The rise of embedded finance represents a significant shift in consumer expectations, driven by demands for speed and simplicity. The introduction of smartphones and Internet services has fundamentally changed how people manage payments and financial transactions.

The Drivers Behind Embedded Finance Adoption

The increasing demand for convenience is the primary catalyst of embedded finance’s rapid growth. Historically, managing financial obligations involved cumbersome processes such as waiting in lines and handling paperwork. However, digital advancements have transformed this experience, enabling users to seamlessly perform financial actions directly within the applications they already utilize. Tap the screen, and transactions are executed instantly—this has become the gold standard.

Statistics underscore this trend; according to Bain & Co. and Bain Capital, revenue from embedded finance platforms is projected to rise from $21 billion in 2021 to an estimated $51 billion by 2026. Furthermore, the transaction volume within this sector is expected to reach $7 trillion, accounting for 10% of all financial transactions in the United States.

Technological advancements further facilitate this shift. Integrating banking services once necessitated extensive IT resources and lengthy deployment timelines. Today, startups can engage with financial services using Open APIs, significantly reducing the time and costs associated with integration.

Moreover, for many non-financial businesses, embedded finance is not merely an enhancement; it’s a critical source of revenue. Companies can earn a portion of transactions, thereby increasing customer loyalty. For instance, Shopify generates nearly half of its revenue from financial services rather than traditional subscriptions.

The Challenge for Traditional Banking

While the rise of embedded finance presents opportunities, it also poses challenges for traditional banks. Many of these institutions are anchored to outdated systems from the 1980s. Transitioning to modern, API-friendly infrastructures is not only costly but operationally challenging. Executing such a transformation within large organizations is a daunting task, often exacerbated by legacy processes and databases.

In an attempt to remain competitive, several Tier 1 banks have invested heavily in Open API infrastructure. However, Tier 2 and older banks may find themselves lagging behind. Issues such as aging leadership, stringent regulatory requirements, and complex cybersecurity protocols complicate their ability to innovate. Many still require customers to visit physical locations for fundamental services, which places them at a disadvantage compared to agile fintech companies.

Shifting Consumer Expectations

Today’s consumers seek “super apps” that centralize multiple services—both financial and non-financial—into one cohesive experience. Modern digital banking solutions provide real-time insights into accounts, allowing users to track earnings and expenses effortlessly. In contrast, traditional banking can often leave users waiting for essential information, such as foreign exchange rates, which detracts from customer satisfaction.

To compete effectively, banks do not necessarily need to create comprehensive solutions independently. Forming partnerships to enable a collaborative ecosystem is a strategic alternative. The focus should be on ensuring that all services are accessible within a single platform. Organizations that manage to create integrated marketplaces will likely thrive, whereas those that do not may experience a decline in market share and revenue.