The embedded finance (EF) market is reshaping the financial landscape in Europe, offering a seamless integration of financial services into nonfinancial platforms.
McKinsey forecasts predict that EF revenues in Europe could exceed €100 billion by the end of the decade, signalling a transformative shift in how financial products are delivered and consumed.
For banks, merchants and customer platforms, the imperative to adapt is clear as the EF market experiences double-digit growth.
Embedded Finance: A Booming Opportunity
In 2023, EF generated an estimated €20–30 billion in revenue across Europe, accounting for approximately 3% of total banking revenues.
Over the past decade, EF volumes have grown three times faster than direct lending.
By 2030, EF is projected to initiate 20–25% of retail and SME banking sales, compared to today’s 5–10%.
Consumers are driving this demand.
They increasingly expect financial services, such as loans and insurance, to be readily available during key transactions – whether financing a car or opting for buy now, pay later (BNPL) solutions at checkout.
A McKinsey survey in 2023 found that 40% of consumers preferred online channels for auto financing, underscoring the growing demand for integrated financial solutions.
For small and medium-sized enterprises (SMEs), integrated finance is equally critical.
Proprietary research suggests that B2B buyers would quadruple their purchases if financing were seamlessly available on supplier websites.
This highlights the untapped potential of embedded finance as a driver of business growth.
Why Embedded Finance Matters
For merchants, EF solutions are a game-changer.
They increase sales conversions, boost basket sizes and enhance customer lifetime value.
Research shows BNPL solutions can improve checkout conversion rates by 20–30% and significantly increase average order values.
A large European retailer offering embedded lending reported that customers using these services spent 20% more per visit compared to other shoppers.
However, ease of use is paramount.
Complex or poorly designed EF solutions can backfire, with some services experiencing a cart abandonment rate of 30% – worse than offering no lending solution at all.
On the supply side, technological advancements and regulatory developments are reducing costs and streamlining EF offerings.
Improved APIs, electronic identification schemes and instant underwriting capabilities now make it easier than ever for platforms to integrate financial services.
Upcoming regulations, such as the European Financial Data Access (FIDA) framework and the third Payment Services Directive (PSD3), promise to further simplify processes by facilitating data sharing and creditworthiness assessments.
A New Customer Acquisition Model
Embedded finance is becoming a critical customer acquisition tool for financial service providers.
In some European markets, the cost of acquiring a qualified SME lending lead through traditional methods is 15–20 times higher than through EF channels.
By leveraging EF, banks and financial institutions can achieve cost efficiency while expanding their customer base.
EF isn’t just about convenience and profitability – it can also address societal challenges.
For instance, Estonian fintech Inbank has partnered with solar panel installers to provide instant financing solutions, promoting sustainable energy adoption while simplifying the lending process for consumers.
Navigating Challenges Ahead
Despite its promise, the EF ecosystem faces challenges, such as unsustainable pricing models like “0% interest, pay later,” which are strained by rising funding costs.
Ensuring equitable value distribution across EF value chains will be essential for long-term sustainability.
Embedded finance is poised to revolutionise the European financial landscape, creating immense opportunities for banks, merchants and SMEs.
As the market matures, businesses that prioritise seamless integration, customer-centric solutions and innovation will be well-positioned to thrive in this €100 billion industry.
For stakeholders, the time to act is now.
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