Embedding financial services at the point of need is one of the most exciting developments within the digital finance space right now. With new use cases and partnerships announced almost daily and projected revenues generated through Embedded Finance (EmFi) north of €100 billion in Europe, many banks feel the urge to explore whether they can benefit from this development and remain relevant for customers.
In 2024, we worked with our clients to find answers to essential questions and define a fit-for-purpose embedded finance strategy for their businesses. The typical approach includes four steps: understanding the market landscape, identifying where the bank has a right to play, assessing required capabilities, and determining how to close capability gaps.
This article, focuses on the fourth step — how banks can fill those gaps. Our analysis shows that incumbent banks broadly take three different approaches to play in the EmFi space.
In-house development as a strategic path to embedded finance
Setting up a dedicated business unit or launching a new venture within a group can help to bundle resources to build capabilities and know-how in-house. This mitigates the risk of dependencies with other partners or acquired businesses. Furthermore, full share of wallet remains at the bank.
Typically, banks either keep the business unit in-house or separate it into an independent venture that is not burdened by corporate processes. This approach can also change along the way. For example, Standard Chartered used its innovation arm SCVentures to build the white‑label BaaS platform SC Nexus in Asia and later separated the capability into the venture audax to scale more freely.
However, this is typically associated with higher investment costs and longer time-to-market, as capabilities need to be developed in-house and require patience, senior executive commitment and willingness to invest.
Partnering to drive strategic growth in financial services
A less investment-heavy approach is to join forces with other relevant tech providers, combining the capabilities and know-how of both parties.
Here, along with a shorter time-to-market, financial services can also be tailored and further enhanced through partnering, as additional data or features can complement the core financial product. In practice, two different approaches can be observed. Forming a “lighter” partnership, mainly consisting of, for example, a referral model and maybe some joint marketing towards clients versus moving into more advanced partnership models, like joint ventures, where a bank takes a (minority) stake in a tech company (BaaS provider).
Partnerships however come with dependency risks that need to be mitigated — both from a reputational, operational point of view (such as unforeseen technical issues or lack of compliance) and strategic perspective (for example exclusivity of partnership and consequences and exit strategies when the partner is acquired by a direct competitor). Furthermore, agreements need to be made regarding the distribution of revenue between involved parties. An example of such a partnership is HSBC and Tradeshift’s joint venture SemFi in the UK. It offers embedded B2B marketplace finance (early invoice payments using transaction data) and plans to expand across more of HSBC’s regions.
Building embedded finance scale through smart acquisitions
The final method, which involves purchasing an existing provider, combines elements of the first two strategies, as capabilities and know-how are being acquired almost instantly, bundled in a dedicated team with experience and clear strategy on the market offering. This can either be an acquisition of a niche capability provider, focused on a specific service like payments or specific industry like energy, or the acquisition of multiple providers to enable a full-suite EmFi offering; for example, UniCredit’s 2024 acquisitions of Vodeno and Aion Bank combined an API‑based BaaS platform with digital banking services to scale an embedded‑finance offering.
Just like the build option, these efforts usually go hand-in-hand with a higher investment cost required upfront. Post-merger integration and operating model considerations need to be carefully assessed to maintain the agility, flexibility and rapid go-to-market approaches of the acquired asset(s).
Banks must lead embedded finance strategy to secure future revenue growth
Banks are in the driving seat when it comes to determining their embedded finance strategy. However, as the pace of new market entrants continues, they risk losing a significant part of their current revenue streams as embedded models are gaining traction across financial products. With that in mind, banks should carefully consider their embedded finance strategy, starting with the development of a solid understanding of the market, where to play and, crucially, how to win.