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More Fintech: Welcome to Embedded Finance

June 27th, 2023

Market Views

Starbucks.  Apple.   Shopify.  Allianz.    These companies – and many others – have identified and are investing in an exciting new area that promises to deliver revenue growth, higher customer engagement, and more brand loyalty.  It falls under the broad Fintech category.

Per Bain, the fastest growth area of this financial service capability accounted for $2.6 trillion of transaction value during 2021, and it is forecast to be $7 trillion in transaction volume by 2026 (source here).  Even at this rate of hyper-growth, expected adoption rates are estimated at a low 10%. We expect much more growth.

The area is embedded finance.

Embedded finance are financial products that are seamlessly integrated into your everyday life, enabled by your online and smartphone usage.  Financial product and service applications and tools become so intuitive, engaging, and easy to use that they make your transactions easier and faster, and in the process, make you increase usage because they are so much better than what existed before.

Let’s look at a series of embedded finance cases, starting with the loyal Starbucks coffee drinker.  The customer – an embedded finance user – collects Stars every time money deposited into the Starbucks card on the Starbucks app is used to make purchases.  Starbucks now has nearly $2 billion in customer deposits on its balance sheet through this program (source here). Sounds like a bank?

Recently, Apple also joined the embedded finance movement, adding a Buy Now Pay Later (BNPL) payment angle through ApplePay on top of its push into bank accounts (source here). All of this is available and happening through your smartphone.

Allianz has started to embed travel insurance options offerings within every American Express enabled booking, boosting its revenues from this product line (source here).

Shopify has helped power its online merchant growth by offering payment rails (Shopify Payments) and a variety of loan options for customers (Shop Pay) and businesses (Shopify Capital).

When done correctly, the integration of these financial services into your daily habits is almost invisible but its impact on both consumers and businesses is incredibly powerful.  This is the power and the promise of embedded finance.

For years, we at HCG have been proselytizing the inevitable digitization in financial services; we built a successful business around this vision.  Moreover, our investment programs have been early adopters of embedded finance, as it has been a key thematic driver since inception and throughout our journey. Embedded finance is at the core of our relationships with payment companies like Block, home improvement finance companies like Wisetack (source here) and leisure travel finance solutions providers like Uplift. Recently, we expanded to ecommerce payment infrastructure operators like Shopify Capital (source here).

At HCG, our mantra is that “every company will be a fintech company.” It fits our digitization vision, plus it is catchy.  If we want to get granular, what we are really saying is that every company will use embedded financial products.  Think about your usage of embedded finance products in your daily life in your non-bank applications, and then ponder the powerful growth potential in this technology.

We believe we are still in the early days and that embedded finance will be at the core of our mission to transform the future of finance.


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