Even if the term is not always familiar, “Embedded Finance”—meaning the delivery of financial services, such as loans, insurance, and payments, by non-financial entities—is already routine. Consumers are increasingly open to getting other financial services from a range of providers. In 2023, about 40% of European consumers said they preferred to use online channels for car financing; almost 30 percent said they want to buy their next car entirely online. Small business people, too, see the appeal they can get a bank account from their accounting software.
Banks in particular will need to respond to EF; otherwise, growth and profits are both in jeopardy. Over the last decade, in sectors such as retail lending, EF volumes have grown three times as fast as directly distributed loans. The EF pickings could be rich for incumbent banks, but there are considerable risks involved, such as the loss of direct relationships with consumers and the commoditisation of core products. In response, some are opting to launch “challenger banks” to pursue clients with digital-led, EF-inspired offerings in segments where they are not entrenched. Others are leveraging banking-as-a-service platforms to distribute deposit and lending products through their non-bank distribution channels; this approach requires strong risk and compliance management, either directly or through a fintech intermediary.
Retailers or other consumer platforms will also need to come to terms with EF. For a non-bank company acting as a distributor—a cohort that includes retailers, business-software firms, online marketplaces, platforms, telecom companies, and original equipment manufacturers (OEMs), EF can boost sales and enhance consumer loyalty. How to do that, though, is less clear. In broad terms, two options are emerging.
One is to offer financing options throughout the consumer decision journey. Online marketplaces such as Poland’s Allegro and Britain’s Very have adopted this model. This keeps all the profit potential in-house but requires considerable investment and expertise. The other is to partner with specialised providers, such as ING’s relationship with Amazon to provide loans to small- and medium-sized enterprises. The advantage of this model is that EF partners can improve their combined economics, at lower cost and risk, for example by sharing data to make credit decisions.
As a whole, however, the EF value chain is still new enough to be unsettled, as merchants and financial institutions figure out how to create value. At the same time, the EF portfolio is widening, as digitisation, artificial intelligence, and risk analytics become more user-friendly and sophisticated. Technology providers in particular are using their strengths in these areas to find their footing in the EF market.
While no approach will work for everyone all the time, we believe these principles will apply widely, providing a template for success.
Think in terms of the entire customer journey, not individual touchpoints. Several elements of the customer journey, such as instant decisioning and straight-through processing, are standard today. Leading vendors and platforms go beyond those. They dig deep to understand customer conversion and pain points; constantly improve their solutions; and measure customer responses. Consider the possibilities for airlines. Their first task, of course, is to get passengers from Point A to Point B safely. But they also connect with consumers at the point of sale and spend more than USD 20 billion a year on payment costs. By strategically addressing payments, including EF innovation, the industry could create USD 14 billion in value.
Make Embedded Finance a team sport. EF solutions are best supported by joint teams from the finance provider and the customer owner. Each party can take ownership of part of the journey, from pre- to post purchase, with clear customer engagement rules. Both sides, though, need to see customer satisfaction as a core responsibility. When the parties share their data, the EF provider can make better decisions, such as when granting a loan, and the customer owner can improve conversion rates and marketing with post-purchase payments data. An approach that emphasizes profit-sharing and openness can help both sides create value and sustainable solutions.
By 2030, EF could account for 10 to 15% of banks’ revenues and 20 to 25% of retail and SME lending revenues. So, it’s complicated, with financial and non-financial companies encroaching on each other’s traditional territory. As Diego Caicedo, cofounder and CEO of KLYM, a data-driven lender, put it: “We have more banks playing in more channels, and more products are being fed into the current stream of the banks.”
In addition to the revenues at stake, excellence in EF will likely be a catalyst for operations of all kinds, for example by enhancing digital expertise and consumer connections. In this sense, Embedded Finance is well named. These capabilities are primed to become more and more central to how consumers live—a trend that will shape the future of businesses large and small, and for both incumbents and new entrants.
About the authours
Albion Murati is a partner in McKinsey & Company’s Stockholm office and a leader in McKinsey´s Financial Services and Payments practices.
Oskar Skau is also a partner in Stockholm and leader of McKinsey´s Nordic Financial Services sector.
About McKinsey & Company
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