Banking is changing. No longer the sole province of financial specialists and time-honored institutions, it has instead become woven into the digital fabric of wherever we shop and conduct business. Aptly named, embedded finance is playing a crucial role in the financial industry’s digital transformation, turning everyday brands into financial services providers. This shift is increasing brands’ profits, empowering consumers, and pressuring traditional banks to reevaluate their role in their customers’ financial lives. From retailers offering buy now, pay later (BNPL) loans to social media platforms handling payments, the lines between commerce and banking are becoming increasingly blurred. The benefits of embedded partnerships to banks and brands are proving mutual, and just about everyone wants in on the action. This movement is no longer a question of “if” but an unfolding reality — and banks are in a unique position to shape its future.
Embedded Finance: Fueling Profitability for Consumer Brands
As brands step into territory once exclusive to banks, the financial services space is becoming increasingly diverse, convenient and innovative. Not surprisingly, consumers — especially younger generations — are driving this trend.
Brands stand to capture Gen Zers and millennials with embedded finance offerings.
Younger consumers are remarkably open to the idea of brands as financial services providers. Such an outlook could dramatically boost traction for embedded finance products. In the United States, 63% of consumers ages 18 to 34 would consider financial services from nonfinancial brands. This sentiment extends across the Atlantic, where 52% of consumers in Europe ages 25 to 34 believe using financial products via their favorite brands is more convenient than using a conventional bank. The alignment of brand affinity with interest in financial products presents an extraordinary opportunity for companies to deepen their relationships with a generation known for its digital fluency and value-driven consumption patterns.
63%
of U.S. consumers ages 18-34 are open to using financial services offered through nonfinancial brands.
Embedded finance is powering retail growth.
In the U.S., 78% of consumers will pay premium prices for brands to which they are loyal, up from 72% last year, suggesting strong, market-specific potential for embedded finance products. Through these offerings, brands across multiple segments could significantly boost customer retention. According to a recent whitepaper co-authored by the Boston Consulting Group, retailers leveraging banking as a service (BaaS) and embedded finance have reported a 5% to 12% increase in conversion rates and a 15% to 30% rise in average order values, resulting in overall revenue growth of 4% to 7%. These results have been especially notable in the fashion segment, with BaaS boosting conversions by 10% to 15% and order values by up to 30%.
Debit co-brands can offer superpowers in embedded finance.
Co-branded debit cards, which are jointly offered by banks and brands, can be a particularly rewarding strategy for embedded finance providers. Debit co-brands can appeal to a wider audience than credit co-brands, including those consumers who may not qualify for or desire credit products. By offering branded debit cards and associated checking accounts, brands can create a stronger connection with their users, leading to more frequent interactions with the brand, higher customer retention rates, and opportunities for personalized rewards and offers. Compared to credit products, debit co-brands also carry less risk for brands and their financial partners; because transactions are based on available funds, the risk of default or unpaid balances is minimal.
These co-branded debit cards typically offer benefits such as instant access to funds, cash-back rewards, or integration with specific platforms or services, thus both leveraging and enhancing customer brand loyalty. Examples of successful co-branded debit card loyalty programs are those offered by companies such as Dollar General, Starbucks, Cash App, Walgreens and others. The embedded finance market, including debit co-brands, presents a significant economic opportunity. With projections estimating the overall embedded finance market to generate $230 billion in revenues by 2025, brands can tap into new revenue streams through transaction fees, interchange fees and other financial services-related income.
Traditional Banks: Turning Trust Into Embedded Opportunities
Trust is the currency of the financial industry, and banks have long held the keys to its treasury. In the world of embedded finance, this trust — along with experience — gives banks a distinct edge over nonbank competitors.
Traditional banks can leverage trust to tap embedded finance potential.
The embedded finance market promises substantial revenue for banks, with estimates in Europe jumping from €20 billion to €30 billion realized in 2023 to a potential €100 billion bonanza by 2030. This is possible in part because banks enjoy a competitive advantage rooted in consumer trust. Indeed, more than 70% of consumers rank traditional banks among their top three most trusted financial services providers.
This strong consumer confidence helps mitigate any hesitation toward novel embedded finance products. However, the market’s vast potential also signals urgency for banks to develop robust embedded finance ecosystems, both to drive growth in an increasingly fragmented financial landscape and to remain competitive.
Lenders are getting on board.
A recent PYMNTS Intelligence study finds that more than two-thirds (67%) of lenders without embedded lending products are considering offering embedded personal loans for consumers. Additionally, more than half are expressing a strong interest in entering the BNPL market. This enthusiasm suggests that lenders are increasingly recognizing embedded finance’s potential to shape customer acquisition strategies and unlock alternative revenue streams. Additionally, as competition heats up, consumers stand to reap the rewards of a more innovative financial services sector. This shift could significantly alter the competitive landscape for both traditional and nontraditional lenders.
Collaboration with tech platforms could be the winning embedded finance formula for banks.
With embedded finance being the sector in which FinTech startups have had the most disruptive impact on traditional banks, technology collaboration can be a potent strategy for banks seeking to partner with consumer brands in the embedded space. Several major brands and tech platforms have strategically partnered with banks to maximize the value propositions of their embedded finance offerings. For example, Uber partnered with Evolve Bank & Trust and FinTech Branch to launch a debit Mastercard that allows drivers to get paid faster and earn rewards on fuel purchases. Similarly, airlines have partnered with BNPL FinTech Uplift and CBW Bank to offer customers installment loans on flight tickets. Such examples highlight the potential of hyper-targeted embedded finance solutions to capture niche markets. These success stories showcase how banks can blend their own expertise with partners’ industry know-how to innovate financial offerings that go well beyond traditional banking.
A Guide to Next-Level Embedded Partnerships for Brands and Banks
Embedded finance encompasses more than just specific services or products. Rather, it is becoming a fully integrated alternative financial ecosystem that is changing the way consumers navigate financial decision-making in a digital-first economy. For their part, consumers are increasingly willing to at least experiment with integrated financial solutions. Banks must take note of this sentiment and act decisively to secure their competitive edge as the embedded finance space develops. By leveraging trust and forging strategic technology collaborations, banks can position themselves at the forefront of this market, turning potential disruption of their business model into a catalyst for innovation and growth.
PYMNTS Intelligence prescribes the following actionable roadmap for brands and banks in embedded partnerships:
- Tap into Gen Z’s brand affinity. Brands that resonate with Generation Z should seek to offer embedded financial services aligned with this demographic’s lifestyle and purchasing habits. Think seamless in-app BNPL options for fashion retail, cash-back rewards on everyday purchases through a coffee shop app, or even custom savings goals tied to future brand purchases. This approach leverages brand loyalty to foster a deeper connection and drive engagement with both the brand and the financial partner’s suite of products.
- Utilize a modular, API-first ecosystem. Adopt a flexible, application programming interface (API)-driven embedded finance platform that integrates seamlessly with popular eCommerce sites, accounting tools and business operations software. Prioritize scalable solutions that alleviate financial headaches across consumers’ most common digital journeys.
- Incentivize adoption with a debit co-branded card or tiered rewards program. Design a program that rewards consumers for increasing their engagement with the brand and its embedded finance solutions. These benefits could include faster fund access or cash back as customers adopt more of these embedded products or increase overall activity with them.
- Accelerate time to market through tech collaborations. Banks seeking embedded brand partnerships should collaborate with FinTech firms specializing in embedded finance to leverage their expertise, technology and agility. These collaborations can expedite implementation timelines, drive innovation and help secure a competitive edge in the rapidly evolving embedded finance market.
Embedded finance is no longer merely a trend. Instead, it is the new currency of customer loyalty. Brands can benefit by partnering with banks that are ready to mint it.
