Embedded finance has transitioned from an emerging concept to a mainstream opportunity with substantial benefits for financial institutions—beyond just banks alone. “Ultimately, with asset managers focused on investment products and asset growth, embedding their capabilities into wealth services makes perfect sense.” Wealth Briefing describes. But “technology has become more intelligent and adaptable; It presents a lucrative opportunity for businesses to grab on to, in the form of embedded finance, the silent disruptor of financial institutions.”
As non-financial companies increasingly integrate banking, payments, and lending services directly into their platforms, traditional FIs face both new opportunities and significant challenges when considering embedded finance. They need a winning strategy to embrace or adapt to this opportunity as a result.
This article explores how investment companies, hedge funds, equity firms, asset managers, and banks can strategically position themselves to capitalize on embedded finance, while also navigating its potential risks.
Understanding Embedded Finance: Definition and Market Dynamics
Embedded finance is the seamless integration of digital banking and other financial products and services into non-financial companies’ platforms or applications. It enables these non-banking businesses to offer their customers financial services without having to build the underlying financial infrastructure or hold regulatory approvals themselves.
Embedded finance is “a shift away from traditional banking models in which consumers must seek out separate providers for their various financial needs,” PwC described in a June 2024 article. Instead, “it brings these services directly to customers within the context of their existing digital experience with a particular brand or digital platform, reducing friction and enhancing end-user convenience.” This fundamental shift is transforming how financial services are discovered, accessed, and experienced.
The market potential is substantial. Embedded finance applications have been projected to grow fivefold, from US$54.3 billion in 2022 to US$248.4 billion in 2032. Financial institutions must develop strategic approaches to embedded finance as a result. It does not matter the degree to which they prioritize its adoption.
The Core Components of Embedded Finance
At its foundation, embedded finance operates through an ecosystem of participants with distinct roles:
- Platforms and Distributors: Non-financial companies that integrate financial services into their user experience to enhance value proposition and generate new revenue streams.
- Financial Infrastructure Providers: Banks and licensed financial institutions that provide regulated financial services, balance-sheet capacity, and risk management capabilities.
- Enablers and Middleware: Technology companies that facilitate integration between platforms and financial institutions through APIs and specialized infrastructure.
The technical backbone of embedded finance is API-first infrastructure, enabling secure, standardized communication between different systems for real-time data exchange and transaction processing.
Strategic Embedded Finance Opportunities for Investment Companies and Asset Managers
For investment companies, hedge funds, and asset managers, embedded finance presents strategic opportunities that extend beyond traditional distribution channels. Here we consider some of those opportunities.
Democratizing Investment Access
Asset managers can partner with digital platforms to offer investment products directly to consumers. They can even do so in contexts where they’re already making financial decisions. This allows for contextual investment offerings that reach customers at the right moment and through familiar interfaces.
New distribution channels mean investment firms can target underserved markets with tailored offerings. This is particularly valuable as embedded finance expands access to financial services for traditionally underbanked populations, who may encounter investment services for the first time through these experiences.
Enhancing Services through Data Analytics
Embedded finance generates rich data about customer financial behaviors and preferences across multiple contexts. Investment firms can use this data to develop more personalized investment recommendations, improve risk assessment models, and identify emerging market trends.
Creating New Products for Embedded Contexts
Firms can design entirely new investment products specifically for contextual deployment. For example, asset managers can develop specialized funds, fractional investment options, and automated investment strategies. These can then integrate seamlessly with eCommerce, lifestyle apps, and business management platforms.
These contextual investment products can drive higher engagement and ‘stickiness’ by meeting customers exactly where they are. They would not need to seek out investment services separately. This approach could reduce “customers’ need to navigate multiple platforms and [increase] their engagement with the primary platform or product,” as PwC’s June 2024 article describes.
Strategic Approaches for Banks and Equity Firms
There are a variety of strategic postures available to financial firms depending on their size, distribution footprint, customer base, and product portfolio. Here we consider some of those opportunities and their benefits.
Balance Sheet and Risk Management Expertise
Large banks with strong balance sheets can adopt ‘balance sheet as a service’ models to power embedded finance offerings without handling customer acquisition or experience design directly. According to McKinsey, “as [embedded finance] players shift attention toward credit and lending use cases, they may increasingly value partners with hefty balance sheets, low cost of funds, and strong risk and regulatory controls.”
This approach allows banks to leverage their core strengths while reaching new customers through platform partners. For example, Cross River Bank built specialized credit underwriting capabilities to serve the fintech lending niche. This provides the bank with “a competitive edge in serving a generation of lending-based fintechs,” as McKinsey describes.
Specialized Services for Vertical Markets
Banks and equity firms with expertise in particular financial products can offer “lending as a service” or specialized financial solutions through embedded finance. This allows them to reach customers with specific needs through vertical-specific third-party platforms. For example, HSBC leveraged its strength in trade financing to “develop trade finance products and distribute them at scale in third-party marketplaces and software platforms,” McKinsey reports.
Partnerships with Enterprises and Technology Platforms
Large financial institutions can form strategic partnerships with major enterprises and technology platforms to distribute embedded financial services. These partnerships can drive significant transaction volumes while leveraging the bank’s existing commercial relationships and trust with blue-chip players.
Requirements for Successful Embedded Finance Strategies
A successful embedded finance strategy requires some core capabilities. Here we consider those capabilities and how FIs can adopt and implement them.
Technical Infrastructure and API Readiness
Financial institutions need robust API infrastructure to enable secure, real-time data exchange and transaction processing. This often requires modernizing legacy systems and adopting cloud-based solutions that support the necessary flexibility, scalability, and security requirements. This technical foundation is essential for rapid adaptation in the fast-evolving embedded finance landscape.
Regulatory Expertise as a Competitive Advantage
Financial services remain heavily regulated, no matter where they appear. Financial institutions must ensure embedded offerings comply with regulations around lending, deposits, anti-money laundering (AML) / know your customer (KYC) processes, consumer protection, and data privacy.
Partnership Frameworks and Business Models
Financial institutions need clear third-party partnership frameworks that define roles, responsibilities, revenue sharing, data usage, and risk management. These frameworks should address brand positioning, customer ownership, and service-level agreements (SLAs). Different partnership models have varying implications for revenue potential and customer relationships.
Managing Risks and Challenges in Embedded Finance
While embedded finance presents significant opportunities, it also introduces several risks and challenges that financial leaders must proactively address. Here we consider these challenges and winning strategies to overcome them.
- Commoditization and disintermediation risks: Embedding financial services in other platforms may reduce bank visibility and brand recognition. PwC notes this “can seem like a threat to their visibility to and relationship with end-users.” To mitigate this, banks should provide differentiated services beyond basic infrastructure.
- Regulatory complexity: Offering services through third-party platforms introduces regulatory complications around consumer protection and liability. Financial institutions must maintain the same standards as their direct services while navigating evolving regulatory expectations in embedded finance.
- Customer experience management: Financial institutions remain responsible for service quality, even with less direct control over the customer interface. This requires careful attention to the entire customer journey, clear SLAs, and monitoring mechanisms to ensure consistent quality and brand compliance.
- Data security and privacy: Data sharing in embedded finance introduces security and privacy concerns. FIs can implement robust data governance frameworks, including clear policies on data usage and protection, consent management, and protocols for responding to potential security incidents.
Long-Term Industry Impacts of Embedded Finance
The ongoing evolution of embedded finance will have profound implications for the financial services industry in the coming years. Here we share just a few that FIs should consider.
- Blurring lines between industries: Financial and non-financial services integration creates new competitive dynamics. This “underscores the need for a fundamental change of mindset” among financial institutions, PwC notes in an April 2023 article.
- More API-first infrastructure: Maturing technical infrastructure supports complex financial services. As the IBM Institute for Business Value describes, embedded finance “puts ecosystems at the heart of a successful business model” and “client and business relationships are no longer transactional—they’re symbiotic.”
- Hyper-personalization: With richer customer data across contexts, FIs could offer increasingly personalized services and insights. Emerging artificial intelligence (AI) capabilities could use this data to identify patterns, predict needs, and generate tailored recommendations.
Positioning Your Firm for Success
For investment companies, hedge funds, equity firms, asset managers, and banks, embedded finance presents both challenges to traditional business models and opportunities for growth and innovation. By understanding its dynamics, building the right partnerships, and developing strategies that build on their strengths, FIs can position themselves to thrive in this new ecosystem.
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