Global Banking & Securities

Embedded finance: Who will lead

the next payments revolution?
Winners are already emerging in the race to provide banking and payments infrastructure
for embedded finance, but incumbents and new entrants still have time to claim a share of
this dynamic market.

by Andy Dresner, Albion Murati, Brian Pike, and Jonathan Zell

© Getty Images

October 2022
 Small businesses starting up today may never a channel for the banks behind them to reach end
interact with a conventional bank. By logging into customers.
their e-commerce or accounting platform, they can
open a deposit account, order a debit card, and What makes the next generation of embedded
meet most of their financing needs. The operators of finance so powerful is the integration of financial
these platforms are not usually banks. Rather, they products into digital interfaces that users interact
are software companies that partner with banks and with daily. Possibilities are varied: customer loyalty
technology providers to embed financial products apps, digital wallets, accounting software, and
into a single seamless, convenient, and easy-to-use shopping-cart platforms, among others. For
customer experience. This new form of partnership consumers and businesses using these interfaces,
between banks, technology providers, and acquiring financial services becomes a natural
distributors of financial products via nonfinancial extension of a nonfinancial experience such as
platforms underpins what has been hailed as shopping online, scheduling employees to work
the embedded-finance revolution. Sitting at the shifts, or managing inventory. This more deeply
intersection of commerce, banking, and business embedded form of embedded finance is what has
services, payments has been one of the first use grown so significantly in the US in recent years.
cases of embedded finance, and a large number of
the aspiring embedded-finance providers originate The evolution of embedded finance has been
from the payments industry. enabled by fundamental changes in commerce,
merchant and consumer behavior, and technology.
The value of this integrated experience for The digitization of commerce and business
customers helps explain why embedded finance management has massively expanded opportunities
reached $20 billion in revenues in the United States to embed finance in nonfinancial customer
alone in 2021, according to McKinsey’s market- experiences. As much as 33 percent of global card
sizing model.¹ According to our estimates, the spending—50 percent in the US—now takes place
market could double in size within the next three online, with a large portion of small and midsize
to five years. Despite the scale of this opportunity, companies in the US relying on software solutions
many banks, payments providers, fintechs, for managing their business.³ In addition, as digital
investors, software firms, and potential distributors natives came of age, they expanded the pool of
are unsure what embedded finance involves, how consumers and businesses open to receiving all
they can participate, and what it takes to win— their financial services via digital platforms. Finally,
questions we address in this article. open-banking innovation, supported by mandates in
the European Union and market-led adoption in the
US, has helped unlock latent demand by enabling
What is embedded finance? third-party fintech players to access consumers’
Put simply, embedded finance is the placing of banking data and even conduct transactions on
a financial product in a nonfinancial customer their behalf.
experience, journey, or platform. In itself, that is
nothing new. For decades, nonbanks have offered
financial services via private-label credit cards Who distributes embedded finance,
at retail chains, supermarkets, and airlines. Other and what products do they offer?
common forms of embedded finance include sales Embedded finance is likely to emerge in any
financing at appliance retailers and auto loans at environment in which a critical mass of end
dealerships. Arrangements like these operate as customers (consumers or businesses) have frequent

1
The model is based on McKinsey’s Global Banking Revenue Pools, 2022; McKinsey’s Global Payments Map, 2022; consumer and merchant
research surveys; and data from the reports of embedded-finance firms.
2
McKinsey Global Payments Map, 2022.
3
McKinsey Merchant Acquiring Survey, 2022.

2 Embedded finance: Who will lead the next payments revolution?

 (often daily) digital interactions with the operator financial products, novel use cases are emerging.
of the digital platform, which we refer to as the For example, embedded-finance distributors are
“distributor” of embedded finance. For a nonbank offering prepaid cards to employees as part of
company acting as a distributor, embedded finance earned-wage access programs; giving merchants
offers a way to enhance the customer experience the option to use their deposit accounts for instant-
and create a new source of revenue without payments settlement. Some are providing just-in-
incurring the overhead associated with operating a time funded debit cards for gig economy workers
bank. The types of businesses well placed to offer to use when making purchases for members of
embedded finance include retailers, business- delivery-service platforms.
software firms, online marketplaces, platforms,
telecom companies, and original equipment The embedded-finance product portfolio is likely
manufacturers (OEMs). All these categories have to expand further as customer-onboarding and
seen high levels of activity and innovation in product-servicing processes are gradually digitized
embedded finance during the past year or two. and real-time risk analytics and services grow more
sophisticated. Risk is likely to remain a constraint
Among embedded-finance distributors and their on growth, however, as products that require case-
end customers, demand is already maturing for a by-case assessment, in-person touchpoints, or
range of deposit, payment, issuing, and lending regulatory waiting periods, such as commercial real
products (Exhibit 1). In addition to these traditional estate financing, are less susceptible to end-to-end

Exhibit 1
Demand for embedded finance is already growing in deposits, payments, issuing,
Demand for embedded finance is already growing in deposits, payments,
and lending.
issuing, and lending.

Embedded-finance distributors Embedded-finance products

Traditional Offer attractive financial Transaction and deposit accounts that

retailers products to enrich the Deposits merchants and consumers can open and
customer checkout use from within an app or software platform
experience and incentivize
brand loyalty and spending
Money movement from within nonbank
Payments
apps or software
Software Strengthen the platform value
firms proposition to drive merchant
adoption, retention, and Prepaid, debit, and credit cards for
revenues Issuing customers and employees, issued from
within business management software
Marketplaces Offer tailored financial products or apps
and platforms to improve the customer
experience and increase Unsecured lending embedded in business
merchant adoption, retention, management software (eg, merchant cash
and revenues Lending advance)

Telecom Increase customer engagement Secured lending for large purchases with
companies and enhance the value of underwriting and origination at point of sale
smartphone software and
hardware with money-movement
capabilities

OEMs Simplify ownership and financing

through subscription and other
financing services

Source: McKinsey analysis

Embedded finance: Who will lead the next payments revolution? 3

 digitization. Despite these constraints, we estimate products. Balance sheet providers sometimes
that products suitable for offering via embedded partner directly with technology providers to
finance could account for as much as 50 percent of create an integrated embedded-finance offering
banking revenue pools.⁴ for distributors. For instance, Stripe is partnering
with Goldman Sachs and other banks to offer
embedded finance to platforms and third-party
Who are the enablers of embedded marketplaces.
finance?
The distributors of embedded finance rely on two A few banks and fintechs, including Cross River
sets of providers to manufacture the embedded- Bank and Banking Circle, fulfill both of these
finance offering and grant access to it (Exhibit 2): functions. Having built their own technology layer
on top of their own balance sheet, they provide
— Technology providers (fintechs) provide the embedded finance to distributors such as retailers,
platform through which distributors can access, business-software providers, marketplaces, and
customize, and offer embedded-finance OEMs by themselves, with no need for additional
products. Some, including Marqeta, provide partnerships.
point solutions for specific categories of
financial products, such as card issuing. Others,
including Unit, Bond, and Alviere, operate Who is capturing the value?
platforms that offer distributors multiple Not all players benefit equally from the rise of
financial products, such as deposits, money embedded finance. As in banking in general,
movement, and lending. revenue primarily accrues to risk takers and to the
distributors that own the customer relationship.
— Balance sheet providers (licensed or chartered For example, according to McKinsey research,
financial institutions) are responsible for the majority of revenues from embedded-finance
manufacturing embedded-finance products, lending products (55 percent of $14 billion in the
providing risk and compliance services, and United States in 2021) accrued to the balance
offering access to funds for lending and deposit sheet provider—the firm bearing the risk of credit

Exhibit 2
To embed financial products into their customer journeys, distributors work
with technology and balance sheet providers.
To embed financial products into their customer journeys, distributors work
with technology and balance sheet providers.
Distributor Technology provider Balance sheet provider
Role in Works with technology and Maintains and configures Provides distributors with
embedded balance sheet providers to technology for delivering access to regulated license,
finance embed financial products in financial products to risk framework, funds, and
its customer, employee, and distributors via APIs a place to hold deposits
partner journeys

Types of Traditional retailers, software Fintechs and banks Banks

firms involved firms, marketplaces and
platforms, telecom companies,
OEMs

Source: McKinsey analysis

4
Calculated as revenue pools of lower-risk, highly automatable products that have proven demand and can realistically be embedded, based on
McKinsey’s Global Banking Revenue Pools, 2022.

4 Embedded finance: Who will lead the next payments revolution?

default. However, where payments and deposit complex offerings to address customers’
products were concerned, the distributors who broader financial needs. Some distributors
owned the end-customer relationship benefited prefer to shape their strategy around a one-stop
most. In lending, for instance, they earned $4 billion shop developed with a single trusted technology
of the remaining $6 billion revenue pool, equal to 30 partner that offers a wide array of products,
percent of total revenues. while others opt to work with several technology
providers to avoid overreliance on one partner.
These revenue dynamics explain two market trends
we have observed. First, many embedded-finance 2. Product depth. A few technology and balance
distributors began by offering deposit and payment sheet providers are building deep expertise in
products before extending their product range to specific embedded-finance categories such as
lending products such as credit cards and merchant issuing, in order to claim outsize market share
financing. Deposit and payment products are in these niches. They develop innovative use
attractive to distributors not only because they cases—such as just-in-time fund deposits into
represent substantial revenue pools and promote cards or crypto-linked payment authorization—
stickiness, but also because they are a powerful as a basis for creating novel financial products
tool for building customer relationships and for end customers. Over time, however, the
capturing customer data that can be used to inform demand for integrated financial solutions and
underwriting decisions for future higher-margin the synergies that can be captured across
lending products. product categories are likely to prompt these
providers to protect their flanks with product
Second, many technology providers are seeking breadth as well.
to capture a larger share of embedded-finance
revenues by expanding across the value chain. In 3. Program management support. Many
lending, for instance, they are looking to increase distributors that are new to embedded finance
their share of revenues by finding ways to share in are understandably concerned about how to
the risk, such as offering repurchase agreements for build, sell, and service a financial product for
loans originated by balance sheet providers. end customers. Some of them may see the
regulatory and reputational risk attached to
financial products, especially lending, as an
What does it take to win in embedded insurmountable hurdle. To help them overcome
finance? the risk, many embedded-finance technology
For embedded-finance providers, success demands providers are offering sales, servicing, and risk
clear differentiation in the form of product breadth management expertise or are orchestrating
or depth, or the provision of ancillary program other partners providing them. The ability to
management services. provide distributors with this kind of program
management is likely to be a key source of
Options for differentiation differentiation in the long run.
We see three main sources of differentiation for
embedded-finance distributors, balance sheet
providers, and technology providers: Key decisions for embedded-finance
market entrants
1. Product breadth. Many distributors are adopting Although leaders are already emerging, the
a “land and expand” approach to embedded embedded-finance market still has ample white
finance. They start by offering payment space for new entrants; we expect it to double in
acceptance or deposits and then extend their size over the next three to five years. The long-
product portfolio to lending products or more term winners are likely to be those that are already

Embedded finance: Who will lead the next payments revolution? 5

 building the table stakes technology, expertise, including the necessary technology to enable it. To
and relationships needed for a future leadership do this, they should provide third-party developers
position. Financial services firms and fintechs with self-service access and well-documented APIs.
looking to stake their claims in the embedded-
finance business would be well advised to commit Adapt to B2B2C and B2B2B sales motions.
themselves to implementing four initiatives: Although some financial institutions operate with
choosing a strategy, establishing a developer channel partners, many are accustomed to serving
experience, building capabilities to support end customers directly. Those using direct channels
distributors, and developing support and risk will need to build a new set of capabilities to support
services. distributors in selling embedded-finance products
to their consumer or business customers.
Choose where to compete. For most banks with
proprietary distribution, embedded finance Develop support and risk services. Retailers,
represents a significant cannibalization risk. manufacturers, telecoms, and other distributors of
However, banks with limited footprints or localized embedded finance may not have the capabilities
relationships, such as community banks and to build, sell, and service financial products in a
regional banks, may see it as an attractive way risk-controlled, regulatory-compliant, effective
to expand their revenue base. Some may be manner, nor will they have the time or appetite to
comfortable with growing deposits and earning build such capabilities. They will look to balance
revenues relatively passively, at least early on, but sheet and technology providers for advice on how
many will look for opportunities to differentiate best to deploy embedded finance and orchestrate
themselves and boost revenues through more the expertise and tools needed to deliver it in a
advanced products and support. At the moment, compliant way. As well as providing advice, the
payments-focused technology providers are leading balance sheet and technology providers will need to
the charge on embedded finance, using their money build a risk management framework that gives them
movement capabilities to attract distributors and confidence that the distributors they work with are
then expanding into products that have been the acting within their risk appetite and in a compliant
strongholds of banks, such as lending. manner.

Build and enable a modern developer experience.

Many banks and legacy financial services
infrastructure firms are not yet equipped to Winners are already emerging among the financial
externalize their processes and workflows to allow institutions that manufacture embedded finance.
distributors to seamlessly integrate embedded- However, tech-savvy banks, fintechs, and payments
finance products into their journeys or distribution companies that are willing to invest and partner still
platforms. Distributors wanting to scale up quickly have time to claim their share of this fast-growing
will need to build a modern developer experience, market.

Andy Dresner and Jonathan Zell are partners in McKinsey’s New York office, Albion Murati is a partner in the Stockholm
office, and Brian Pike is an associate partner in the Stamford office.

The authors wish to thank Robert Byrne and Jill Wilder for their contributions to this article.

Copyright © 2022 McKinsey & Company. All rights reserved.

6 Embedded finance: Who will lead the next payments revolution?