5 Embedded Finance Predictions for 2024
Around this time last year, I made some predictions, and fortunately, my batting average was pretty good. I predicted that the oversight over BaaS would increase, and true enough, federal regulators issued landmark regulatory guidance this year such as the Novel Activities Supervision Program and the Interagency Guidance on Third-Party Relationships.
Additionally, I predicted that embedded finance companies would ascend to the Fintech top 10 list. Back then I stated: “I predict a few new corporations will burst onto the embedded finance scene by the end of 2023. They won’t be the pure financial technology companies of yore like Affirm and Chime. Instead, the new titans will be non-financial companies that we don’t traditionally think of as fintech companies.”
Indeed, this has come to fruition. Among those on the 2023 Fintech Top 10 list are companies such as Bolt, an e-commerce checkout software provider, and Goodleap, an app that connects consumers with lenders and companies that install solar panels and other home improvements. Will this trend continue in the next year? Definitely.
As we step into 2024, I wanted to share some thoughts on what we might expect in the embedded finance and Banking as a Service (BaaS) sectors this coming year. So, let's dive into my five predictions for the year ahead.
1. More cautious approach in the embedded finance and BaaS sectors.
In 2024, the prospect of increased federal guidance will likely make everyone a bit more cautious in the embedded finance and BaaS sectors. Despite the challenges, the need to offer innovative financial solutions will continue apace. A Bain & Company report found that the transaction value of embedded finance will surge $7 trillion in 2026 and account for 10% of U.S. financial transactions. This growth will continue for the foreseeable future, albeit a bit more carefully.
Both fintechs, non-financial brands and banks will be grappling with regulatory hurdles as the financial sector races forward. Balancing adherence to regulations while keeping the innovation engine running will be the name of the game. Banks that outsourced compliance to a BaaS provider under an API Dealer Model will stop that practice because it’s no longer feasible, as witnessed by numerous consent orders in 2023. The regulators will enforce the bank management of fintechs with the same rigor they do with bank vendors. Banks should get the staff and tooling they need to govern the tech firms and bake it into their planning.
Integration of technology and ensuring cybersecurity will be significant concerns, given the increasing reliance on digital platforms. If you ask me, the fraud vectors that FedNow is bringing to the table will be a serious concern for banks.
For fintechs and brands, building and maintaining trust in the face of stringent banking regulations and the need for solid partnerships with traditional banks? That's the holy grail. The costs of governance will increase and tech firms should expect to bear those costs. This means that it will take longer for a tech firm to get into production, but patience and persistence will be rewarded by increased market share in the long run. As for tactics, fintechs should partner with high-quality banks and demand the best tools and partnerships. Don’t just settle for one bank, have at least two banks that actually work together through an embedded banking software platform with a large bank network like Treasury Prime.
In 2023, the industry underwent a rigorous vetting process, where the wheat was separated from the chaff. As we transition into 2024, I expect at least two more dramatic failures in the financial services industry as the system shakes itself out. I also anticipate the ascendance of high-quality companies that have demonstrated integrity and resilience amidst the challenges of the preceding year.
2. More big banks will try to add embedded banking products to their lineup.
I forecasted this trend gaining momentum last year, and I think it will continue to pick up pace in 2024. In September, JPMorgan Chase announced a partnership with Gusto to offer embedded payroll services to its business clients in-platform. Another example is Wells Fargo forming a strategic partnership with Bilt Rewards, a loyalty program for renters. Through a co-branded credit card, members can pay rent and earn points with no transaction fees on rent payments at any rental property in the U.S.
Big banks know they need to compete and I predict these types of collaborations will only grow in 2024.
3. The Bank-Vendor Partnership Model will win out
I am a strong proponent of the Bank-Vendor Partnership BaaS Model, a collaborative framework wherein multiple banks work directly with fintechs and brands to deliver financial products, facilitated by Treasury Prime’s advanced API banking technology. In 2024, I predict this approach will become the favored strategy. It achieves an ideal equilibrium of agility, compliance, and direct bank involvement. There's a noticeable shift in companies adopting this model, and I'm convinced it's a wise decision.
4. M&A will shake up banking
Expect the usual mergers and acquisition dance between banks to continue in 2024. It's like a yearly tradition at this point. This ongoing trend reflects the perpetual drive for growth, market consolidation, and adaptation to the dynamic forces shaping the industry. As traditional banks seek to fortify their positions and extend their reach, M&As will proceed with renewed vigor in the coming year. But here's the interesting part – non-bank M&A will be all about gaining tech capabilities and expanding into new realms like embedded finance.
5. Regional banks will step up with fintech partnerships
The competition between regional and big banks will intensify in 2024. Regionals will tout their local market expertise, while big banks will flex their brand muscles. But here's the kicker – don't overlook the elephant in the room as the banking industry undergoes a deconstruction phase with branches closing and tech companies taking away market share. Partnerships with fintechs might be the regional banks' secret weapon for low-cost deposits without breaking the bank.
As we navigate the twists and turns of embedded finance in 2024, these predictions are more like signposts on the road ahead. The industry's ability to pivot, adapt, and maybe break a few molds will shape the narrative. So here's to a year of challenges, changes, and, hopefully, a lot of innovation in the world of embedded finance and BaaS. Cheers!
Hear more of my predictions, along with those of Treasury Prime CEO Meghan Ryan and FS Vector Principal Ethan Singleton in our webinar “2024 Predictions: What’s in Store for Embedded Finance and Bank Fintech Relationships.”