By Will McCurdy on Thursday 15 September 2022
Growth areas such as B2B payments and business lending will push the sector to previously unheard-of heights according to Bain & Company.
The total transaction value of embedded finance is set to surge to $7 trillion in 2026 and account for 10 per cent of all US financial transactions, according to research from Bain & Company.
"Embedded finance" describes an approach where the front-end and the back-end of finance become decoupled so that non-finance consumers such as retailers can offer loans, payments, insurance, or bank accounts seamlessly.
In addition, the analyst house predicted that the revenue opportunities for software platforms and the infrastructure providers that power these embedded offerings will hit $51bn in 2026.
Business lending is set to be a key growth area for embedded finance according to the research and is projected to grow five-fold over the next five years, rising from just $200m in 2021 to $1.3bn by 2026.
Another significant driver of growth in the space is set to be B2B payments.
B2B payments using embedded finance have traditionally lagged behind consumer transactions, but are expected to reach $2.6 trillion by 2026, marking a three-fold compared to levels today.
Currently, consumer payments account for more than 60% of all embedded finance transactions according to Bain and this is expected to reach $3.5 trillion by 2026.
Bain claims that smaller retail merchants will stand to gain the most from the growth of embedded B2B payments, as the technology will help these businesses to tackle challenges such as late or unpaid invoices.
Bain also presented a pessimistic outlook of the impact of embedded finance on established banks, saying it poses a “major challenge” to traditional financial institutions, threatening to separate banks from their customers and leave them with the low growth and the low margin role “of a regulated entity”.
However, there is still a "significant opportunity" for these institutions to use embedded finance according to the consultant.
It’s not just Bain and company that are betting big on the potential of embedded finance.
Jeff Tijssen, a Bain & Company expert partner and leader of its global fintech practice, predicted that there will be "no shortage" of growth finance for the sector and that platforms will continue to experiment with trying an embedded approach to tax and payroll services in the coming years.
Blake Adams, a senior vice president at Bain Capital, claimed that embedded finance will enable end-consumers to access financial services at lower costs compared to traditional financial institutions.