May, Australia's Zip, a global BNPL platform, bought out Dubai-based Spotii in a $16.25 million deal.
“Embedded lending at point of sale is a massive opportunity for leaders such as Klarna or Afterpay, but it is also an opportunity for banks,” research author Nick Maynard said.
“As open APIs proliferate, we expect banks to take a significant interest in the market, leveraging their existing user relationships and trusted brands to create compelling propositions.”
In Australia, banks are beginning to recognise the importance of collaborating with BNPL platforms, with Afterpay this week rolling out a staff pilot for its new money-management app Money by Afterpay with Westpac, the country's fourth-biggest lender.
The app, which will provide general financial product advice and distribute basic deposit products and debit cards, will be available to customers in Australia from October this year, Afterpay said in a statement on Tuesday.
The home carousel of the Money app will display customers' BNPL balances, upcoming orders and instalments alongside their daily spending account and savings accounts, and will offer an interest rate of 1 per cent per annum.
Meanwhile, the global market for embedded insurance premiums is estimated to more than double to $10bn in 2026, from $3.8bn this year, the research company said in the report.
“Embedded insurance holds promise as a compelling way to boost the uptake of insurance for high-value products with e-commerce users. By bringing insurance directly into the checkout process and pairing it with the individual high-value item, product insurance becomes a compelling proposition,” Juniper Research said in the report.
Interest from big technology companies such as Facebook, Google and Amazon is a major driver for embedded finance development, it added.
By combining their expertise in user experience with third-party capabilities, big tech can add value and significantly broaden their appeal in a constantly evolving market. They can also diversify revenue streams by offering embedded payments.
“[However], if established financial industry players fail to adapt to embedded finance, or fail to improve their own user experiences to combat the threat of embedded finance, then they will begin to lose substantial market share,” Juniper Research said.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Defined benefit and defined contribution schemes explained
Defined Benefit Plan (DB)
A defined benefit plan is where the benefit is defined by a formula, typically length of service to and salary at date of leaving.
Defined Contribution Plan (DC)
A defined contribution plan is where the benefit depends on the amount of money put into the plan for an employee, and how much investment return is earned on those contributions.
