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McKinsey: Embedded Finance – Who Will Capture the Value? Risk vs Reward

McKinsey & Co | Andy Dresner, Albion Murati, Brian Pike, and Jonathan Zell  | Oct 13, 2022

McKinsey embedded finance growth - McKinsey:  Embedded Finance - Who Will Capture the Value?  Risk vs Reward

New Small businesses may never interact with a conventional bank to open a deposit account, order a debit card, and meet most of their financing needs.

  • The operators of these platforms are not usually banks. Rather, they are software companies that partner with banks and technology providers to embed financial products into a single seamless, convenient, and easy-to-use customer experience.

See:  Bain & Co Embedded Finance Report: What It Takes to Prosper in the New Value Chain

  • This new form of partnership between banks, technology providers, and distributors of financial products via nonfinancial platforms underpins what has been hailed as the embedded-finance revolution.
    • Sitting at the intersection of commerce, banking, and business services, payments has been one of the first use cases of embedded finance, and a large number of the aspiring embedded-finance providers originate from the payments industry.
    • embedded finance reached $20 billion in revenues in the United States alone in 2021, according to McKinsey’s market-sizing model. According to our estimates, the market could double in size within the next three to five years.
  • Digitalization: The digitization of commerce and business management has massively expanded opportunities to embed finance in nonfinancial customer experiences.
    • As much as 33 percent of global card spending—50 percent in the US—now takes place online, with a large portion of small and midsize companies in the US relying on software solutions for managing their business
    • Time has come:  As digital natives came of age, they expanded the pool of consumers and businesses open to receiving all their financial services via digital platforms.
    • Open-banking innovation, supported by mandates in the European Union and market-led adoption in the US, has helped unlock latent demand by enabling third-party fintech players to access consumers’ banking data and even conduct transactions on their behalf.
    • For a nonbank company acting as a distributor, embedded finance offers a way to enhance the customer experience and create a new source of revenue without incurring the overhead associated with operating a bank.

See:  McKinsey Global Banking: Revenue pools moving to customer-ownership with embedded digital financial services

  • Risks: likely to remain a constraint on growth, however, as products that require case-by-case assessment, in-person touchpoints, or regulatory waiting periods, such as commercial real estate financing, are less susceptible to end-to-end digitization. Despite these constraints, we estimate that products suitable for offering via embedded finance could account for as much as 50 percent of banking revenue pools
  • Adapt to B2B2C and B2B2B sales motions. Although some financial institutions operate with channel partners, many are accustomed to serving end customers directly. Those using direct channels will need to build a new set of capabilities to support distributors in selling embedded-finance products to their consumer or business customers.

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