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Embedded Financial Services: What it takes to prosper in the new value chain

September 13, 2022

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The rise of embedded finance marks a new era, not only for banking transactions but also for how consumers and businesses build and manage relationships with financial services.

Users increasingly prefer the convenience of using payments, lending, insurance, and other financial services embedded in their day-to-day software, rather than accessing standalone services from traditional financial institutions.

Bain Capital and Bain & Company have spent years advising and investing across this ecosystem but found a lack of a quantitative exploration of industry dynamics. To that end, we embarked to quantify the size, growth profile, and economics of the key offerings powering the growth of embedded financial services.

This research is a product of more than 50 interviews with industry practitioners, market experts, and analysts, as well as published data and our collective experience. The scope of the report covers three primary categories: payments services, including both business-to-consumer and business-to-business; lending products, such as buy now, pay later, and business lending; and banking offerings like savings or checking account issuance or credit/debit card provisioning.

We believe that demand for embedded finance will grow because it can improve customer experiences and financial access, along with providing cost- and risk-reduction benefits to companies throughout the value chain. This report explores these benefits and how firms can capture them.


Five Key Takeaways

1. Embedded finance provides a greater value proposition to customers. Customers benefit from contextual, seamless experiences while platforms can unlock new use cases, improve financial access, and reduce costs for their end customers. Plus, the insights generated about those end customers are more readily available, which helps to foster growth.

2. A new value chain which favors platforms. The traditional, bank-driven value chain is shifting to a new ecosystem that requires four important participants: the end customer, platforms that own the customer relationship, software enablers that help meet complex regulatory and technological requirements. and a regulatory services or license provider. Firms can assume multiple roles and models.

Traditionalbankingvalue chain Bank Owns productmanufacturing,supported byinternal services Enables productsfor distribution Distribution in branchor on banking app Bank-brandedfinancial productsoffered to customer Bank Bank Customer Regulated entity Can provide manyservices includingbalance sheet andlicense provisioning,risk, and know-your-customer support Technically supportsdelivery of productsand services to platformsfor distribution Hosts embeddedfinance software,incorporates it intonative customer journey,and owns distribution Visits the platformand transacts viaembedded financialproducts Software and data enabler Platform Customer Embeddedfinancevalue chain

Source: Bain Capital and Bain & Company

3. The market is large and growing. We estimate the US market for platforms and enablers at $21 billion in total revenue across payments, lending, banking and cards. We expect this market to more than double to $47 billion by 2026 The transaction values of embedded finance will also surge from $2.6 trillion to $7 trillion in 2026.

Forecast 2026 US platform and enabler revenues US platform and enabler revenues in 2021 $20B $13B $10B 0 20 40 60 80 100% Consumer payments Business-to-business payments Business lending Transactionrevenue $14B $6B $2B 0 20 40 60 80 100% Consumer payments Business-to-business payments Consumerlending, point-of-sale, andbuy now,pay later Consumerlending, point-of-sale, andbuy now,pay later Business lending Software-as-a-service revenue Software-as-a-servicerevenue Transactionrevenue

Source: Bain Capital and Bain & Company

4. Different sectors and services are developing at different rates. Adoption curves vary, with retail and e-commerce platforms being the major use cases for embedded finance solutions today. We believe payments and lending will continue to be the largest embedded financial services, we expect this dynamic to extend to other financial products in the future, including insurance, tax, accounting, and other services.

Effects of embedded finance Real estate T ravel Nonprofit Entertainment Fitness clubs Food delivery and mobility Retail/e-commerce Embedded services often used by rideshare and deliveryplatforms to pay delivery partners Embedded payments relatively mature because of risk management benefits Use of embedded payments emerging for gaming Va rious services for religious and charity organizations Medical, dental, and veterinary practice management softwareincreasingly embedding financial offerings Nascent; limited examples of embedded finance to date Limited use; potential for growth subject to regulatory barriers (e.g., mortgages) Use of embedded payments common fore-commerce marketplaces Health Phase in embedded finance journey

Source: Bain Capital and Bain & Company

5. Traditional financial services have reached an inflection point. Traditional financial institutions face the threats of shifting economics and adverse selection with this new value chain. They can also tap tremendous growth potential, especially if they identify where to play across specific verticals. Investing in the right capabilities will ultimately lead to opportunities to serve the new value chain in multiple ways.


Supporting the Embedded Finance Ecosystem

Bain Capital is one of the longest-tenured investors in the payments and software spaces. Across our technology platform from seed to scale, we’ve had the privilege of helping software platforms launch and build embedded financial offerings that offer a more seamless UX and access to new customer end markets while reducing costs across the value chain. We’ve also supported enablers – that support the delivery of embedded financial services through platforms – to scale and attain product-market fit.

Platforms

Enablers

This research will help us continue to serve as the capital provider of choice to platforms and enablers, who will require deep technical experience in fintech and software, as well as insight into the dynamic impact the embedded finance ecosystem will have on their business models and growth strategies.