Unlocking the Embedded Finance: Apple and Amazon Have Entered This $7 Trillion Blue Ocean Market

Bain Capital estimates that the embedded finance market in the US, which is projected to hit $7 trillion by 2026, or 10% of total financial transactions, could witness a boost due to the increasing number of nonbank entities offering financial services. Although payments are expected to be the primary driver of the overall embedded finance revenue pool, growth in embedded cards and lending could outpace that of payments.

The benefits emerging from the expansion of embedded finance are not expected to be evenly distributed throughout the industry. Traditionally, banks have played the dual role of risk bearers and distributors while maintaining control over customer relationships. Currently, the extent to which value is captured varies by financial product. New market entrants often begin with low-risk services such as payment processing. Nonetheless, as these newcomers strengthen their customer engagement and accumulate more data, they might be inclined to assume greater underwriting risks, potentially enabling them to secure a larger slice of the revenue pie.

Apple's strong position in the U.S. smartphone sector presents a growing challenge to traditional banks, financial technology companies, and payment processors as it accelerates the shift towards digital monetary transactions. Leveraging NFC for seamless interactions with payment terminals and biometric methods for secure user verification, Apple Pay has made payment processes more accessible, particularly notable in transforming payment acceptance. This innovation has the potential to enable phones to substitute traditional point-of-sale systems, especially benefiting small enterprises. Among its competitors, Apple Pay's streamlined checkout process represents the most significant threat to PayPal's dominance.

Amazon's financial services, initially designed to boost user interaction within its own ecosystem, are now reaching beyond as Amazon Pay starts to resonate with other merchants, introducing options such as Buy Now, Pay Later (BNPL). Venturing into fintech through investments in countries like India and Mexico, Amazon is also advancing in product innovation, with features like Alexa-enabled voice payments, a collaboration with Hyundai, and pioneering palm recognition payment technologies in physical stores, beginning with Whole Foods. These services position Amazon in direct rivalry with traditional banking services, offering checking accounts and cards, loans and payment solutions for small businesses, as well as insurance.

The year 2024 may witness further advancements in payment checkout processes, intensifying the competitive landscape for e-commerce and omnichannel payment solutions among industry players, including PayPal, Stripe, Adyen, and Apple.

The latest figures from the US holiday shopping season underscore the widespread adoption of Buy Now, Pay Later (BNPL) options, with approximately 7.5% of the record-breaking online sales being financed through this alternative payment solution. This surpasses Worldpay's forecast of 7% by 2026, indicating that BNPL may be transitioning from a temporary trend to a mainstream payment method. Between November 1st and 27th, BNPL accounted for $8.3 billion in US e-commerce transactions, a 17% increase from the previous year, as reported by Adobe Analytics. On Cyber Monday, BNPL usage jumped by 42.5%, making up 7.6% of that day's online sales.

During the peak shopping period from Black Friday to Cyber Monday, Block's BNPL service, Afterpay, experienced a transaction surge of 120% compared to the pre-holiday period, spanning both online and in-store purchases. Notably, the food and beverage as well as hardware categories saw the most significant growth in BNPL use.