What Is Embedded Finance and Why Every App Wants to Be a Bank

Goldman Sachs invested $2.5 billion in various fintech companies in 2022, a move that signifies the growing interest in embedded finance. This concept allows non financial apps to offer financial services, essentially turning them into banks. By 2023, it’s estimated that 70% of businesses will adopt embedded finance in some form. That’s a significant shift from just a few years ago, when this idea was still in its infancy.

The numbers are telling: in Q1 2023, companies like Uber and Shopify raised a combined $1 billion to expand their financial service offerings. It’s not just big names, either – smaller businesses like Gusto are also getting in on the action, with 100,000 small businesses now using their platform to manage payroll and other financial tasks.

This trend didn’t start overnight. Back in 2016, companies began exploring ways to integrate financial services into their existing products. Fast forward to 2023, and it’s clear that embedded finance is here to stay. As more businesses jump on board, the question becomes: what exactly is embedded finance, and why are apps so eager to become banks?

For companies like Uber, offering financial services is a natural extension of their existing business model. By providing tools for drivers to manage their finances, Uber can increase user engagement and loyalty. It’s a win win: drivers get access to valuable financial tools, and Uber gets to keep its users within the app market.

Key Highlights

• Goldman Sachs invested $2.5 billion in fintech companies in 2022, highlighting the growth of embedded finance.

• By 2023, an estimated 70% of businesses will have adopted embedded finance in some form, marking a significant shift in the industry.

• Companies like Uber and Shopify raised a combined $1 billion in Q1 2023 to expand their financial service offerings, demonstrating the trend’s momentum.

• Gusto, a smaller business, now serves 100,000 small businesses with its financial management platform, showing the potential for embedded finance to support businesses of all sizes.

• The trend towards embedded finance began gaining traction in 2016, with companies exploring ways to integrate financial services into their existing products.

What is Embedded Finance?

At its core, embedded finance is about providing financial services within the context of a non financial app or platform. This can include everything from payment processing and lending to insurance and investment products. The goal is to create a straightforward user experience, where financial tasks are integrated into the app’s existing functionality. Regulatory filings published by the SEC document the evolving enforcement posture toward digital assets.

For example, a ride sharing app might offer drivers the ability to access their earnings instantly, rather than waiting for a weekly payout. This type of service can be a game changer for users, who can manage their finances more easily and efficiently. By offering these types of services, apps can increase user engagement and loyalty, while also generating new revenue streams.

It’s not just about convenience, either. Embedded finance can also provide access to financial services for underserved or marginalized communities. By offering financial tools and resources within the context of an existing app, businesses can help bridge the gap between traditional banking and the unbanked or underbanked.

Why Every App Wants to Be a Bank

So why are apps so eager to become banks? The answer lies in the potential for revenue growth and increased user engagement. By offering financial services, apps can tap into a lucrative market and generate new income streams. It’s a strategic move, too: by controlling the financial experience, apps can reduce their reliance on third party providers and keep users within their market.

Take Shopify, for example. The ecommerce platform now offers a range of financial services, including payment processing and lending. By doing so, Shopify can increase merchant loyalty and retention, while also generating revenue from transaction fees and interest payments. It’s a win win: merchants get access to valuable financial tools, and Shopify gets to keep its users within the service.

It’s not just about the money, either. Embedded finance can also provide a competitive advantage, setting an app apart from its rivals. By offering an unique and clean financial experience, businesses can differentiate themselves and attract new users. It’s a key part of the strategy for companies like Gusto, which now offers a range of financial services to its small business clients.

Opportunities and Risks

As embedded finance continues to grow, there are both opportunities and risks to consider. On the one hand, this trend has the potential to increase access to financial services and promote financial inclusion. By offering financial tools and resources within the context of an existing app, businesses can help bridge the gap between traditional banking and the unbanked or underbanked.

On the other hand, there are risks to consider. Regulatory challenges, for example, can be a major hurdle for companies looking to offer financial services. In the US, companies must comply with a range of regulations, including the Dodd Frank Act and the Bank Secrecy Act. It’s a complex industry, and one that requires careful navigation.

Security is another concern, as companies must protect user data and prevent fraud. This can be a challenge, particularly for smaller businesses that may not have the resources or expertise to invest in solid security measures. As the trend towards embedded finance continues, it’s likely that we’ll see new security protocols and regulations emerge to address these concerns.

401(k) plans, for instance, are a type of financial service that could be offered through embedded finance. Companies like Uber could offer retirement savings plans to their drivers, providing a valuable benefit and increasing user loyalty. It’s an opportunity that could have a major impact on the financial lives of users, and one that companies are eager to explore.

Frequently Asked Questions

The TCB View

Our read: the trend towards embedded finance is here to stay, and it’s going to change the way we think about banking and financial services. With $2.5 billion invested by Goldman Sachs in 2022, it’s clear that this is a space with huge potential for growth. The question is, what are the risks and opportunities associated with this trend? One concrete risk is regulatory challenges, which could hinder the growth of embedded finance. On the other hand, there’s a concrete opportunity for companies like Uber to increase user loyalty and retention by offering financial services like 401(k) plans.

The signal to track: the adoption rate of embedded finance among small businesses, which could be a key indicator of the trend’s momentum. As companies like Gusto continue to serve more and more small businesses, it’s likely that we’ll see a significant shift in the way financial services are delivered. With 100,000 small businesses now using Gusto’s platform, it’s clear that this is a space with huge potential for growth and innovation. The key will be to navigate the regulatory challenges and security concerns, while also providing a straightforward and intuitive user experience.