A new report by Bain & Company predicts that embedded finance will surge to $7 trillion in total value by 2026.
As Bain defines it, embedded finance can include payments, banking, and lending – like buy now pay later (BNPL) services. According to Bain, the report defines “embedded finance as a nonfinancial software platform providing an adjacent financial service, for which it takes some degree of economic ownership.” The goal is to provide access to finance or remove intrinsic friction from a transaction at the point of action. Financial services everywhere.
The research and analysis from Bain & Company, along with Bain Capital, claims that revenue opportunities for platforms that power these embedded offerings will more than double from $21 billion in 2021 to $51 billion in 2026. Overall, the transaction value of embedded finance will jump to $7 trillion in 2026 and account for 10% of US financial transactions.
While we have already seen a dramatic transition from analog to digital and point of sale finance, Bain notes that this change is being fueled by better customer experiences, access to finance as well as cost and risk reduction. So it just makes sense – as it can be a win-win; for consumers, for merchants, for providers.
To quote Bain:
“Platforms are partnering across the new value chain to deliver these benefits to customers and differentiate their core services. In turn, this increases their ability to spur sales in their core business. For example, embedding payments into the native invoicing workflow improves accounting or business management software for the merchant, significantly reducing time spent reconciling payments and invoices. Embedding financial services helps platforms drive superior economics, increasing customer lifetime value. With minimal incremental customer acquisition costs, platforms can raise average revenues per user, while keeping customers longer.”
Bain expects that payments and lending will continue to be the two biggest segments of embedded finance. Consumer payments will account for more than 60% of all embedded finance transactions and this is expected to reach $3.5 trillion by 2026.
B2B payments are expected to reach $2.6 trillion by 2026. Smaller retail merchants will stand to gain the most from embedded B2B payments, helping these businesses to tackle challenges such as late or unpaid invoices. Embedded finance-driven business lending is predicted to rise from $200 million in 2021 to $1.3 billion by 2026.
While payments and lending will constitute a significant driver for the rise of embedded finance over the next decade, the analysis also predicts growth in compliance, HR and procurement among a range of areas.
Adam Davis, associate partner in Bain & Company’s Fintech practice, said that embedded finance has quietly become a significant part of the way payments are completed and funding accessed. This transition “will have a transformative effect” removing friction and making financial services more accessible.
Jeff Tijssen, a Bain & Company expert partner and leader of its global FinTech practice, added:
“For businesses this shift is an enormous opportunity. There will be no shortage of growth finance for the sector as platforms experiment with integrating everything from tax to payroll services in the years to come.”
It’s a win-win, said Blake Adams, a Senior Vice President at Bain Capital.
“For software platforms, these products unlock new revenue streams and for end customers, they routinely increase access to financial services at lower costs compared to traditional financial institutions.”
Embedded finance is still in its early innings said Matt Harris, a Partner at Bain Capital.