Embedded finance market projected to exceed $138bn by 2026

Buy-now-pay-later platforms will drive the sector's growth and account for more than 50% of market share, new research finds

FILE PHOTO:    A photo illustration shows the Uber app on a mobile telephone, as it is held up for a posed photograph, in London, Britain November 10, 2017.  REUTERS/Simon Dawson/File Photo

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.

Updated: July 21st 2021, 10:14 AM