- Venture capital investors are chasing startups in the embedded finance market.
- These enable non-finance firms to offer banking services.
- Investors at Accel, Fin VC, and FISV told Insider why the $230 billion market is one to watch.
- See more stories on Insider’s business page.
Embedded finance is quickly becoming a major area of interest for Europe’s technology investors.
The premise is fairly straightforward in principle, if tricky in practice.
Embedded finance is all about enabling non-financial services companies to provide banking services beyond online payments, such as bank accounts, wallets, or loans.
For example, an e-commerce retailer that plugs in APIs from an embedded finance provider could then offer a variety of payment services or financing options to its shoppers at checkout, such as a buy now, pay later option.
Europe has become something of a hotspot for the sector, thanks to a pre-existing network of cross-border trade regulation, multi-currency banking and open banking policy.
As a result, embedded finance has become a booming part of Europe’s fintech landscape.
“The interoperability of financial services in Europe and the UK are far ahead of the US,” Alokik Advani, partner and technology investor at FISV, said. “It’s hard to find value in this sector in the US and China, so even though there is still some fragmentation and cross-border regulation, there are a number of businesses attracting investor interest.”
Embedded finance companies, including those pivoting into the trend, have been tipped to be worth as much as $7.2 trillion by 2030. The sector is expected to generate around $230 billion of new turnover by 2025 in the US, a massive jump from the $22.5 billion it generated in 2020, according to figures from Lightyear Capital.
Now venture capitalists are piling into the space.
A couple of recent examples include London-based startups Primer, which is backed by Accel, and Fidel, which was backed by QED Investors and counts Google as a client of its payments platform API.
Primer offers low-code payments infrastructure and an online checkout API. It was approached by Accel for investment pro-actively.
Sonali De Rycker, who led Accel’s investment into Primer, said: “If you have a consumer product it’s hard to be in financial services but embedded finance can improve customer loyalty, frequency and ultimately drive up margin.”
It’s not just European funds that want a slice of the pie.
Logan Allin, founding partner at Bay Area fund Fin VC, a fintech-focused vehicle that has invested in the likes of financial startup SoFi and identity startup Onfido, said the European market is ripe for new investment.
“Companies are taking advantage of open banking laws and embedded payments which are further ahead in the UK than the US,” he said.
He pointed to the complexity of regulation in the US — with each different state requiring approval on financial services products — as a disadvantage to the full stack offering Europe has available.
The first step in the embedded finance process was the buildout of financial services infrastructure and plumbing, much of which has been competitively developed in Europe by companies such as Truelayer. In the US, payments giants like Plaid and Stripe are dominating the first wave of development.
Now companies are able to integrate embedded solutions via an API, but investors see plenty of scope for development.
“APIs are now the next piece of the puzzle,” Advani added. “The access and democratization that they allow is part of an overarching thesis which we are only halfway through.”
Insider reported last year that Qover had penned an agreement with fintech unicorn Revolut to offer insurance products to customers via an API.
Beyond insurance, De Rycker expects that enterprise marketplaces will be another area of investment interest despite the sector being “messier.”
“Open banking has been an enabler and you see the success of neo banks like Monzo or platforms like Coinbase, if you get it right and enable the rest of the world to do that for their core product then there’s a real moat,” De Rycker said.