Embedded Finance is generally defined as the integration of financial products and services into the customer journeys of non-financial third parties. Embedded Finance has grown steadily in Germany over the past five years and reached a significant degree of maturity and prevalence in areas such as business-to-consumer (B2C) payments, lending, and insurance. Current growth areas are Embedded Finance offers in the business-to-business (B2B) space, innovative payment applications, and sector-specific solutions. As the Embedded Finance ecosystem in Germany evolves, banks have started to regard Embedded Finance as a strategic initiative for fostering innovation and retaining their relevance and visibility at the customer interface. New strategic partnerships and business models are emerging within Germany and Europe, which will be essential in the face of future regulations such as the Financial Data Access Regulation (FIDA), the increasing competition by large international players such as bigtechs, and the growing potential of artificial intelligence (AI) to fundamentally impact customer journeys and interfaces.
Four key trends have accelerated the shift towards Embedded Finance in Germany over the past years:
Changing customer behaviours and expectations regarding digital customer experiences;
Open Finance regulation;
The increasing emergence and popularity of new competitors;
Technological developments like connectivity via APIs and AI.
Customers interact increasingly via digital and mobile channels, and their expectations regarding digital customer experiences have been significantly influenced by highly customer-centric players such as bigtechs, lifestyle apps, and large online retailers. At the end of 2023, 82 per cent of Germans shopped online, and the smartphone had become the most important access channel for online shopping, with about two-thirds using it as their favourite channel. German customers have also become more open towards alternative payment methods. In 2022, PayPal became the most popular online payment method, with a share of almost 30 per cent, and Apple Pay was the most popular mobile payment method at the physical POS with 40 per cent in 2023.
The adoption of PSD2 has promoted Open Banking by introducing payment initiation services (PIS) and account information services (AIS). As of July 2024, 113 institutions were registered with the Zahlungsdiensteaufsichtsgesetz (ZAG) register of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). Of these, 44 offered a combination of AIS and PIS, often together with other services. Most companies already registered in 2018 and 2019, but some payment subsidiaries of larger corporates like OTTO Payments and Mercedes-Benz Leasing did so in 2022 and 2023. Current payment institutions are a mix of fintechs, subsidiaries of banks and banking associations, and subsidiaries of larger corporates. The proposed FIDA will extend the opening of banks’ infrastructures to other financial products beyond payments, paving the road for further Embedded Finance use cases.
Over the past twenty years, new entrants emerged in the financial services sector. Fintechs, neobanks, and even bigtechs offer financial services based on embedded models. Amazon, for example, offers payments and financing options for customers and merchants as well as a credit card in cooperation with Santander’s Zinia, and Apple and PayPal play leading roles in online and mobile payments. While German customers still primarily trust their own banks, 41 per cent of those over 30 years old and 55 per cent of those under 30 years old could imagine opening a current account with a digital company such as Amazon, Apple, or Google, according to a Bitkom study.
Technological advancements have also paved the road towards Embedded Finance. APIs are the core building blocks in the development of Embedded Finance, and leading German banks have been developing their API portals for the past decade. As of October 2024, Deutsche Bank's API portal, for example, featured 43 APIs. AI also supports the adoption of Embedded Finance use cases. It allows for hyper-personalisation and contextualisation due to advanced real-time data analytics as well as the automation of routine tasks and decisions regarding fraud prevention and credit scoring. A typical application in the context of embedded lending is the automation of creditworthiness assessments within minutes, as implemented by several banks and fintechs.
Embedded payments already display a significant maturity and prevalence in Germany, especially in the digital context. As discussed above, many Germans use alternative or embedded payment solutions while shopping online. Additionally, German retailers such as Lidl and Edeka have launched payments via their proprietary apps, and Rewe is operating cashier-free supermarkets in selected locations. Another payment use case that is becoming popular is pay-per-use. For B2C, typical examples include sharing models in the context of mobility, but even Miele's washing machines can be supplied to tenants using pay-per-use via a Miele app. For B2B, pay-per-use is becoming more popular as well, and examples include energy consumption, raw materials like industrial gases, and general machine usage.
As Embedded Finance blurs the boundaries between financial products, payments and lending tend to be used more closely together. Buy Now, Pay Later (BNPL) has become popular in Germany, with about one-quarter of consumers using BNPL in 2023. Many online shops offer embedded options, either through providers like PayPal and Klarna or in direct cooperation with banks. B2B embedded lending also exhibits significant growth. As small and medium-sized enterprises (SMEs) typically struggle more with obtaining financing than larger corporations due to their lack of extensive credit history and collateral, new embedded lending approaches have emerged in the context of platforms and marketplaces. Companies like Berlin-based fintech Banxware have stepped in to provide business loans to a variety of SMEs via platforms and other aggregators. Lieferando, Germany's largest food delivery platform, belonged to Banxware’s first customers. Similarly, providers of solutions for liquidity and working capital forecasting for SMEs are starting to cooperate with banks and fintechs to provide Embedded Finance. Thus, Embedded Finance fosters the growth of German SMEs, which provide more than 50 per cent of all jobs in Germany. For larger companies, embedded solutions have become available in the form of invoice, supply chain, and trade finance services, such as those offered by SAP Fioneer, which are integrated into the SAP ERP system. True examples of Embedded Finance in areas like investment, accounts, and embedded banking are still rare, except for card offerings using Banking-as-a-Service (BaaS).
As Embedded Finance matures, more sector-specific solutions and strategic partnerships emerge. While embedded payments, lending, and insurance are already well established in the ecommerce, mobility, travel, and hospitality segments, new providers emerge in other sectors like healthcare and real estate. Some retailers like Rewe, OTTO, and Metro have also set up payment subsidiaries that offer services to third parties in their own marketplaces or conglomerates and beyond. Strategic partnerships are also solidifying across different types of players, giving rise to an Embedded Finance ecosystem. Collaboration between banks, fintechs, and other Open Banking and Embedded Finance enablers has become more common. Examples are banks providing liquidity to fintechs, which in turn offer Embedded Finance solutions to third parties. Other examples are fintechs enabling pay-by-bank solutions for merchants.
Additionally, the variety of customer touchpoints is increasing. Thanks to technological developments such as geolocation, cloud computing, sensor technology, and the resulting comprehensive connectivity, almost any device can become an integration point for financial services. One example of the extension of Embedded Finance to new touchpoints is the native in-car payment service Mercedes pay+, through which Mercedes-Benz customers in Germany have been able to pay for digital extra services and at gas stations from their cars using their fingerprints since 2023.While payments, particularly in the B2C sector, have already reached a high degree of maturity, new embedded use cases are continuously developed. One potential emerging innovation is using request-to-pay (RTP) in an embedded context. Solutions in combination with instant payments could include contextual insurance or payment on delivery for shipping high-priced goods in a B2C context. If invoices are integrated into banking apps, as in the pilot of PAYCY and DZ BANK, banks could also strengthen their relevance at the customer interface.
Innovative use cases for Embedded Finance also arise due to large corporates' increasing adoption of distributed ledger technology (DLT) for automating and optimising their supply chains. DLT-based models for pay-per-use, such PayperChain’s solution, started to emerge in the past four years. Additionally, leading German banks such as Deutsche Bank, Commerzbank, DZ BANK, Unicredit, and Helaba completed a proof-of-concept of a Commercial Bank Money Token (CBMT) in the summer of 2024, paving the way for further Embedded Finance use cases for larger corporates leveraging DLT, such as delivery-against-payment, automated payments – potentially in combination with invoice and supply chain finance – as well as machine-to-machine payments.
While German consumers tended to be rather conservative in the past, especially the younger generation has increasingly been influenced by the customer-centric, convenient, and seamless digital experience offered by bigtechs, lifestyle apps, and social media. Embedded Finance allows companies to optimise their customer journeys and experiences while deriving additional data-driven insights, streamlining and automating their own processes, and generating additional revenues from the financial products they integrate. Embedded Finance has become a strategic topic for German fintechs and banks as well. One of the key challenges for the future is to concentrate on use cases with high relevance and benefits for private and corporate customers, improving the customer experience while simultaneously being highly relevant for the integrating company. Especially for SMEs, of which Germany has more than three million, Embedded Finance solutions offer significant advantages and constitute an important future growth area.
Silke Finken is a professor of innovation and a keynote speaker on various topics related to innovation, transformation, emerging trends, failure culture, and strategy for banks and corporations. Previously, she set up and headed the innovation management division for Transaction Banking at DZ BANK and worked as a project leader in Bain & Company’s Financial Service Practice. She often speaks and publishes on fostering innovation in the financial services sector.
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