The embedded finance market in the U.S. is experiencing a steep growth path, with an estimated value of $29.5 billion in 2024 and a 31.85% CAGR until 2034. Meanwhile, transaction volumes are growing fast. Industry analysis indicates that they will increase to $7 trillion in 2026, as compared to $2.6 trillion in 2021. These figures represent a paradigm-level transition in products to financial experience, the intuitive integration of financial experiences into one online life.
For regional and community banks, embedded finance software is no longer just an option. With the increasing need to contest fintechs, satisfy customer demand, and pursue long-term growth, it is becoming a necessity to invest in technology. Fintech-first players are paying significant attention to payments and consumer wallets; banks need to address compliance, SMB lending, and their digitalization.
Why Embedded Finance Is Reshaping Banking
Embedded finance is radically transforming the way that financial services are produced and consumed in the US. Credit cards, debit cards, Buy Now Pay Later (BNPL) payment options, Point of Sale, and bank accounts, once seen as a service, are now expected to become a part of digital-first embedded finance solutions. The move has been catalyzed by fintech partnerships and technology platforms. These companies have demonstrated the effectiveness of integrating financial services directly into user experiences, resulting in a more rapid adoption rate and improved customer loyalty.
The Current Gaps in the Embedded Payments and Finance Industry
Although the concept of embedded finance has attracted a lot of attention in the recent past, several discussions on the same are yet to be conclusive. Most of the industry discussion revolves around the big picture, excluding the very hard realities that are most important to regional and community banks.
1. Hyper-Focus on Fintech Success Stories
Many embedded finance software providers tend to focus on how their digital platform enables payment processing, embedded banking, and embedded insurance services. But they often fail to point out what exactly makes it difficult for banks to mimic such models. Stricter regulatory frameworks, legacy systems, and customer demand states of trust impose tighter requirements on banks and require more subtle work.
2. Lack of Compliance and Risk Capabilities
There is also the growing popularity of new forms of revenue, which can be at times misleading, especially due to the complexity of compliance in embedded finance offerings. Any solution needs to have data privacy, anti-money laundering processes, and consumer protection regulations in place at the planning stage, since regional banks and credit unions cannot afford to fail regulatory measures.
3. Unexplored Integration Challenges
Incorporation of financial products in third-party non-financial platforms like e-commerce, Online checkout portals, and digital wallets, through APIs, is seldom a straight-out-of-the-box operation. Many financial institutions underestimate the work involved in integrating core systems, synchronizing data, and continuing to support real-time risk evaluation without disrupting existing systems.
4. Lack of SME Use Cases
Discussions between bank leaders and fintech providers tend to revolve around convenience of payments and broader financing. However, the small and mid-sized corporate sector is an expansive, untapped marketplace when it comes to embedded credit and working capital services. Overlooking this segment would create a missing link as to how embedded finance software would make a difference to serving regional economies.
5. Unclear Value Proposition
Lastly, whether embedded finance software-led business models are profitable at scale compared to traditional banking can be disguised by hype. Unless you have disciplined cost management and a clearly understood value-capture strategy, what at first appears to be scalable innovation can quickly end up being a very costly experiment.
By focusing on these areas that have been ignored, regional and community banks can stop dwelling on buzzwords and start looking to create long-term, embedded financial strategies that are realistic and sustainable.
Strategic Benefits of Embedding Financial Services
The objective to embed financial services should be driven by the vision of ensuring long-term relevance, opening new revenue streams, and offering unmatched customer experiences right where the users are. More importantly, embedded finance software offers a way to extend banking beyond the walls of the branch and into the digital spaces where modern SMEs are already managing their businesses and finances. It unlocks a range of strategic benefits like:
1. Portfolio of Revenues
- Allows banks to monetize financial services in the digital ecosystems outside the traditional branches.
- Opens new fee and interest revenue streams via integrated lending, payments and working-capital offerings.
2. Better Customer Retention
- Locates banks in the daily platforms customers are using, such as accounting tools and business marketplaces.
- Minimizes customer attrition by enabling the in-mingling of financial services and essential processes.
3. Quicker Cycles of Innovation
- Embedded finance software limit reliance on cumbersome IT initiatives.
- New products are easy to roll out by banks, and pilot them to a particular segment of customers, and expand depending on the demand.
4. Better Cost-Efficiency
- Repayment automation (reconciliation), compliance check, and loan processing automation reduce the cost of servicing.
- Enhanced digital process eliminates manual process and accelerates decision-making.
5. Competitive Differentiation
- Balances the ground between fintechs and large banks, which already lead with digital banking-as-a-service platforms.
- Increases trust through a compliance-first approach and a frictionless digital delivery.
6. SME Community Engagement
- Equips banks to capture small businesses where they need them most with custom lending products.
- Enhances the position of regional banks as important local economy support agents.
Key Considerations for Banks Before Adopting Embedded Finance Software
The opportunity of building a one-stop shop embedded finance solution for SMEs is irrefutable, yet proper planning is necessary to make it successful. Before taking further steps, it is important that regional and community banks consider the following.
1. Legacy System integration
Many banks and financial service providers use aging core infrastructure. Embedded finance software must be evaluated for its ability to integrate smoothly with non-financial companies through APIs, data connectors, or low-code interfaces without disrupting ongoing operations.
2. Regulatory Readiness and Compliance
The integration of financial services within third-party ecosystems may expose a financial institution to compliance risk outside its territory of control. Banks should insist on solutions that are configured to have in-built functionality of onboarding, KYC, AML, backend audit logging, and consumer protection.
3. Agile Risk Management Structures
Not every customer segment has an equal level of risk. An efficient embedded finance platform must incorporate flexible underwriting models that suit the unique credit policies of the institution.
4. Flawless Customer Experience
Embedded lending is not all about enabling finance on external apps like Shopify, Stripe, Uber, or Amazon. Traditional financial institutions must pay proper consideration to the transformed customer journey and make the operations as smooth, transparent, and customer centered as possible. The embedded payment solution should be built in accordance with the needs of modern SMEs, including digital retailers, SaaS startups, and other business clients.
5. Profitability and Business Case
Although the opportunity is appealing, the costs of implementation have to be weighed against the current cash flow and forecasted revenues. A scale roadmap that is underpinned by pilot testing and ROI analysis is necessary to prevent expensive experiments.
6. Partnership Alignment
Adoption frequently necessitates a partnership with financial solutions providers and third-party software platforms. Banks ought to weigh fintech companies both in terms of technology compatibility, as well as in long-term compatibility with their business targets.
By getting a jumpstart on these factors, banks will be able to bypass experimentation and develop sustainable, compliant, and lucrative embedded finance strategies sooner rather than later.
The Future Outlook for Embedded Finance in U.S. Banking
Like open banking, embedded finance is a new entrant in the US banking landscape, but its overall effect on U.S. banking is likely to be revolutionary in the long run. The following trends can be assumed to characterize regional and community bank adaptation to embedded finance products in the upcoming decade.
1. Small Business Ecosystem Ramp
Embedded finance solutions open new opportunities to SMBs, which move to increased use of the technology at a fast rate in search of faster and more contextual credit and working capital accessibility. The role of banks as the main partners of the business, which will give lending at the point of need in business tools, will be enhanced.
2. Expansion in the Role of Regulation
Regulators are likely to increase monitoring of embedded finance formats as the adoption increases. This will require banks to double down on compliance-first approaches, ensuring embedded finance software remains fully aligned with evolving U.S. standards.
3. More Collaborative Architectures
Instead of engaging in direct competition with fintechs, the majority of banks will seek to form partnerships with the technology-enabling firms in order to streamline financial services within non-bank platforms. This partnership will aid in expanding the reach to the external platforms’ existing users and exploiting the pre-existing trust and risk management ability of banks.
4. Data-Driven Personalization
Enhanced financial data analytics and AI will also help banks provide more customized embedded services, including differentiated credit services to industries or segments. Data-driven decision-making using embedded finance platforms will become a source of competitive advantage.
5. Embedded Finance as a Core Banking Strategy
The features of embedded financial transactions regarded as optional today will very quickly become table stakes. Over time, embedded finance software will not sit on the periphery of banking but will become central to how services are designed, delivered, and monetized.
To regional and community banks, planning ahead for this future is essential. Not only will the early movers be more competitive, but they also will be able to establish long-term ecosystems, which better serve customers in a more holistic way.
Final Takeaway
Embedded finance is not an exclusive innovation anymore; it is starting to become the linchpin of the contemporary banking strategy. For regional and community banks in the US, the rise of embedded finance software represents both a challenge and an opportunity. By placing a stronger emphasis on compliance, integration, customer experience, and long-term profitability, banks may step out of the noise to develop embedded finance strategies that are both practical, sustainable, and future proof.
See How Embedded Finance Uplifts Your Financial Institution, Live!
Schedule a customizable demo of the Biz2X embedded finance software and experience unmatched capabilities, along with a precise calculation of your ROI after implementing it.
FAQs about Embedded Finance Software
1. What is embedded finance software?
Embedded finance software integrates banking products such as payments, lending, or credit directly into digital platforms that customers already use. It enables the delivery of financial services in a smooth, contextual way without the customer having to go to a branch or a separate portal.
2. What are the reasons regional and community banks should consider embedded finance software?
Moving to embedded finance software would allow banks to expand their presence into the sites where customers are already operating. This will enhance collaboration, generate new sources of revenue, and keep the banks on a competitive track in the digitalized customer engagement world.
3. What are the types of services provided on the embedded finance platforms?
Typical applications include payments, credit cards, digital wallets, and small business lending. Embedded finance software can significantly help regional banks wishing to provide term lending, working capital, and SBA lending directly to their customers.
4. What role can compliance play in the adoption of embedded finance software?
A compliance component in any embedded finance software is crucial, as many of them are under legal regulations. In-built KYC, AML, audit trails, and consumer protection ensure that new services comply with regulatory expectations and build customer trust.
5. What are the initial stages that banks need to follow before integrating embedded finance solutions?
Banks need to test integration with old systems, assess risk management systems, and develop a compelling business case to make a profit. One way to approach this is with a pilot program to help enforce the approach before scaling it to the larger organization.
