The Strategic Significance of Embedded Finance for Banks

In the era of digital disruption and constantly changing consumer expectations, banks are facing increasing pressure to maintain competitiveness. Embedded finance is currently one of the most transformative but perhaps underestimated strategies for banks. From seamlessly implementing loans at the point of sale to supporting B2B payment processes within third-party platforms, embedded finance is no longer an edge innovation. It is becoming a core element for banks to compete in the rapidly changing financial ecosystem. According to a recent article published by the World Economic Forum, embedded finance is a disruptive force that financial institutions cannot ignore.

Firstly, embedded finance refers to the direct integration of financial services such as loans, payments, insurance, and even investments onto non-financial platforms. Imagine being able to purchase insurance when checking out on an e-commerce website, or obtaining a small business loan while using accounting software. It allows for the provision of financial products based on specific circumstances when customers need them, thereby creating a seamless customer experience. For banks, this transformation marks their departure from the traditional "customer to home" model, and instead, they are moving towards digital platforms.

Secondly, multiple forces converge to make embedded financing a strategic priority for banks. Customers increasingly expect financial services to be instant, contextualized, and invisible, and they do not want to switch back and forth between various platforms to complete transactions. From Shopify to Salesforce, platforms are becoming the digital infrastructure of the economy. The financial services provided in these ecosystems have natural advantages. Fintech companies quickly seized these inherent opportunities. Companies such as Stripe, Square, and Adyen are not banks, but rather provide banking like services. In markets such as the United States, United Kingdom, and Europe, open banking and evolving licensing systems make it easier for banks to provide services through APIs and partnerships.

Moreover, banks have long regarded technology as a risk. Embedded finance redefines it as a growth opportunity. According to a report by Dearroom and Dutch bank venture capital firm, it is estimated that the global embedded finance market will reach a size of $7 trillion by 2030. This is not only about increasing distribution channels, but also monetizing the core competitiveness of banks in the new environment.

However, banks that fail to embrace embedded finance face the risk of marginalization. This is not because their services are irrelevant, but because their distribution channels are irrelevant. Consumers and businesses increasingly expect financial services to be built-in rather than additional. Even if the demand for core services remains strong, banks that adhere to traditional distribution models may face the risk of decreased brand awareness. The advantage of embedded finance is that it can provide real-time access to user behavior, transaction history, and background insights, which traditional banking relationships often overlook. By embedding services into digital platforms, banks can reach more customers without opening new branches or conducting expensive marketing campaigns. Secondly, many banks now choose to collaborate with fintech companies rather than compete, and embedded finance allows for modular collaboration where each party can leverage their own strengths.

It can be seen that embedded finance is not only a new channel, but also a new way of thinking about how banking business operates and where to conduct it. It drives banks to become infrastructure providers, not just service providers. This is a profound transformation of identity and also a liberation. Banks can create value without controlling end-user relationships. Just as cloud providers provide support behind the scenes for software companies, banks can also become a trusted bridge behind the next generation of business, work, and digital life.

Overall, with the increasing decentralization of financial services, banks that embrace embedded finance can not only survive, but also lead the development of the industry. The future of the banking industry is not limited to one place, but exists in seamless connection, situational awareness, and intangible insensitivity. Embedded finance is precisely the way in which banks demonstrate their existence. For those enterprises that take decisive action, this is not just a technological change, but also a strategic turning point.