$7 Trillion Embedded Finance and the BaaS Gold Rush


Make no mistake about it: integrated finance has taken the leap…er, the shark. It’s a real gold rush, and everyone and their mothers jump on the bandwagon. Here are some recent titles from:

  • synovis. The company will launch Maast, a payment-as-a-service (get it?) offering, later in 2022, and announced a strategic investment in Qualpay to leverage fintech payment technology.
  • Adyen. Adyen announced its expansion beyond payments to create “integrated financial” products to help platforms and marketplaces create bespoke financial experiences for merchants.
  • lemon.markets. The Germany-based neo-broker has raised 15 million euros to accelerate the development of its product that would allow non-financial companies to integrate stock trading into their services.
  • Column. This fintech acquired a single-branch bank and built its own banking platform, with a direct connection to the Fed’s payment network. According to Fintech Business Weeklyit was “designed to be available to third parties from day one – let’s call it third-generation or native BaaS”.

And that’s just the tip of the iceberg.

Integrated financial estimates

How big is integrated finance? There is a growing number of estimates for the global integrated finance opportunity. One December 2021 pymnts.com related article:

“A new study, The Next-Gen Commercial Banking Tracker, reports that integrated finance will reach a value of $7 trillion globally over the next 10 years.”

The report, however, contains no reference to this $7 trillion estimate (there are 17 occurrences of the number 7, none of which is preceded by a dollar sign or followed by the word “trillion”). Unfortunately, people quote this number as if it is scientifically proven.

Not that integrated finance aficionados are inclined or incentivized to know the “real” number. Generally speaking, they are happy to hear as much as anyone is willing to provide.

I found another article citing the $7.2 trillion figure on Fintech Switzerland. It says the source of the number was a report published by Mambu, so I downloaded that report. It references the estimate with a link to one of my own articles. The only problem is that there is no reference to an embedded $7.2 trillion financial “valuation” in my article.

The Fintech Switzerland article does, however, contain some interesting charts. To finish! Source and escape for the $7.2 trillion estimate. What a coincidence that the projected market value of insurance, lending and integrated payments is nearly equal to the valuation of today’s fintech startups and the top 30 global banks and insurers.

But who exactly understands the components of integrated finance on the 2030 side of this chart? Wouldn’t it be fintechs, banks and insurers playing in the integrated finance space? And when was the valuation of “today’s” fintechs calculated? I bet that was before the recent valuation drop.

Which brings us to another question: how do you foresee “recovery” in eight years? I can predict trade value and volume, but not market value.

Below is another graph from the publication Swiss Fintech showing venture capital funding for fintech and year-over-year growth between 2020 and 2021. According to the graph, integrated lenders raised 300 million dollars and embedded insurers raised $800 million in 2021 – orders of magnitude less than the $6.1 billion raised by embedded finance and BaaS players.

Can you tell me why integrated lenders and insurers are not included in the integrated financing category?

According to the article, “these two sub-segments are still rather nascent, despite their enormous potential.”

Wait what? Is integrated lending and insurance “nascent”? Cover Genius and Qover, two of the integrated insurers included in the chart, were founded in 2014 and 2016, respectively. Liberis, an integrated lender was launched in 2007.

If these two segments represent “enormous potential”, wouldn’t VCs invest a lot in them?

Perhaps the most incredulous thing in the Swiss Fintech article is the reference to the open banking and core banking segments as “other trends including integrated finance.” Basic banking = integrated finance? Not at all.

Integrated funding = $7.2 trillion in 2030? Not at all.

The Integrated Funding Opportunity

That said, I have no doubt that there is a huge opportunity in integrated finance.

A new consumer survey by Cornerstone Advisors and Obligation (who commissioned the study) surveyed gamers, gig workers, creators, small business owners and other consumers about their involvement and interest in obtaining financial services from non-financial brands.

Survey results show strong trend in product categories including gaming, electronics, home fitness, home improvement, automotive, fashion, pharmaceutical and retail retail in general:

  • The interest of the category is imperative. Consumers highly committed to a product category are most likely to be interested in embedded finance. Category interest varies widely, making integrated finance more appealing to some categories than others.
  • Brands need an engagement mechanism. Video game companies have a head start in the area of ​​integrated finance: their customers (i.e. gamers) frequently interact with them digitally. Fashion aficionados may regularly wear their favorite brands’ jewelry and apparel, but that doesn’t give brands much of an opportunity to engage and digitally integrate financial services. Mobile merchant applications will be important for the provision of integrated financial services.
  • Integrated financial services need a value proposition. Consumers won’t get a brand’s financial services just because they like the brand. They will get them because the brand’s financial product offers a combination of superior convenience, customization, or cost. Different consumers place different levels of importance on these factors, making product design and customer experience critical success factors.

Pickaxes, shovels and mining equipment

Like the gold rush of yore, the embedded finance gold rush is attracting its share of pick and shovel vendors – they just have a fancier name: Banking as a Service (Baas ). As the number of players in this space grows, banks and integrated finance-conscious brands evaluating BaaS platform providers should consider:

  • Brand-bank adjustment. A brand should choose a BaaS platform provider that already supports consumers aligned with the brand’s customer base. Easier said than done.
  • Product specialization. A brand should choose a platform provider that aligns with (or improves on) the integrated financial products it intends to offer – platform providers are often strong in lending or payments, and sometimes not even in all payment offers.
  • Brand-bank relationship. Many BaaS platform providers won’t let a brand and a bank interact directly, which is undesirable, and may even cause the bank headaches with regulators. With a direct relationship, brands benefit from better oversight, control and program flexibility.

There’s gold in the hills of the Thar

Logic and data are not going to stop the integrated finance gold rush. Just as there were plenty of would-be miners looking for gold in the wrong places – and doing all the wrong things – during the gold rush of the 1860s, so will many brands, banks and fintechs during gold of the integrated finance rush of the 2020s.

While some (and possibly many) brands, banks, and fintechs pursuing an integrated funding strategy won’t strike gold, others will. Who will succeed?

  • Brands that: 1) seamlessly integrate the application and management of financial services into their business processes, applications and websites, and 2) truly understand the economics of providing integrated financial services so that they can price both financial services and their existing products and services to optimize profitability and customer loyalty.
  • The banks that make the cultural, strategic and technological shift from a B2C (or direct-to-customer) business model to a B2B2C model. In the world of integrated finance, brands are customers. Taking care of consumers is always important, but banks will do this to keep their main customers, the brands, happy.
  • BaaS platform providers that better balance between quality of technology and support with the magnet and matchmaking capabilities that a good platform needs. I’m afraid that some platform providers focus too much on the technical side and not enough on developing business capabilities.

Bryce K. Locke