Embedded finance is a transformative force in the dynamic financial services space, reshaping revenue dynamics and creating challenges and opportunities for industry stakeholders。Financial professionals must have a nuanced understanding of this rising trend to navigate these uncharted areas。Although the benefits vary, strategic differentiation is the key to success, while carefully considering changing market trends。

Interpreting the Revenue Dynamics of Embedded Finance

Embedded finance is similar to traditional banking, with a preference for institutions that are willing to take risks and distributors that promote direct customer relationships.。A recent McKinsey study shows that balance sheet providers are prominent in the lending space, with 55% of the $14 billion in U.S. revenue in 2021 going primarily to providers that bear credit default risk。Conversely, distributors with customer relationships are thriving in payments and deposit products, accounting for the majority of the revenue pool。

Market Trends and Strategic Differentiation

Two distinct trends emerge in the complex interplay of revenue dynamics in embedded financial services。First, many embedded financial distributors have strategically begun to enter the market by offering deposit and payment products.。This step-by-step approach, often referred to as "landing and expanding," allows them to cultivate customer relationships and capture valuable data for future higher-margin lending products.。This well-thought-out strategy builds credibility and trust before moving into more complex financial products。

Second, technology providers are actively expanding the revenue share of embedded finance by expanding the entire value chain。For example, in the area of lending, they explore mechanisms such as repurchase agreements to share risk, indicating their strategic initiatives in income distribution.。

The Winning Strategy of Embedded Finance

Success in embedded finance requires clear differentiation and a keen understanding of the strategic pathways of stakeholders (distributors, balance sheet providers, and technology providers)。

1. Product breadth: Many embedded financial distributors choose the strategy of "landing first, then expanding," starting with accepting payments or deposits, and gradually expanding their product portfolio.。The importance of product breadth is highlighted by the choice between a single technology partner offering a one-stop shop for a range of products or working with multiple vendors。
2. Product Depth: A handful of technology and balance sheet providers focus on building deep expertise in specific embedded finance categories, creating innovative use cases and capturing significant market share in niche segments。However, this trend suggests a future shift towards integrated financial solutions, which requires product breadth to capture synergies across categories.。
3. Program management support: Many embedded financial technology providers recognize the concerns of new entrants in managing financial products (especially loans) and provide project management support。This includes expertise in sales, service and risk management, which is a key factor for distributors to stand out in a complex financial environment.。

Strategic Decisions for Market Entrants

As embedded financial markets continue to expand, new entrants can position themselves for success by implementing four key measures: