The national goal of shifting half of the Philippines’ retail payments this year to digital from cash is on track, making holistic financial inclusion a reality for even more Filipinos.

That, along with a clearer and renewed thrust for full digitalization from the national government, should provide relevant sectors and industries further reason to explore, revisit, and implement embedded finance — traditionally understood as the integration of financial products and services into non-financial platforms.

Embedded finance typically falls into these main categories: banking, payments, insurance, lending and investment (private capital management). It also has several interaction models: business-to-consumer (B2C), business-to-business (B2B) and others.

American research firm Future Market Insights estimated the worldwide embedded finance market at $54.3 billion last year, with a more than fourfold growth forecast to $248 billion by 2032. Juniper Research, a firm based in the United Kingdom, estimated it to be about $65 billion in 2022, with projected growth to USD 183 billion by 2027. This impressive pace is mainly due to the global digital transformation in many industries. Back in 2021, investments in embedded finance totaled $3.1 billion worldwide.

The United States stands out when comparing various markets. A study by Bain & Company in 2021 saw the volume of embedded finance being worth $2.6 trillion, 5 percent of all financial transactions in the country. By 2026, it is expected that it will exceed $7 trillion (or 10% of all transactions). While there are obvious methodological differences compared to earlier estimates, it is clear that the US market fares favorably in volume against other countries, having excellent odds for further strong mid-term growth.

The various data points also reveal an opt-told and more visceral consensus on the growing demand for embedded finance, as the technology makes the customer experience better, improves access to finance, and reduces costs and risks for businesses — incentivizing non-financial companies to establish strategic partnerships with digital players.

A confluence of drivers

Southeast Asia is doing a lot to catch up with the US and Europe, with embedded finance development being driven by strong e-commerce growth in the region, the rise of super apps, mobile wallets, and online banking, growing internet and smartphone penetration, large unbanked and underbanked populations, and a generally tech-savvy young audience.

This explains why embedded payments stand out as the most developed type of embedded finance in Asia. Embedded lending is gradually gaining momentum, as traditional credit card penetration remains low in the region (29% for East Asia & Pacific in 2021, excluding high income, according to The World Bank’s Global Findex Database). Embedded insurance is also growing in popularity.

Examining interaction models, B2C is where the development of embedded finance is most concentrated. However, while offering products for the end consumer, digital platforms and fintech are expanding the scope of their B2B options such as commercial financing, digital payments for small and medium enterprises, BNPL (buy now, pay later) solutions for retail, and others.

There is an argument to be made that the Philippines in particular is spearheading the trend. A 2022 Statista survey revealed 70 percent of Filipinos have used apps with built-in finance, with 83 percent of Filipinos saying they use apps with built-in finance because they make payments more convenient. 71 percent choose these apps for instant payments, 59 percent for rewards and discounts, 56 percent to not use cash, whilst 29 percent do so for BNPL options.

A ResearchAndMarkets study, meanwhile, said the country’s embedded finance industry promises to grow by 56.8 percent year-on-year to USD 1.2 billion this year. According to the forecast, during the period 2023-2029, the compound annual growth rate (CAGR) will be 43.7 percent. By 2029, it will already reach $6.73 billion, thus significantly outperforming projected global dynamics.

Given the population’s high online presence and shopping app usage rate, it will be to no one’s surprise that embedded finance will become an increasingly important driver for online transactions and have a big influence on the consumer experience. The embedded finance industry will grow through continuous technological innovation, improve financial inclusion, and expand the range of solutions.

Various partnerships are already showcasing best practices on what this looks like, but it is clear that there remain many opportunities in the local market, heralding both the growth of fintech and non-fintech companies and the emergence of a great variety of consumer services.

With the powerful growth of widespread digitalization in the Philippines, embedded finance promises to get integrated into the national digital economy so deeply that it may become a benchmark for the global fintech industry. And ultimately, the consumer wins.

Farit Shakirov is the country manager of consumer finance company Digido.

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