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Embedded finance: assessing the benefits, use case, challenges and interest over time

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Embedded finance: Who will lead the next payments revolution?

Small businesses starting up today may never interact with a conventional bank. By logging into their e-commerce or accounting platform, they can open a deposit account, order a debit card, and meet most of their financing needs. The operators of these platforms are not usually banks. Rather, they are software companies that partner with banks and technology providers to embed financial products into a single seamless, convenient, and easy-to-use customer experience. This new form of partnership between banks, technology providers, and distributors of financial products via nonfinancial platforms underpins what has been hailed as the embedded-finance revolution. Sitting at the intersection of commerce, banking, and business services, payments has been one of the first use cases of embedded finance, and a large number of the aspiring embedded-finance providers originate from the payments industry.

The value of this integrated experience for customers helps explain why embedded finance reached $20 billion in revenues in the United States alone in 2021, according to McKinsey’s market-sizing model. 1 The model is based on McKinsey’s Global Banking Revenue Pools, 2022; McKinsey’s Global Payments Map, 2022; consumer and merchant research surveys; and data from the reports of embedded-finance firms. According to our estimates, the market could double in size within the next three to five years. Despite the scale of this opportunity, many banks, payments providers, fintechs, investors, software firms, and potential distributors are unsure what embedded finance involves, how they can participate, and what it takes to win—questions we address in this article.

What is embedded finance?

Put simply, embedded finance is the placing of a financial product in a nonfinancial customer experience, journey, or platform. In itself, that is nothing new. For decades, nonbanks have offered financial services via private-label credit cards at retail chains, supermarkets, and airlines. Other common forms of embedded finance include sales financing at appliance retailers and auto loans at dealerships. Arrangements like these operate as a channel for the banks behind them to reach end customers.

What makes the next generation of embedded finance so powerful is the integration of financial products into digital interfaces that users interact with daily. Possibilities are varied: customer loyalty apps, digital wallets, accounting software, and shopping-cart platforms, among others. For consumers and businesses using these interfaces, acquiring financial services becomes a natural extension of a nonfinancial experience such as shopping online, scheduling employees to work shifts, or managing inventory. This more deeply embedded form of embedded finance is what has grown so significantly in the US in recent years.

The evolution of embedded finance has been enabled by fundamental changes in commerce, merchant and consumer behavior, and technology. The digitization of commerce and business management has massively expanded opportunities to embed finance in nonfinancial customer experiences. As much as 33 percent of global card spending—50 percent in the US—now takes place online, 2 McKinsey Global Payments Map, 2022. with a large portion of small and midsize companies in the US relying on software solutions for managing their business. 3 McKinsey Merchant Acquiring Survey, 2022. In addition, as digital natives came of age, they expanded the pool of consumers and businesses open to receiving all their financial services via digital platforms. Finally, open-banking innovation, supported by mandates in the European Union and market-led adoption in the US, has helped unlock latent demand by enabling third-party fintech players to access consumers’ banking data and even conduct transactions on their behalf.

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Who distributes embedded finance, and what products do they offer.

Embedded finance is likely to emerge in any environment in which a critical mass of end customers (consumers or businesses) have frequent (often daily) digital interactions with the operator of the digital platform, which we refer to as the “distributor” of embedded finance. For a nonbank company acting as a distributor, embedded finance offers a way to enhance the customer experience and create a new source of revenue without incurring the overhead associated with operating a bank. The types of businesses well placed to offer embedded finance include retailers, business-software firms, online marketplaces, platforms, telecom companies, and original equipment manufacturers (OEMs). All these categories have seen high levels of activity and innovation in embedded finance during the past year or two.

Among embedded-finance distributors and their end customers, demand is already maturing for a range of deposit, payment, issuing, and lending products (Exhibit 1). In addition to these traditional financial products, novel use cases are emerging. For example, embedded-finance distributors are offering prepaid cards to employees as part of earned-wage access programs; giving merchants the option to use their deposit accounts for instant-payments settlement. Some are providing just-in-time funded debit cards for gig economy workers to use when making purchases for members of delivery-service platforms.

The embedded-finance product portfolio is likely to expand further as customer-onboarding and product-servicing processes are gradually digitized and real-time risk analytics and services grow more sophisticated. Risk is likely to remain a constraint on growth, however, as products that require case-by-case assessment, in-person touchpoints, or regulatory waiting periods, such as commercial real estate financing, are less susceptible to end-to-end digitization. Despite these constraints, we estimate that products suitable for offering via embedded finance could account for as much as 50 percent of banking revenue pools. 4 Calculated as revenue pools of lower-risk, highly automatable products that have proven demand and can realistically be embedded, based on McKinsey’s Global Banking Revenue Pools, 2022.

Who are the enablers of embedded finance?

The distributors of embedded finance rely on two sets of providers to manufacture the embedded-finance offering and grant access to it (Exhibit 2):

• Technology providers (fintechs) provide the platform through which distributors can access, customize, and offer embedded-finance products. Some, including Marqeta, provide point solutions for specific categories of financial products, such as card issuing. Others, including Unit, Bond, and Alviere, operate platforms that offer distributors multiple financial products, such as deposits, money movement, and lending.
• Balance sheet providers (licensed or chartered financial institutions) are responsible for manufacturing embedded-finance products, providing risk and compliance services, and offering access to funds for lending and deposit products. Balance sheet providers sometimes partner directly with technology providers to create an integrated embedded-finance offering for distributors. For instance, Stripe is partnering with Goldman Sachs and other banks to offer embedded finance to platforms and third-party marketplaces.

A few banks and fintechs, including Cross River Bank and Banking Circle, fulfill both of these functions. Having built their own technology layer on top of their own balance sheet, they provide embedded finance to distributors such as retailers, business-software providers, marketplaces, and OEMs by themselves, with no need for additional partnerships.

The 2022 McKinsey Global Payments Report

Who is capturing the value.

Not all players benefit equally from the rise of embedded finance. As in banking in general, revenue primarily accrues to risk takers and to the distributors that own the customer relationship. For example, according to McKinsey research, the majority of revenues from embedded-finance lending products (55 percent of $14 billion in the United States in 2021) accrued to the balance sheet provider—the firm bearing the risk of credit default. However, where payments and deposit products were concerned, the distributors who owned the end-customer relationship benefited most. In lending, for instance, they earned $4 billion of the remaining $6 billion revenue pool, equal to 30 percent of total revenues.

These revenue dynamics explain two market trends we have observed. First, many embedded-finance distributors began by offering deposit and payment products before extending their product range to lending products such as credit cards and merchant financing. Deposit and payment products are attractive to distributors not only because they represent substantial revenue pools and promote stickiness, but also because they are a powerful tool for building customer relationships and capturing customer data that can be used to inform underwriting decisions for future higher-margin lending products.

Second, many technology providers are seeking to capture a larger share of embedded-finance revenues by expanding across the value chain. In lending, for instance, they are looking to increase their share of revenues by finding ways to share in the risk, such as offering repurchase agreements for loans originated by balance sheet providers.

What does it take to win in embedded finance?

For embedded-finance providers, success demands clear differentiation in the form of product breadth or depth, or the provision of ancillary program management services.

Options for differentiation

We see three main sources of differentiation for embedded-finance distributors, balance sheet providers, and technology providers:

• Product breadth. Many distributors are adopting a “land and expand” approach to embedded finance. They start by offering payment acceptance or deposits and then extend their product portfolio to lending products or more complex offerings to address customers’ broader financial needs. Some distributors prefer to shape their strategy around a one-stop shop developed with a single trusted technology partner that offers a wide array of products, while others opt to work with several technology providers to avoid overreliance on one partner.
• Product depth. A few technology and balance sheet providers are building deep expertise in specific embedded-finance categories such as issuing, in order to claim outsize market share in these niches. They develop innovative use cases—such as just-in-time fund deposits into cards or crypto-linked payment authorization—as a basis for creating novel financial products for end customers. Over time, however, the demand for integrated financial solutions and the synergies that can be captured across product categories are likely to prompt these providers to protect their flanks with product breadth as well.
• Program management support. Many distributors that are new to embedded finance are understandably concerned about how to build, sell, and service a financial product for end customers. Some of them may see the regulatory and reputational risk attached to financial products, especially lending, as an insurmountable hurdle. To help them overcome the risk, many embedded-finance technology providers are offering sales, servicing, and risk management expertise or are orchestrating other partners providing them. The ability to provide distributors with this kind of program management is likely to be a key source of differentiation in the long run.

Key decisions for embedded-finance market entrants

Although leaders are already emerging, the embedded-finance market still has ample white space for new entrants; we expect it to double in size over the next three to five years. The long-term winners are likely to be those that are already building the table stakes technology, expertise, and relationships needed for a future leadership position. Financial services firms and fintechs looking to stake their claims in the embedded-finance business would be well advised to commit themselves to implementing four initiatives: choosing a strategy, establishing a developer experience, building capabilities to support distributors, and developing support and risk services.

Choose where to compete. For most banks with proprietary distribution, embedded finance represents a significant cannibalization risk. However, banks with limited footprints or localized relationships, such as community banks and regional banks, may see it as an attractive way to expand their revenue base. Some may be comfortable with growing deposits and earning revenues relatively passively, at least early on, but many will look for opportunities to differentiate themselves and boost revenues through more advanced products and support. At the moment, payments-focused technology providers are leading the charge on embedded finance, using their money movement capabilities to attract distributors and then expanding into products that have been the strongholds of banks, such as lending.

Build and enable a modern developer experience. Many banks and legacy financial services infrastructure firms are not yet equipped to externalize their processes and workflows to allow distributors to seamlessly integrate embedded-finance products into their journeys or distribution platforms. Distributors wanting to scale up quickly will need to build a modern developer experience, including the necessary technology to enable it. To do this, they should provide third-party developers with self-service access and well-documented APIs.

Adapt to B2B2C and B2B2B sales motions. Although some financial institutions operate with channel partners, many are accustomed to serving end customers directly. Those using direct channels will need to build a new set of capabilities to support distributors in selling embedded-finance products to their consumer or business customers.

Develop support and risk services. Retailers, manufacturers, telecoms, and other distributors of embedded finance may not have the capabilities to build, sell, and service financial products in a risk-controlled, regulatory-compliant, effective manner, nor will they have the time or appetite to build such capabilities. They will look to balance sheet and technology providers for advice on how best to deploy embedded finance and orchestrate the expertise and tools needed to deliver it in a compliant way. As well as providing advice, the balance sheet and technology providers will need to build a risk management framework that gives them confidence that the distributors they work with are acting within their risk appetite and in a compliant manner.

Winners are already emerging among the financial institutions that manufacture embedded finance. However, tech-savvy banks, fintechs, and payments companies that are willing to invest and partner still have time to claim their share of this fast-growing market.

Andy Dresner and Jonathan Zell are partners in McKinsey’s New York office, Albion Murati is a partner in the Stockholm office, and Brian Pike is an associate partner in the Stamford office.

The authors wish to thank Robert Byrne and Jill Wilder for their contributions to this article.

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Assessing global interest in decentralized finance, embedded finance, open finance, ocean finance and sustainable finance

Asian Journal of Economics and Banking

ISSN : 2615-9821

Article publication date: 15 September 2022

Issue publication date: 6 July 2023

This paper analyzes global interest in Internet information about decentralized finance (DeFi), embedded finance (EmFi), open finance (OpFi), ocean finance (OcFi) and sustainable finance (SuFi) and the relationship among them.

Design/methodology/approach

The paper used a comparative methodology based on regression and correlation analyses to assess global interest in Internet information about DeFi, EmFi, OpFi, OcFi and SuFi.

The findings reveal that global interest in Internet information about EmFi was more popular in Asian and European countries. Global web search for Internet information about OcFi decreased during the financial crisis while global web search for Internet information about OpFi and EmFi increased during financial crisis years. Global web search for Internet information about DeFi, SuFi and EmFi increased during the pandemic years. There is a significant and positive correlation between interest in DeFi, EmFi, OcFi and SuFi. Also, there is a significant and negative correlation between interest in EmFi and interest in OpFi. The regression coefficient matrix shows that OpFi, EmFi, OcFi, DeFi and SuFi are significantly related.

Originality/value

To the best of the author’s knowledge, this is the first paper that analyses the association between interest in DeFi, EmFi, OpFi, OcFi and SuFi. Thus, this study addressed an important knowledge gap in the literature by exploring people’s interest in Internet information about DeFi, EmFi, OpFi, OcFi and SuFi.

• Information technology
• Decentralized finance
• Open finance
• Embedded finance
• Ocean finance
• Sustainable finance

Ozili, P.K. (2023), "Assessing global interest in decentralized finance, embedded finance, open finance, ocean finance and sustainable finance", Asian Journal of Economics and Banking , Vol. 7 No. 2, pp. 197-216. https://doi.org/10.1108/AJEB-03-2022-0029

Emerald Publishing Limited

Copyright © 2022, Peterson K. Ozili

Published in Asian Journal of Economics and Banking . Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

1. Introduction

Modern financial innovations come in many forms such as sustainable finance (SuFi), social finance (SoFi), decentralized finance (DeFi), embedded finance (EmFi), open finance (OpFi), ocean finance (OcFi), circular finance (CiFi), blockchain finance (BoFi) and so on. They exist mainly to increase access to finance for specific activities or projects. Before adopting a new financial innovation, people and organizations will search for information about the new financial innovation. They will search for information on the Internet to gain substantial knowledge or information about the new financial innovation and how it works. They can also conduct research about new financial innovations using Internet information. The outcome of their research can help them reach a decision on whether to adopt or reject the innovation. This means that Internet information about a new financial innovation can play an important role in determining whether a new financial innovation will be adopted or rejected.

The objective of this paper is to analyse global interest in Internet information about DeFi, EmFi, OpFi, OcFi and SuFi, and the interrelationship among them. The paper used global web search data from Google Trends database to measure global interest in Internet information about DeFi, EmFi, OpFi, SuFi and OcFi. DeFi refers to an ecosystem of financial applications that are developed on top of blockchain and distributed ledger systems ( Popescu, 2020 ). DeFi uses decentralized networks and open source software to create or transform old financial products into trustworthy and transparent protocols that run without intermediaries ( Popescu, 2020 ). DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable and transparent way ( Schär, 2021 ).

EmFi is the integration of financial services into the customer offerings of non-financial institutions ( Kore Fusion, 2021 ). EmFi allows the delivery of financial services directly into the websites, mobile applications and business processes of non-financial organizations ( Oracle, 2021 ). EmFi allows financial companies to incorporate financial services into their payments journey. Embedded financial services are offered to customers through easy-to-use application programming interface (API) integrations that are modular by design and allow brands to easily incorporate them into their existing payments technology stack ( PPS, 2021 ). OpFi allows data sharing and third-party access to a wide range of financial services and products ( FCA, 2019 ). The aim of OpFi is to open up more data about people’s finances in order to give consumers greater control over their data and give consumers the power to make better financial decisions ( Finlab, 2021 ). OpFi provides a framework that allows consumers and enterprises to access and share financial data with third-party providers who can use the shared data to develop innovative products and services with consent ( Mothibi et al. , 2020 ).

OcFi refers to all financial services and financial instruments that are used to raise funds that will be channelled towards improving the health of marine ecosystems or to address existing problems in marine or ocean life ( Sumaila et al. , 2021 ). SuFi refers to financial product and service offerings that take into account the pertinent environmental, social and governance (ESG) factors when making financing and investment decisions in the financial sector ( Schumacher et al. , 2020 ; Ozili, 2022c ).

Many studies have examined the effect of financial innovation on welfare (e.g. Allen, 2012 ; Mullineux, 2010 ; Farzin et al. , 2021 ); the effect of financial innovation on the economy (e.g.  Johnson and Kwak, 2012 ; Laeven et al. , 2015 ; Thottoli, 2022 ); the effect of financial innovation on banking and financial stability (e.g. Norden et al. , 2014 ; Kim et al. , 2013 ); the different types of financial innovation (e.g. Schindler, 2017 ; Zavolokina et al. , 2016 ) and the regulation of innovative financial products and services (e.g. Lumpkin, 2010 ; Kim et al. , 2013 ; Ozili, 2022a ). Yet, existing studies have not analysed global interest in information about specific financial innovations such as global interest in DeFi, EmFi, OpFi, OcFi and SuFi and the interrelationship among them. None of the existing studies have explored the relationship between DeFi, EmFi, OpFi, OcFi and SuFi using “interest over time” data. To the best of my knowledge, this is the first paper to analyse the association between interest in DeFi, EmFi, OpFi, OcFi and SuFi information. Thus, this study addresses an important knowledge gap in the literature by exploring people’s interest in Internet information about DeFi, EmFi, OpFi, OcFi and SuFi. Given this background, the present study investigates the association between global interest in Internet information about DeFi, EmFi, OpFi, OcFi and SuFi.

This study contributes to the literature in two ways: first, the study contributes to the literature that examines the factors that give rise to new financial innovations. The present study shows that interest in information about a specific financial innovation spurs interest in other financial innovations. Second, this study contributes to the literature that examines the determinants of the adoption of financial innovation. This study contributes to this literature by showing that interest in Internet information about DeFi, EmFi, OpFi, OcFi and SuFi is a determinant of whether people will adopt these financial innovations.

The rest of the paper is organized as follows. Section 2 provides the theory and literature review. Section 3 presents the research methodology. Section 4 reports the empirical results. Finally, section 5 concludes the paper.

2. Literature review

2.1 diffusion of innovation theory.

The diffusion of innovation theory developed by E.M. Rogers in 1962 provides a good explanation on how innovation spreads within a population from introduction of the innovation to widespread adoption of the innovation. The theory showed that innovations spread from introduction of the innovation to early adopters, early majority adopters, late majority adopters and to the laggards. Rogers (2010) identified five elements that influence the spread of a new innovation. The five elements are as follows: the innovation itself, the adopters, the communication channels, time and a social system. By communication channels, Rogers refers to the way in which innovations are communicated to different parts of society. Rogers argued that the way in which innovations are communicated to different parts of society is an important factor influencing the early adoption or late adoption of innovations. In this paper, the Internet is considered to be main communication channel through which people learn about specific innovations such as DeFi, EmFi, OpFi, OcFi and SuFi. This study considered web search for Internet information about specific innovations to be a crucial determinant of people’s growing interest or declining interest in specific innovations. I then argue that the early adopters of DeFi, EmFi, OpFi, OcFi and SuFi innovations are people in society who searched for Internet information about these innovations at an early stage. Doing so at an early stage allowed them to understand the benefits and risks of these innovations thereby leading to greater interest in these innovations, and it helped them to reach a decision to embrace DeFi, EmFi, OpFi, SuFi and OcFi at an early stage. In contrast, late adopters did not use the Internet to search for these things; rather, they adopted these innovations because other people have already adopted it.

2.2 Embedded finance literature

Existing studies on EmFi in the literature are practitioner white papers rather than academic papers. For example, Plaid and Accenture (2021) explored the huge opportunity for EmFi in the financial sector. They showed that EmFi can improve customer experience and unlock a huge market opportunity. They also showed that EmFi has the potential to generate US$230 bn in net new revenue by 2025. Plaid and Accenture (2021) suggest four ways through which EmFi can change how financial and nonfinancial companies do business in an era of embedded financial services. They suggest the need to (1) rearrange relationships between financial providers and businesses; (2) create new revenue streams for financial and non-financial companies; (3) create new forms of competition in financial services and other industries and (4) launch new partnerships among financial providers on behalf of businesses and providing them with the know-how to benefit from EmFi without hiring teams of software developers and compliance experts ( Plaid and Accenture, 2021 ). Compton (2021) showed that large-scale EmFi can open the door to major innovation in financial services and can generate revenue of over US$140.8 bn by 2025 only if EmFi is (1) driven by technology, (2) offered and co-developed with third-party companies and (3) leads to a shift from a business to customer (B2C) model to a business to business (B2B) model for Fintech. Compton (2021) further argued that being prepared for EmFi disruption and being open to the opportunities and partnerships that EmFi presents will be vital because of the opportunities it presents for the Fintech ecosystem, the financial services industry and for global clients.

Torrance (2020) argued that by embedding banking and insurance functionality into the business of non-financial services, EmFi allows a business or merchant to integrate low-cost innovative financial services into customer experiences. He argued that there are three key issues that need to be addressed for a successful transformation to EmFi. The issues are (1) leadership understanding and commitment, (2) organisational structure, operating model and skills, and (3) technical capability. In another report, Kore Fusion (2021) showed that EmFi can transform finance and create US$ 7 tn of market value by 2030. They showed that the EmFi transformation will be driven by the shift to e-commerce and the use of APIs and banking as a service (BaaS) providers. They conclude that incumbent players and Fintech providers need to position themselves to partake of the EmFi opportunity and develop their own EmFi strategy. Teboul and Angelos Anastasiou (2021) showed that operationalizing embedded financial services will require deep expertise to manage regulatory, legal and compliance matters; and it demands significant technology investment, specialized skills to operate the services at scale and will also require high cost for businesses that want to offer embedded financial services to their customers.

2.3 Decentralized finance (DeFi) literature

Several studies in the literature such as Ozcan (2021) , Katona (2021) , Chohan (2021) , Ozili (2022b) and Schär (2021) showed that there is widespread interest in DeFi because of its potential to eliminate traditional financial intermediaries, improve access to financial services, increase financial inclusion, increase transaction speed, improve flexibility in smart contracts, increase privacy and transparency, enhance security, increase trust and increase efficiency in the form of reduction in overhead costs for banks. Yavin and Reardon (2021) showed that DeFi can revolutionize modern finance by making banking more accessible and more flexible in society. Yavin and Reardon (2021) then advise banks to use DeFi solutions to improve their own banking product and services offerings. Meegan and Koens (2010) argued that DeFi is a new paradigm which allows decentralized financial services to be offered on the blockchain. They showed that although DeFi has numerous benefits, it also poses serious risks. Meegan and Koens (2010) opposed the idea of replacing CeFi services with DeFi services. Rather, they argued that there is a need for DeFi and CeFi to cooperate and coexist in the same financial system so that customers can enjoy the benefits of the two systems.

Some studies have assessed the challenges of DeFi. For instance, Zetzsche et al. (2020) criticized DeFi and argued that DeFi has the potential to undermine traditional forms of accountability and erode the effectiveness of traditional financial regulation and enforcement. Zetzsche et al. (2020) stressed the need for the regulation of DeFi through “embedded regulation” which allows regulation to be in-built in the design of DeFi. Chen and Bellavitis (2020) showed that DeFi may reshape the structure of modern finance and create a new landscape for entrepreneurship and innovation and could give rise to decentralized business models. Chen and Bellavitis (2020) showed that although DeFi could make the financial system more decentralized, DeFi still has to overcome a number of challenges to achieve its full potential. Chohan (2021) showed that DeFi prioritizes disintermediation and decentralization to empower individuals along crypto-anarchist principles. Chohan (2021) further showed that DeFi is often mired in many difficulties including market manipulation, distortionary incentives, excess short-termism, Ponzi schemes and money-laundering challenges that significantly hinder the widespread adoption of DeFi.

Schär (2021) showed that DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable and transparent way. However, Schär (2021) stressed that DeFi is still a small niche market with specific risks even though it has the potential to improve efficiency, transparency, accessibility and composability. Katona (2021) argued that although DeFi has the potential to provide financial services with an open, transparent and robust infrastructure, a great deal of effort is required for the development of the DeFi sector and the effective management of emerging risks associated with DeFi. Ozcan (2021) showed that although DeFi has promising benefits, DeFi markets in their current state are not technologically able to provide financial services on a global scale and at the scale that centralized finance (CeFi) provides. Ozcan (2021) then called for improved DeFi technology and sound regulation to increase DeFi acceptance. Johnson (2020) argued that although there are many crypto-enthusiasts who support and advocate for DeFi, many crypto trading platforms often turn to traditional financial service firms to receive help and support when their own crypto trading platforms fail, thereby showing that these DeFi platforms have not lived up to their promise of decentralizing financial services since they still seek help from traditional financial institutions.

2.4 Open finance literature

Existing studies on OpFi in the literature are mostly practitioner white papers rather than academic papers. For instance, Equinix (2020) argued that OpFi can lead to a shift in the entire banking process and can usher in an era of open collaboration across the digital ecosystem, and it can also lead to an increase in the demand for exchange of private data between businesses. Khan and Eroglu (2020) argued that OpFi creates an umbrella that takes products and services and connects them across a shared framework. They further argued that OpFi can eliminate the data fragmentation problem in the traditional financial system by providing a secure and efficient means for customers to allow businesses to share and use customer data across a common framework, and this will lead to increase in new competitors and will encourage innovation ( Khan and Eroglu, 2020 ). Mothibi et al. (2020) showed that OpFi is enabled by specific technologies such as open API, cloud computing, big data and artificial intelligence. Many applications of OpFi can be found in payments, account aggregation, insurance, alternative lending and in financial management. Mothibi et al. (2020) also argued that the three main parties involved in an OpFi ecosystem are (1) existing financial institutions that collect and store customer data, (2) the third parties that collect customer data from financial institutions using APIs to offer value-added services to customers and (3) the customers whose information are collected and stored. In their research analysis, they showed that screen scraping and API technologies are the main technologies that are used to facilitate OpFi. However, they stressed that issues such as data privacy issues and cybersecurity issues will remain in the absence of effective and meaningful regulation.

Hope (2021) showed that open banking will transform into OpFi, and OpFi will become integrated into digital ecosystems or platforms thereby blurring industry boundaries towards creating an open data economy. This means that banks need to re-think their business models in order to provide compelling new propositions to their customers in order to stay relevant in an industry served by a complex web of players in the open data ecosystem. Mercer and Hallas (2021) showed that although the UK has adopted open banking, some identified issues in the UK OpFi model are (1) the lack of collaboration between customers, regulators and third parties, (2) the imposition of a 90-day re-authentication rule and (3) the lack of regulation for digital data sharing right. They then suggest some steps to address these issues. They suggest (1) the creation of a new data sharing right legislation, (2) the removal of the 90-day re-authentication rule, (3) the introduction of technologically-neutral regulation or principles-based smart regulation to govern the move towards OpFi and (4) the creation of a better governance architecture that incorporates better collaboration between regulators, financial institutions, third-party agents and customers. Woodhurst (2020) argued that the number of individuals and small businesses that have used open banking products or services has more than doubled in 2020. Woodhurst (2020) then suggests ways that the finance industry can lay the foundation for OpFi. Woodhurst (2020) suggests that there should be (1) a consistent approach to contextualised data sharing, (2) greater focus should be placed on value exchange to drive awareness and consumer education, (3) financial institutions should embrace further regulation as an opportunity and business enabler, (4) financial institutions should appreciate the compelling business case for change and (5) financial institutions should embrace digitization as a step to OpFi. Arner et al. (2021) argued that the future of data sharing under an OpFi framework can lead to two extremes: the first case is a situation where data will be controlled by a small number of massive firms and governments who will use it for profit, suppression and control purposes while the second case is a situation where data will be under the control of individuals which should support a more open and innovative economy and society.

2.5 Ocean finance

Walsh (2018) defined OcFi as effective investment of financial capital to produce sustained ocean governance. Walsh (2018) suggested four actions that are necessary for effective OcFi. They are (1) generate public and private financial capital through traditional and innovative finance mechanisms to create a diversified portfolio of revenue that supports ocean health; (2) invest financial capital effectively, efficiently and strategically to achieve measurable ocean outcomes and sustained ocean governance; (3) account for how financial capital is deployed against performance benchmarks and account for values of marine ecosystem services through time and (4) align public and private economic incentives with long-term ocean health.

Regarding the aim of OcFi, the European commission states that the aim of OcFi is to build an international coalition of financial institutions that endorse the sustainable blue economy finance principles on a voluntary basis, applying the principles to their investment decisions thereby showing their support for healthy oceans and for the development of a sustainable blue economy. Pereira and Nogueira (2021) argued that the transition to the blue (or ocean) economy requires funding contributions which is known as OcFi. They also argued that despite global efforts to develop principles to motivate investors to support projects suitable for a blue economy perspective, the OcFi project still has a long journey towards establishing a relevant OcFi arrangement towards a sustainable use of the oceans. UNDP (2022) argued that financial institutions can play a critical role in embedding social equity across ocean-linked sectors through their investment, financing and underwriting decisions.

Wabnitz and Blasiak (2019) argued that a major challenge for ocean financing is the difficulty in securing adequate financial resources to achieve the sustainable ocean economy goals, and it will be difficult to obtain a funding mechanism that go beyond traditional official development assistance and philanthropy. Sumaila et al. (2021) identified some barriers to financing a sustainable ocean economy. The barriers are (1) the gaps in understanding how the ocean economy contributes to the wider global economy; (2) the lack of universally adopted definitions, standards and taxonomy on what counts as a sustainable ocean economy investment and (3) market distortions. They argued that each of these barriers inhibit financing for a sustainable ocean economy and jeopardizes the future of biodiversity and ocean-based economic opportunities. Shiiba et al. (2022) propose a solution to these challenges which is to develop connections between all stakeholders to illustrate potential incentives for increasing private investment and public donations. This can be achieved through a regulatory-driven financing mechanism that incorporates the core concepts of blue finance in the context of marine governance both at the international and domestic levels. Notwithstanding, Thiele (2020) argued that convincing private sector investors and multilateral financing that blue infrastructure finance is not only possible and desirable but that it is both feasible and financially attractive is critical to achieve a just transition to sustainability. Rustomjee (2016) showed that small developing states have had limited success and are at the very earliest stages of mobilizing and securing finance and investment for the blue economy with most resources typically confined to established areas rather than new blue growth sectors. The author also points out that there are many challenges in scaling up finance and attracting investments in a wider range of blue growth sectors in small states. The author then argued that there is a need to (1) develop an enabling environment to attract investment, (2) improve information sharing among small states and (3) gain the support of international development partners and new partnerships to leverage blue investments in order to overcome these challenges.

2.6 Sustainable finance

Schumacher et al. (2020) defined SuFi as financial product and service offerings that take into account the pertinent ESG factors when making financing and investment decisions in the financial sector. Schoenmaker (2017b) argued that traditional finance focuses solely on financial return and risk while SuFi considers financial, social and environmental returns and is aimed at long-term value creation for the wider community. He argued that the major obstacles to SuFi are short-termism and insufficient private efforts. Fatemi and Fooladi (2013) argued that the traditional finance approach to shareholder wealth maximization is no longer a valid guide to the creation of sustainable wealth because of its emphasis on short-term results which has had the unintended consequence of forcing many firms to externalize their social and environmental costs. They also argued that an unwavering faith in markets’ ability to efficiently uncover long-term value implications of short-term results has created many unacceptable outcomes.

Sandberg (2018) argued that financial institutions should contribute to sustainable financing as part of their social responsibility to society. Kemfert and Schmalz (2019) suggest the need to develop a framework that encourages private financial market players towards sustainability. Pimentel and Ramírez (2021) emphasized the need to create concrete laws and regulations that incentivize actors in the financial markets to redirect funds from non-sustainable investments to sustainable alternatives. Fullwiler (2016) showed that the four important trends contributing to the growth of SuFi are blended-value investing; recognition that sustainability factors can be related to systematic risk; financial innovation to increase sustainability and building infrastructure for SuFi. Hong et al. (2021) state that the financial sector is being pressured to help keep global temperatures within 1.5 °C above pre-industrial levels. They show that governments and activists are pressuring financial institutions to ensure that a fraction of their portfolios are restricted to hold firms that can meet net-zero emissions targets by 2050. Schoenmaker (2017a) showed that financial institutions have started to avoid unsustainable companies from a risk perspective, and the frontrunners of sustainable financing are now increasingly investing in sustainable companies and projects to create long-term value for the wider community. However, the major obstacles to SuFi are short-termism and insufficient private efforts.

Migliorelli (2021) observed that the SuFi landscape is dominated by an overabundance of heterogeneous concepts, definitions, industry and policy standards. The author argued that such heterogeneity may hinder the smooth development of the conceptual thinking underpinning SuFi and it could give rise to specific risks that may harm the credibility of the SuFi agenda. These risks include green and sustainable washing, the rebranding of financial flows and the disordered adjustment in the cost of capital spreads between industries. Ziolo et al. (2021) examined the link between SuFi and SDGs. They analysed European countries in the Organisation for Economic Co-operation and Development (OECD) and argued that the SuFi model plays a fundamental role in implementing SDGs and ensuring that social and environmental sustainability are reflected in SDGs. They find that the more sustainable the finance model, the better the achievement of SDGs in the group of analysed countries. They also found a strong link between SuFi model and social sustainability (SDG 1, 3, 4, 5, 10 and 16); environmental sustainability (SDG 11, 12, 13 and 15) and economic sustainability (SDG 8, 9 and 17). Meanwhile, formulates theories of SuFi, namely, the priority theory of SuFi, the resource theory of SuFi, the peer emulation theory of SuFi, the life span theory of SuFi, the positive signalling theory of SuFi and the system disruption theory of SuFi. Ozili (2022c) argue that these theories offer believable explanations for the behaviour and actions of economic agents towards SuFi.

3. Research methodology

3.1 the data.

Monthly data were extracted from Google Trends database. Data were extracted for five variables, namely, “interest in decentralized finance” data, the “interest in embedded finance” data, “interest in sustainable finance” data, “interest in ocean finance” and the “interest in open finance” data. These five variables were selected because recent studies show that DeFi, EmFi, OpFi, OcFi and SuFi are the future of finance and are also considered to the main disruptors of modern finance (see, for example, Woodhurst (2020) , Arner et al. (2021) , Schär (2021) , Ozcan (2021) , Compton (2021) , Torrance (2020) , etc.). The sample period is from January 2004 to January 2022 while the country coverage is global.

The data obtained from Google Trends database measures interest over time (or the popularity) of specific web-search keywords on the Internet. The data reflect the number of times people searched for specific keywords in a location or a time period. To obtain the data, I simply query the Google Trends database by inserting the keywords “decentralized finance” into the search box in the Google Trends database. The resulting data are what I refer to as “interest in decentralized finance” data. This procedure is repeated for the “embedded finance”, “open finance”, “ocean finance” and “sustainable finance” keywords. The data output from the database are numbers (or popularity count) ranging from 0 to 100. These numbers represent interest in a keyword relative to the highest point on the scale for the given location, region and time. The numbers capture the relative popularity of a keyword. A count of less than 50 indicates that interest in the keyword was relatively low. A count of 50 means that interest in the keyword is half as popular. A count of 100 means that interest in the keyword was highly popular and reached the peak popularity for the term. A score of 0 means there was not enough data for the term.

4.1 Country interest over time: graphical analysis

4.1.1 interest in embedded finance (emfi).

Figure 1 presents the data for global web search for information about EmFi. Figure 1 shows that some Asian and European countries recorded the highest web search for information about EmFi during the period. The countries include Singapore, India, United Kingdom (UK), the USA, Germany and Japan. Interest in web information about EmFi exceeded the 50-point mark in Singapore. This indicates that EmFi was relatively more popular in Singapore during the period. This implies that web search for information about EmFi was greater in Singapore than in any other country in the world during the period. The high interest in Internet information about EmFi in Singapore was due to increase in the demand for embedded financial services in Singapore. Singapore has one of the fastest growing markets for embedded financial services in the world. As a result, a lot of people in Singapore are seeking to gain more online information about embedded financial services. People want to learn about how embedded financial services can improve their lives and how it can help to grow their business. In contrast, there is average interest in Internet information about EmFi in the USA, the UK and Germany because people in these countries have easy access to offline information about EmFi, and this information can be found in physical workshops, seminars and short courses about EmFi, which are often cheap and affordable in these countries. Since people in these countries can easily access offline information about EmFi, there is not much incentive for people in these countries to rely heavily on the Internet to gain information about EmFi. Meanwhile, interest in EmFi is very low in Brazil. The reason for this is the general lack of interest in EmFi among the population.

4.1.2 Interest in decentralized finance (DeFi)

Figure 2 presents the data for global web search for information about DeFi. Figure 2 shows that global interest in web information about DeFi exceeded the 50-point mark in St Helena, Singapore, Hong Kong and Nigeria. Interest in DeFi was relatively more popular in Nigeria during the period. This implies that web search for information about DeFi was greater in Nigeria than in any other country in the world during the period. The high interest in Internet information about DeFi in developing countries, such as Thailand, Philippines, St Helena and Nigeria, is due to the growing need to gain more information about DeFi-enabled blockchain financial innovations such as cryptocurrency, bitcoins and stablecoins. A lot of people in these developing countries want to hold their wealth in cryptocurrencies – mostly as an investment asset rather than as a currency – to mitigate the decline in their personal wealth caused by the decline in the value of fiat paper currency. As a result, people in these developing countries are seeking more information about cryptocurrencies and related DeFi-enabled financial innovations to help them preserve their wealth especially during economic crisis. In the case of developed countries like the USA, there is average interest in Internet information about DeFi because information about DeFi is easily available offline. There are many physical workshops, seminars and short courses about DeFi which are cheap and affordable. People in these countries can easily access offline information about DeFi, and this partly explains why interest in Internet information about DeFi is not very strong in developed countries such as the USA. In contrast, people in many developing countries cannot easily access offline information about DeFi; therefore, they have to rely mostly on the Internet to gain information about DeFi. This explains the reason for the high interest in Internet information about DeFi in some developing countries. However, interest in DeFi is very low in some countries such as Brazil, Russia and Japan as shown in Figure 2 . The reason for this is the general lack of interest in DeFi among the population due to trust in the existing centralized financial system which has its roots in centralized finance (CeFi).

4.1.3 Interest in open finance (OpFi)

Figure 3 presents the data for global web search for information about OpFi. Figure 3 shows that interest in web information about OpFi exceeded the 50-point mark in Poland. This implies that web search for information about OpFi was greater in Poland than in any other country in the world during the period. Other countries that recorded some level of interest in OpFi are Hong Kong, Singapore, Sri Lanka, UK and St Helena. The high interest in Internet or web information about OpFi in Poland, St. Helena and the UK is due to increase in the demand for open financial services in these countries. For instance, the UK has a thriving OpFi industry where APIs are used to access financial services or banking services remotely. As a result, a lot of people in the UK and Poland are seeking to gain more online information about OpFi and open banking to learn about how OpFi, or open banking, can improve their lives and how it can help to grow their business. In contrast, there is low interest in Internet information about OpFi in countries such as South Korea and Israel due to a general lack of interest in OpFi among the population in these countries. There is also zero-interest in Internet information about OpFi in countries like Turkey, Russia and Japan.

4.1.4 Interest in ocean finance (OcFi)

Figure 4 presents the data for global web search for information about OcFi. Figure 4 shows that interest in web information about OcFi exceeded the 50-point mark only in the UK. This implies that web search for information about OcFi was greater in the UK than in any other country in the world during the period. Other countries that recorded some level of interest in OcFi are South Africa, the USA and Australia. The high interest in Internet information about OcFi in the UK is due to the growing interest on the need to protect ocean life in the UK. In the last decade, the UK launched a campaign to protect ocean life by ensuring the reduction in plastic waste in the ocean, avoiding ocean-harming products and by voting on ocean issues. In contrast, there is zero interest in OcFi in many countries as shown in Figure 4 . The low interest is due to a general lack of interest in protecting and preserving ocean life in these countries.

4.1.5 Interest in sustainable finance (SuFi)

Figure 5 presents the data for global web search for information about SuFi. Figure 5 shows that interest in web information about SuFi exceeded the 50-point mark in Luxembourg and St Helena. This implies that web search for information about SuFi was greater in Luxembourg and St Helena than in any other country in the world during the period. Other countries that recorded some level of interest in SuFi are Hong Kong, Singapore and Switzerland. The high interest in Internet information about SuFi in Luxembourg and St Helena is due to the growing interest in sustainable development in these two countries. In contrast, there is very low interest in Internet information about SuFi in countries like Russia and Turkey. The low interest is due to a general lack of interest in SuFi among the population in these countries.

4.1.6 Relationship between DeFi, EmFi, OcFi, SuFi and OpFi

Figure 6 shows that global web search for information about OpFi increased during the 2007 to 2009 global financial crisis and reached a significant peak in 2010. Afterwards, global web search for information about OpFi declined continuously and fell below the 50-point mark in 2016, 2017 and 2018. Global interest in OcFi decreased during the 2007 to 2009 global financial crisis. Global web search for information about OpFi increased during the first wave of the COVID pandemic and declined in the second wave of the COVID pandemic in 2021. Global web search for information about DeFi was very low in 2017 and 2018 and witnessed a sharp rise during the first wave and second wave of the COVID pandemic in 2020 and 2021. Global web search for information about EmFi grew in 2008 in the middle of the global financial crisis and during the COVID pandemic from 2020 to 2021. Overall, the graph in Figure 6 shows that global web search for information about OpFi and EmFi increased during the financial crisis years while global web search for information about DeFi, SuFi and EmFi increased during the pandemic years.

4.2 Correlation analysis

The Pearson correlation result is reported in Table 1 . The correlation matrix in Table 1 shows that there is a significant positive correlation between global interest in DeFi information and global interest in EmFi information. This indicates that people who were interested in Internet information about DeFi were also interested in Internet information about EmFi. Also, there is a significant negative correlation between global interest in EmFi information and global interest in OpFi information. This indicates that people who were more interested in Internet information about EmFi were less interested in Internet information about OpFi. There is also a significant negative correlation between global interest in OpFi information and global interest in OcFi information. This indicates that people who were more interested in Internet information about OpFi were less interested in Internet information about OcFi. There is also a significant positive correlation between global interest in EmFi information and global interest in OcFi information. This indicates that people who were more interested in Internet information about EmFi were less interested in Internet information about OcFi. There is also a significant positive correlation between global interest in EmFi, OcFi and SuFi information. This indicates that people who were more interested in Internet information about EmFi were less interested in Internet information about SuFi.

4.3 OLS and GMM regression coefficient matrix

The regression coefficient matrix is used to determine the association between EmFi, DeFi, OpFi, SuFi and OcFi as shown in Table 1 . I focus on the coefficient sign and the statistical significance of the coefficient of the variables in the univariate regression models. The purpose of the estimations is to check whether the coefficients of the regression estimations confirm the association in Table 1 above. To do this, I specify a one dependent variable and one independent variable regression model as shown in Table 2 below. The result in Table 2 shows that the coefficients are all positive and statistical significance in all the models. This indicates that OcFi, OpFi, EmFi, SuFi and DeFi are significantly related to each other in the ordinary least square (OLS) estimations in Table 2 . The generalized method of moment (GMM) estimations in Table 3 also report coefficient signs that are positive and some coefficients are statistically significant. From the results in Tables 2 and 3 , it can be seen that interest in EmFi and DeFi, OpFi and DeFi, OpFi and EmFi, OcFi and EmFi, OcFi and OpFi, SuFi and EmFi, and SuFi and OcFi are significantly related.

5. Conclusion

This study analysed global interest in information about DeFi, EmFi, OpFi, OcFi and SuFi, and the causal relationship among them.

The findings revealed that global interest in Internet information about EmFi was more popular in Asian and European countries. Global web search for Internet information about OcFi decreased during the financial crisis. Global web search for Internet information about OpFi and EmFi increased during financial crisis years while global web search for Internet information about DeFi, SuFi and EmFi increased during the pandemic years. There is a significant positive correlation between interest in DeFi, EmFi, OcFi and SuFi. Also, there is a significant negative correlation between interest in EmFi and interest in OpFi. The regression coefficient matrix shows that OpFi, EmFi, OcFi, DeFi and SuFi are significantly related.

The findings from the correlation analysis have implications. First, it indicates that people who were more interested in Internet information about DeFi were also interested in Internet information about EmFi, SuFi and OcFi while people who were more interested in Internet information about EmFi were less interested in Internet information about OpFi. The implication is that there is a need to increase the amount of Internet information about DeFi in order to encourage more people to also learn about EmFi, SuFi and OcFi, thereby making it easier for people to embrace DeFi, EmFi, OcFi and SuFi solutions in their daily lives. Private sector agents and policymakers should use incentives to encourage people to develop interest in Internet information about DeFi, EmFi, OpFi, OcFi and SuFi. Policymakers should also create a policy environment that embraces DeFi innovations as it can lead to greater search for Internet information about DeFi, which can also spur interest in EmFi, SuFi, OpFi and OcFi based on their correlation with one another.

Future studies can extend this study by investigating whether interest in the blockchain is related to interest in DeFi using Internet search data. Future studies can also examine the relationship between interest in DeFi, OpFi, SuFi, OcFi and EmFi in specific country contexts. Future studies can also examine the lag from information search to acceptance of DeFi, OpFi, EmFi, OcFi and SuFi innovations.

Global interest in web information about EmFi (from January 2004 to December 2021)

Global interest in web information about DeFi (from January 2004 to December 2021)

Global interest in web information about OpFi (from January 2004 to December 2021)

Global interest in web information about ocean finance (OcFi) (from January 2004 to December 2021)

Global interest in web information about sustainable finance (SuFi) (from January 2004 to December 2021)

Global interest in web information about EmFi, DeFi, OpFi, OcFi and SuFi (from January 2004 to December 2021)

Pearson correlation between DeFi, EmFi, OpFi, OcFi and SuFi

GMM regression coefficient matrix

Note(s): The GMM instruments are the one-year lag of the dependent variable in each regression model

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What Is Embedded Finance?

Understanding embedded finance, how embedded finance works, examples of embedded finance, embedded finance companies, pros and cons of embedded finance, benefits of embedded finance, drawbacks to embedded finance, the bottom line, embedded finance: everything you need to know.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Embedded finance is the term for integrating banking and other financial services into nonfinancial apps and services. Companies are merging banking, lending, insurance, and investment services with their customer offerings through application programming interfaces (APIs) linked to financial partners.

Embedded finance is, in a sense, nothing new: Buy now, pay later (BNPL) is based on invisible third-party loans given at the point of sale. However, with APIs and smartphones ubiquitous, consumers get their banking services wherever they are, while companies can gain greater loyalty and more revenue streams from their customers.

To help us understand the shift marked by embedded finance, we contacted Joris Hensen, founder and co-lead, and Brigitte Kötting, communications manager at Deutsche Bank's ( DB ) API program. They have published academic work on the practice while helping to lead its use at one of Europe's largest banks. "Embedded finance has great potential to empower 'unbanked,' target groups," even though, they told us via email, noting there still needs to be widescale use cases for this. "Whether it's offering banking services through mobile wallets or providing microfinance options, e.g., within agricultural supply chains—embedded finance can help ... foster [r] economic growth."

Key Takeaways

• Embedded finance is seamlessly offered to customers by firms not usually considered financial companies through their own platforms and ecosystems.
• It includes services like banking, payments, lending, and insurance.
• Technological advances like application programming interfaces (APIs), companies looking to open new profit lines, and changing consumer behavior are driving its growth.
• Embedded finance marks a shift from traditional banking and fintech models, potentially expanding the scope and reach of financial services. This could help reduce the number of those unbanked or otherwise underserved by the financial sector.

Embedded finance puts checking and savings accounts, loans, insurance, debit cards, savings, and investment tools into the platforms of companies that typically don’t deal in finance . This results from partnerships with technology partners and traditional financial institutions.

Inserting financial products or services into nonfinancial company transactions isn’t new. For example, many car companies began offering direct-to-consumer auto loans and financing options decades ago, and store-branded charge cards for department stores and other retailers are as old as mass-market credit services. However, embedded finance has gained prominence, first as a term in the mid- to late 2010s and then through changes in fintech and retailing apps. These include competition from innovative players, evolving customer expectations, the unbundling of traditional banking functions for many, the prominence of APIs and software as a service (SaaS) models, and the pursuit of new market opportunities.

By enabling nonfinancial companies to incorporate financial services directly and seamlessly into their platforms and connect with fintech and banks through APIs, proponents of embedded finance say it’s a significant departure from both the conventional fintech model and traditional banking practices. If so, it would have profound implications for the future of banking and the fintech industry, underscoring a significant shift in how financial services are delivered and experienced. To do that, it would need to be different from the following:

• An app-based analog to car dealers that offer direct-to-consumer loans or sign up customers for third-party financial institutions. Companies have long done this so that customers could cover the costs of new autos or other products, many using branded cards. These transactions might help purchases and keep customer loyalty, but they supplement the primary transactions between a customer and a business.
• It’ll also need to be different from the leveraging of APIs and smartphones by fintech firms to offer more efficient and cost-effective ways for consumers to get credit, transfer money, and invest in the stock market.

The point is captured by thinking of banking and other financial services as offered less by independent entities with separate locations and different apps than as part of one consumer experience. Let’s turn to how it works and some examples to see how embedded finance could be a new phase beyond its predecessors.

Embedded Finance and Privacy Concerns

Platforms with embedded finance gain access to data they can use to personalize each experience. But it could put that data at risk, so when you use these services, treat them with the enhanced online security you would use for banks and other sensitive transactions.

Four fundamental shifts are driving the emergence of embedded finance:

• Shift to ecommerce : The digitalization of commerce has paved the way for embedded finance, as businesses integrate financial services within their digital platforms as part of a single customer experience. Ecommerce merchants offer BNPL financing, branded credit cards, and rewards programs in their checkout flows to boost sales. On-demand platforms like ride-hailing apps and freelance marketplaces also provide digital wallets, payments, and wealth management tools to attract producers and consumers.
• Advances in technological integration : With the rapid development of fintech and APIs, integrating financial services into nonfinancial platforms has become more workable and scalable. Digital onboarding, electronic Know Your Client , and real-time data connections make authenticated transactions prompt and far easier for the customer. APIs enable SaaS and subscription services to incorporate flexible payment options, in-app invoicing, and lines of credit for business users.
• Changes in consumer expectations : Consumers are increasingly comfortable using nontraditional providers for financial services, driven by a desire for convenience and streamlined experiences. The ubiquity of smartphones, fintech apps, ecommerce, and digital banking has helped bring about these changes in attitude.
• Reaching the underserved : Those not served by traditional banks and other financial institutions have been a complex problem. Some argue that embedding finance into everyday transactions could democratize finance and expand access to financial products. Others imagine behavioral economic approaches where embedding insurance options right into, say, a ride-sharing transaction and making other choices easier could help those who may not have the time or knowledge to seek out such services separately.

For Hensen and Kötting, "Embedded finance is [to be] understood as a transformation of the bank as such...This is ultimately where the biggest transformation takes place: the customization of banking services to the needs of a partner or the requirements of a product. In the end, only fundamental flexibilization will support these developments and make it possible to meet upcoming regulatory requirements, such as the EU's planned Open Finance Framework."

Embedded finance, a rapidly evolving practice, is reshaping how businesses integrate financial services into their operations. Here’s an overview of some of the ways that it’s being used.

Embedded Banking

Embedded banking seamlessly integrates banking services into nonfinancial companies’ platforms. For instance, Shopify’s ( SHOP ) Shopify Balance provides business banking and card services within its platform, streamlining financial management for ecommerce businesses. Uber ( UBER ) has also developed an embedded banking ecosystem, offering its drivers instant earnings deposits and specialized debit cards.

Hensen and Kötting walked us through how Deutsche Bank is implementing these practices throughout its services. "Our embedded finance initiative initially focussed on the account opening processes for Deutsche Bank's brands," they said.

Deutsche Bank first standardized its systems across the organization. In their Wealth Management division, they created an investment API that family offices can integrate with their software. For small and medium-sized business customers, they now offer db Smart Access. "With this product, they can easily integrate their business account into their IT landscape," they said. "We have received a lot of valuable feedback and suggestions for new functions that we are working on right now. After all, that is also part of embedded finance: taking feedback into account and learning how we can further expand our portfolio."

Embedded Payments

Embedded payments integrate this process into a platform or app, making transactions more convenient for users. For example, Uber and Lyft ( LYFT ) have simplified the payment process by allowing users to complete transactions within the app and integrating themselves into apps like PayPal and Venmo​. In addition, Housecall Pro has launched business expense cards for home service professionals, offering financial management from their software platform​​.

​Similarly, the Starbucks ( SBUX ) app enables customers to order and pay via their phones while earning reward points​​.

Branded Payment Systems

Companies use branded cards to simplify payments, such as the PayPal ( PYPL ) cash card, which provides immediate access to PayPal account balances. These differ from traditional store-branded charge cards, as they not only earn loyalty rewards but also draw directly from stockpiled balances held via the app. Conversely, Amazon.com ( AMZN ) lets customers use the JPMorgan Chase & Co. ( JPM ) rewards program to pay for purchases on its site.

​These cards often carry the branding of the company and can be used just like regular debit or credit cards for transactions at other companies, offering a more integrated financial experience for users.

Embedded Lending

Embedded lending offers immediate loan options at the point of sale, enhancing the customer’s purchasing power. Popular examples include BNPL services like Klarna and Afterpay , which let consumers split online purchases into smaller monthly payments​.

Embedded Investing

Financial platforms like Robinhood ( HOOD ), Cash App , and Acorns integrate investment services into their apps so that users can buy, sell, and exchange stocks or crypto without a separate investment account or advisor.​

​This approach democratizes and clarifies investing for average consumers by embedding it into platforms they already use for other financial services.

Embedded Insurance

Embedded insurance streamlines the process of purchasing insurance by combining it with the purchase of a product or service. For instance, Tesla ( TSLA ) offers an insurance program that customers can buy when buying a vehicle​.

​Airlines and online travel companies like Expedia ( EXPE ), Booking Holdings ( BKNG ), and Hotels.com also provide travel insurance during the booking process, making it more convenient for customers.

There are three primary categories of companies enabling embedded financial services: technology providers; banking (balance sheet) firms; and embedded finance distributors.

Technology Providers

These firms create the digital infrastructure that connects financial institutions and the companies embedding financial services. Here are the elements of what this takes:

• APIs and cloud platforms that allow for integrating financial tools into external environments. Examples include Synapse and Unit.
• Middleware firms that help manage integration and place core banking infrastructure on the back end. Railsr, Bond, and GreenDot are examples.
• Turnkey “stack” providers that offer embedded finance capabilities through a ready-made suite. Providers of stacks include DriveWealth, Solaris, and Treasury Prime.

By reducing the complexities of embedded finance through APIs and infrastructure, technology providers make it easier for nonfinancial companies without the staff or in-house know-how to offer these services.

Balance Sheet Providers

These regulated, licensed financial institutions originate core banking, credit, and insurance products and provide the underlying balance sheet that enables nonbanks to embed customized financial services. They also offer safekeeping and other banking services on behalf of end users. These include the following:

• Challenger banks that generate assets and liabilities on their balance sheet
• Banking-as-a-service, or open banking providers that rent out regulatory-compliant bank capabilities
• Specialized lenders that originate credit assets for embedding

Balance sheet providers bankroll and assume the risks for the financial products that technology companies then carry out with customized APIs and other tools for their distribution partners.

Embedded Finance Distributors

The following firms integrate financial services into customer offerings for distribution to the following:

Traditional retailers

Retailers embed finance to move beyond simple ecommerce transactions. For example, through its partners, Walmart ( WMT ) offers check cashing, bill pay, credit card, BNPL, and money transfer services in its stores and apps. Home Depot ( HD ) provides consumer credit cards for all its customers and professional credit lines for contractors as part of their purchases.

Software firms

SaaS companies can incorporate tailored financial tools for other businesses. Here are some examples:

• Invoicing, tax, and accounting tools are placed within enterprise resource planning and billing software platforms.
• Cash flow forecasting, payment reconciliation, and virtual cards are made part of expense management apps.
• Easy multipayment functions and flexible billing terms are embedded in project management tools.

Marketplaces and platforms

Transaction hubs for gig workers and digital matching embed access to wages, lending, wallet, and investing tools like these:

• Payment accounts and debit cards for income settlement, like Uber Money
• Microloans and advances against future earnings data for flexible liquidity
• Automated tax withholdings and holistic earnings data analytics dashboards

Telecom companies

Telecoms offer customers mobile financial services such as these:

• Airtime and data advances through prepaid balance overdrafts
• Microloans and nanoinsurance are bundled with mobile money capabilities.
• Fee-based wallet accounts, often with subsidies and discounts

Original equipment manufacturers

Product makers incorporate specialized financing programs into their internet-connected devices:

• Auto companies provide lease financing and insurance bundles with vehicles.
• Electronics makers embed warranty coverage and replacement device insurance as add-ons during product purchases that continue their relationship with the customer.

Behavioral economic advantages

One-step financial shopping

Enhanced security

Streamlines user experience

Cultivates trust and brand loyalty

Increased financial access

Expanding portfolio of services

Behavioral economic pitfalls

Customer overload

Increased need for customer support

Loss of focus

Security and privacy pitfalls

Regulatory compliance

Reliance on third parties

Reputational risk

Trust erosion

In addition to providing new revenue streams and profit possibilities, embedded finance has features that can benefit both the provider and the consumer:

• Behavioral economic advantages : Nudge-like practices championed by behavioral economists aim to push customers toward more beneficial financial decisions. Embedding ways to make better, more informed, or easier choices (like adding insurance for a car) could improve financial decision-making for many.
• Covering more customer needs : Spanning financing, risk coverage, bank accounts, and money transfers lets companies act as a one-stop shop covering many customer financial needs customized to particular services and products.
• Enhancing security : Vetted financial technology partners specializing in payments, lending, and asset management already meet strict regulatory security requirements, reducing the risks that would come with managing everything in-house.
• Improving the user experience : Allowing users to remain within one ecosystem, streamlining identity checks, making payments faster, and getting the customer virtually out the door before they go elsewhere can improve convenience and save time.
• Increasing loyalty and engagement : Becoming the default financial services arm for customers beyond commercial transactions can cultivate trust and brand affinity and increase engagement. Businesses also can benefit from discounts from financial partners on bulk processing, which they can pass on to loyal customers.
• Increasing financial access : Financial services could become more efficient and cost-effective while reaching more people.
• More products to offer : Embedded finance allows retailers, platforms, SaaS firms, and other businesses to expand their portfolio of products to serve customers better in one place. Providing loans, insurance, and payments builds a “stickier” relationship beyond one-off transactions.

For businesses and consumers, there are risks like overextending their reach, integration complexities, changes to the relevant laws and regulations, liability for partners’ actions, data privacy concerns, increasing security vulnerabilities, and turning customers off by monetizing every possible interaction and further extending checkout time with more and more checkboxes and opt-outs if not managed right. Here are some further potential drawbacks:

• Behavioral economic pitfalls : While a benefit could be nudging consumers toward more informed choices—a digital version of replacing high-calorie snacks with healthier choices at the checkout counter—there is the potential for the opposite. As a seamless service, customers could make major financial decisions without even considering the ramifications—or realizing there are any.
• Complexity : Integrating with one or several financial services partners through APIs and ensuring reliable connections and data sharing across different systems open up further technology and operational risks. It expands the attack surface for hackers and could increase the potential for system outages, performance lags, and cyber breaches.
• Customer overload : Trying to build an all-encompassing financial experience across too many domains too fast can overwhelm customers and erode trust if promises on seamlessness are not fulfilled or it simply adds to the sense that a company you trust is now trying to get at your wallet in other ways through opt-outs, checkboxes, and the like just to make a purchase.
• Increased need for customer support : Financial services often require a high level of customer support. Companies new to this space may struggle to provide this, potentially damaging customer relationships.
• Loss of focus : Perhaps the biggest potential downside of embedded finance is simply losing focus. Expanding the value proposition of a company with embedded finance and ancillary services risks diluting the competitive advantages and distracting from what customers found valuable about their offerings to seek out their service in the first place.
• Security and privacy pitfalls : Collecting your users’ financial data for personalized services poses threats if sensitive personal information is compromised through a platform breach. Rigorous safeguards must be maintained across partners, though companies can find themselves the targets of sophisticated hacking operations. There are also emerging privacy regulations restricting the data that is shared among companies.
• Regulatory compliance : By embedding regulated financial activities like lending, payments, and investments, platforms inherit compliance rules for customer identification, data usage, privacy protection, transparency disclosures, equity access, and fair lending, even as a service distributor.
• Reliance on third parties : A company could be putting major contact points with customers largely in the hands of others. Relying on third-party fintechs or banks to provide embedded financial services creates the risk that they fail to deliver them well.
• Reputational risk : If a company’s embedded financial service fails or has a security breach, it could damage its reputation, even if the financial service is a small part of its overall business.
• Trust erosion : Companies might roll out these services with promises of increasing financial access or ease of use that end up feeling to customers less a benefit than a hassle.

What Is the Difference Between Open Banking and Embedded Finance?

Open banking refers specifically to banks providing third-party financial services access to customer data and account functions through APIs. It enables external fintech companies to build applications and services around banking data to deliver more value, convenience, and personalized offerings to account holders. Open banking (also known as banking-as-a-service), therefore, deals with banks opening up regulatory-compliant services and data flows.

Embedded finance focuses on nonbanks integrating financial services using open APIs and infrastructure. So, open banking provides the foundations for embedded finance by enabling regulated back-end financial institutions to distribute capabilities, while embedded finance is about extending financial tools into new distribution channels.

What Is the Difference Between DeFi and Embedded Finance?

Decentralized finance , often shortened to DeFi, aims to use blockchains, smart contracts, and cryptocurrency to make financial systems more open, global, and accessible without the need for central authorities through automated processes. DeFi, therefore, seeks to build alternative financial rails using decentralized technologies, which some proponents think removes intermediaries between a customer and someone else providing services.

Rather than taking away middle parties, embedded finance seeks to embed financial services into nonfinancial contexts via centralized or proprietary technologies like APIs. It essentially enables nonfinancial companies to offer white-labeled financial products from licensed traditional financial institutions.

How Big Is the Embedded Finance Market?

Estimates given can be within a broad range, often with proponents offering numbers that count what would seem like all future financial transactions in the trillions. More solidly, according to Global Market Insights, the market was valued at $58 billion in 2022 and is estimated to register a compound annual growth rate (CAGR) of over 29% until 2032, potentially reaching $730.5 billion by 2032​. Another perspective from Grand View Research estimates the global embedded finance market size to grow at a CAGR of 32.2% through 2030.

Embedded finance could be a significant shift in the financial services landscape, seamlessly integrating financial products and services into nonfinancial environments. This integration allows companies traditionally outside the finance sector to offer banking, lending, insurance, and investment services directly through their platforms. Enabled by the use of APIs from specialized providers, embedded finance not only broadens product portfolios and enhances customer convenience but also opens new revenue streams for businesses. The trend signifies a departure from traditional banking and fintech models, embedding financial services into everyday consumer and business interactions.

As a modern financial phenomenon, embedded finance is driven by the digitalization of commerce, advances in technological integration, and shifts in consumer behavior. Ecommerce, ride-hailing apps, and freelance marketplaces, for example, are embedding wallet, payment, and wealth management tools into their platforms. The rise of APIs and SaaS models has made these integrations feasible and caters to consumers comfortable with nontraditional financial service providers. The implications for the future of banking and fintech are profound, highlighting potentially a major transformation in the delivery and experience of financial services.

Scarlett Sieber and Sophie Guibaud. “ Embedded Finance: When Payments Become an Experience ,” Pages 2–3. John Wiley & Sons, 2022.

Joris Hensen and Brigitte Kötting. “ From Open Banking to Embedded Finance: The Essential Factors for a Successful Digital Transformation .”  Journal of Digital Banking , vol. 6, no. 4 (2022), pp. 308–318.

Peterson K. Ozili, via Emerald Insight. “ Embedded Finance: Assessing the Benefits, Use Cases, Challenges, and Interest Over Time .” Journal of Internet and Digital Economics , Vol. 2, No. 2 (November 2022), Pages 108–123.

PwC. “ Uncovering Value in Embedded Finance: Managing Risks in the Transition to Integrated Financial Services .”

Bain and Company. “ Embedded Finance: What It Takes to Prosper in the New Value Chain .”

Scarlett Sieber and Sophie Guibaud. “ Embedded Finance: When Payments Become an Experience ,” Pages 165–173. John Wiley & Sons, 2022.

Shopify Help Center. “ Shopify Balance .”

GoBank. “ Uber Debit Card Account Updates and GoBank Debit Card Benefits .”

Uber. “ Your Uber Debit Card Will Soon Become a GoBank Debit Card .”

Uber Help. “ Updating a Payment Method on Your Account .”

Lyft Help. “ How to Add or Update Payment Info .”

Housecall Pro. “ Invest in Easy-to-Use Solutions .”

Starbucks Stories. “ How to Pay at Starbucks .”

PayPal. “ PayPal Debit Card .”

Amazon. “ Shop with Points—Chase Ultimate Rewards® .”

Scarlett Sieber and Sophie Guibaud, via Google Books. “ Embedded Finance: When Payments Become an Experience ,” Pages 80–81 and 145. John Wiley & Sons, 2022.

Tesla. “ Tesla Insurance .”

National Association of Insurance Commissioners. “ Center for Insurance Policy and Research: Travel Insurance .”

McKinsey & Company. “ Embedded Finance: Who Will Lead the Next Payments Revolution? ”

Abigail B. Sussman, Hal E. Hershfield, and Oded Netzer, via The University of Chicago Press Journals. “ Consumer Financial Decision Making: Where We’ve Been and Where We’re Going .” Journal of the Association for Consumer Research , Vol. 8, No. 4 (October 2023).

Open Bank Project. “ Open Banking API Platform .”

Open Bank Project. “ Open Banking Compliance .”

Global Market Insights. “ Embedded Finance Market Size—by Finance Type, End Use, Business Model & Forecast, 2023–2032 .”

Grand View Research. “ Embedded Finance Market Size, Share & Trends Analysis Report by Type, by Business Model, by End-Use, by Region, and Segment Forecasts, 2023–2030 .”

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