Will Sowell is divisional president of banking as a service at Pathward, formerly known as MetaBank. He previously held senior roles at Ingo Money and Green Dot Bank.  

With immense benefits for organizations and customers alike, embedded finance — the integration of financial services into non-financial offerings — continues to grow rapidly. The market for embedded finance applications is projected to grow nearly fivefold, from $54.3 billion in 2022 to $248.4 billion by 2032. Additionally, according to new data from national bank Pathward, N.A., 82% of executives planning or considering offering embedded finance predict it will happen in the next two years. As with all new technologies, it’s crucial to understand why businesses are flocking to embedded finance solutions, and what newcomers need to understand to be successful.

What’s driving the growth of embedded finance

Embedded finance has proven itself to be a strategic and worthwhile business decision for executives who have taken the leap to adopt the technology. Pathward found that among the executives who currently offer embedded finance solutions, nearly all see embedded finance as a revenue driver, including 53% who noted it’s a primary driver. 

Given the revenue-driving power of embedded finance, it may come as no surprise that 47% of  business development teams are pushing for implementation within organizations. Leadership and finance are not far behind at 40% and 36%, respectively, while 40% of executives cited faster access to funds as a major benefit of embedded finance. 

Embedded finance also offers enhanced options for companies to collect data. In fact, two out of five senior executives cite the ability to collect more data as a benefit of implementing embedded finance. This, in turn, has piqued the interest of IT departments, with 42% of senior executives saying the IT team is pushing implementation of embedded finance within their organization.

Customer experience is another benefit of embedded finance. Organizations typically pursue embedded finance solutions to simplify the customer experience with faster, frictionless transactions. This digital relationship delivered through a streamlined payments process keeps customers coming back, thus improving brand loyalty and increasing transaction volume.

Implementation challenges

Embedded finance has several advantages, but it comes with its own set of unique adoption challenges. There is a knowledge gap at the core of embedded finance, with slightly more than half of senior executives not having a strong working knowledge of the technological details. 

For executives who have implemented embedded finance, a shocking 96% admit they underestimated the complexity of the process. Addressing knowledge and readiness gaps will take time and preparation on the part of executives. How can this be done?  

A few critical early-stage evaluation activities can help give executives the confidence they need before moving into the development stage. First, they need to understand customer demand and confirm they have a viable business case before moving forward. Once that is determined, talking to industry experts who have successfully built embedded finance solutions  is key. This step will help them understand what sort of internal resources they will need to support the development and maintenance of the new solution.

Beyond organizational preparedness, executives may have concerns about embedded finance, particularly amid heightened cybersecurity and regulatory scrutiny. Security, fraud and compliance are key priorities. In order to tackle security issues, businesses should strengthen their risk and compliance operations, and they should be sure to partner with banks and fintech providers that prioritize risk management in their work. As embedded finance grows, regulatory oversight and requirements will only increase, and companies need to be prepared.  

Looking to the future 

As embedded finance adoption continues to accelerate, partner banks that understand the ins and outs of technology can provide essential support and fill in knowledge gaps for businesses looking to implement embedded finance solutions. Not only do these partners provide the banking rails, access to lending and deposits, risk and compliance solutions, but also they can ensure a good customer experience without sacrificing safety and compliance measures. Finding the right partner can be invaluable to implementing this technology, especially when mitigating risks and navigating other challenges.

It’s crucial that executives critically evaluate a potential partner before moving forward with the process. This includes completing their due diligence to understand a bank partner's experience in the field they want to pursue and confirming that the bank has a proven track record. They should also ensure the bank partner has a scalable risk and compliance platform. Building with a partner bank that is not ready can cause serious downstream impacts and potential redevelopment if the company needs to switch bank partners.

As embedded finance becomes the new norm and technology evolves, consumers will expect the increased convenience and simplicity that these solutions offer. Now is the time for businesses to explore how technology may fit into their business. With proper planning, due diligence and the right partner bank at their side, businesses can successfully implement embedded finance solutions and position themselves for growth ahead.