Consumer use of embedded finance for payments, borrowing and insurance grew strongly over the past year, according to new research.
A survey of Australian consumers by financial services technology company FIS found that 60 per cent of people paid for goods or services within service providers' apps over the past year, with 23 per cent saying they pay this way at least once a month. Common payment applications included paying when ordering food or transport.
And a new McKinsey report on embedded finance estimates that revenue from the sector will double over the next few years but also says many financial institutions are unsure of how they can get into the market.
Embedded finance is the placing of a financial product within a non-financial consumer platform. White label services have been around for decades but FIS and McKinsey say what is new is the integration of financial products into digital interfaces that consumers use daily.
FIS also found that 41 per cent used a buy now pay later service in an e-commerce app and 22 per cent purchased insurance directly from a merchant, such as a travel company.
Embedded investing, such as rounding up payments and putting small amounts into a savings or investment account, has had slower take-up. Seven per cent of respondents said they used such a service over the past year.
FIS managing director Australia and New Zealand, Nick Aronson, said key drivers of adoption include convenience and speed.
Among those not using some form of embedded finance, security was a big concern, along with a preference for using a “traditional” financial institution.
According to the McKinsey report, Embedded Finance: Who Will Lead the Next Payments Revolution?, payments has been the biggest use case in embedded finance to date.
McKinsey said it was not just consumers using embedded finance. Increasingly, small businesses are getting financial services through their e-commerce or accounting platform providers.
McKinsey estimates that embedded finance generated global revenue of US$20 billion in 2021 and this could double over the next three to five years.
“Despite the scale of the opportunity, many banks, payment providers and fintechs are unsure how they can participate,” McKinsey said.
It said the embedded finance product portfolio would increase as customer onboarding and product servicing processes are digitised and real-time risk analytics become more sophisticated.
“We estimate that products suitable for offering via embedded finance could account for as much as 50 per cent of banking revenue.”