Initially, I was not planning to write a 2023 prediction post. But after a few messages and conversations in the past days I changed my mind and want to share my personal expectations for 2023. But before we take a look in the future, let's take a look back.
2022 recap for Embedded Finance
2022 was quite a mixed bag for Embedded Finance (EF). On the one hand, there was of course the macro development that has impacted everything in the business world. Almost all startups and companies had to adjust their plans to a new reality and this wasn't always to the benefit of Embedded Finance. On the other hand, Embedded Finance has manifested its position in 2022 as a center of attention in the Fintech space. Additionally, we have seen many product launches from non-financial brands as well as infrastructure providers who have secured substantial funding and announced geographical expansions.
How will 2023 continue? Based on my personal experience in the space, I have chosen the following six predictions.
1. Hard times make strong business models
2023 will continue for many businesses in the same way how 2022 ended with further budget cuts and layoffs. It is very likely a challenging year for many especially for VC funded startups. However, as I (and others) have mentioned before, a downturn can be a great moment to build and launch an Embedded Finance solution. And I believe many companies will actually build an MVP or launch their initial efforts into EF. I am not expecting that every solution will be a game changer or has material to be on the front page of Fintech news. But I believe quite a few companies will lay their Embedded Finance foundation. Maybe they are not able to gain benefits of these efforts in 2023, but a company that wants to strive in the years to come cannot wait much longer to start with. As a reminder, Shopify started with their first financial product in 2016 and it took a few years until they were able to benefit from their efforts.
2. Speed bumps
I am an optimist but I am not a blind optimist. 2023 will be tough and even though downturns make a great chance to launch Embedded Finance, I am sure we will see EF-related companies or projects fail in 2023. I remember this Forbes article from 2020 about Uber stopping it's banking products for their drivers. This change in strategy was often used from critics that EF is more likely to fail with adoption. Similarly, I believe we will read about stories in 2023 where those critics will point again "I told you so". It appears with the potential fire sale of Railsr we might have the same news of that kind early in the year. However, as the Uber article pointed out I believe such news will not be more than a speed bump. In fact, Uber launched a new banking product last year and whatever negative story 2023 has in store for us, I am certain the industry will overcome it as well.
3. Vertical SaaS and marketplaces biggest driver of EF adoption
Many types of non-financial companies can offer financial products - from a retailer to a tractor manufacturer. Nevertheless, I believe Vertical SaaS and marketplaces will claim the top spot both for new product launches but also for growth achievements. There are a few reasons for this. Firstly, both types of companies are ideally positioned to offer financial products. Vertical SaaS solutions address the need of specific verticals and it is in their nature to cover more than area of functionality (unlike horizontal SaaS who focus on a few areas but sell it to a wide range of customers). Adding financial products to a B2B Vertical SaaS creates value for customers and service providers alike. Similarly, Marketplaces are aiming to lock in customers stronger and want to take over more of the value chain. Thus, adding financial services is equally beneficial for marketplaces. Secondly, both types of companies are significantly growing. Some people expect an explosion of Vertical SaaS in 2023 and also personally most people who reached to me to speak about their EF plans represent one of the two groups. While Vertical SaaS may explode in 2023, B2B marketplaces have already exploded last year. I believe that timing is often one of the most important success factors (for anything), and because of such developments in Vertical SaaS and marketplaces, I believe Embedded Finance is on the tipping point.
4. Blurry lines
In a previous blog post, I described how Embedded Finance is different to Vertical Banking/Finance and also Open Banking/Finance. I believe with further development and adoption of these concepts, it will be harder to put a company or product offering into one category or another. Vertical Banking and Embedded Banking have a lot in common as they aim to combine financial products with a non-financial offering. There might be a company starting with Vertical Banking but growing into an Embedded Finance solution and vice versa. Luckily, this doesn't really matter for the people using these products. Furthermore, I believe that we will see a growing number of Vertical Banking solutions being launched in the next twelve months. If you are following the space closely, you might remember that we have seen a number of them failing in the past months and years. Personally, I don’t think that those failures are due to a flaw in Vertical Banking in general. Vertical Banking solutions are by definition aiming at a smaller customer market (selling to a vertical vs selling to "everybody") but are faced with the same challenge of monetization. Successful Vertical Banking solutions need to have a strong business case right from the beginning. This can be either via their non-financial offering or via financial products with which revenue can be generated (e.g. lending, investing, insurances).
Personally, I have spoken to different players both in the consumer and business segment that are in the process of building or launching their vertical banking solutions in the next few months. Especially consumer banking can be tough but I cannot imagine (or hope?) that we continue the way we bank today for much longer.
5. More banks will enter EF
In Europe, Embedded Finance has mostly (!) been enabled by BaaS or Plug-and-Play Providers that own their licenses (usually eMoney license). Traditional or even neo-banks have mostly not participated in this development (Starling is the exception on neo-bank side and Aion Bank for the traditional banks). But in the past months, we have seen that more and more banks have entered the space. If you are an Embedded Finance Review subscriber you might have seen my EF News Update and perhaps read the news about NatWest partnering with technology provider Vodeno or SEB building their own solution. I don't think it is a question of 'if' we will see more banks and Financial Institution building and launching an EF offering, but rather 'how' will they do that. Will the majority build it or will they partner? You might say 2023 could be the "last call" for banks to start this journey because otherwise it could be too late.
6. New infrastructure providers
I remember a time when somebody asked me about who is the right provider to build financial product X, that there were one or two names that were likely partners but that was about it. In the past years, we have seen many new players entering the market and many of them had a new twist. Thus, the landscape of infrastructure providers got broader but also more complicated. I guess this is a good and bad thing for non-financial brands. It is good to have more choices but bad if it's too complicated to navigate the space. I am very curious to see how the new infrastructure providers will be positioning themselves and if they perhaps will focus on a specific type of ideal customers.
What do you think about my Embedded Finance predictions for 2023? Do you agree or disagree? What am I missing? I am keen to hear your thoughts and I am looking forward to December 2023 and check if I was correct perhaps with one or two predictions.
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