Share
11 Embedded finance stats for banks
Embedded finance is complicating compliance for sponsor banks in 2024. Here’s a look at the latest embedded finance trends.
Embedded finance has been around for a while (think credit card offers at retail stores or on airplanes). And signs are good that this business model will stick around for years to come (consider, for instance, Klarna’s recent growth and the uptick in embedded lending at online checkouts).
From large banks to credit unions, financial institutions want to take advantage of embedded finance's transformative potential. To do so, they must understand the dynamics of bank-fintech partnerships and the factors driving them.
This article uses data from Alloy's 2024 State of Embedded Finance Report (created with the help of The Harris Poll), McKinsey, Research and Markets, Polaris, the Klaros Group, and more to examine the benefits and regulatory challenges sponsor banks face. Read on to learn what’s on sponsor banks’ (i.e., the banks and credit unions tasked with lending their financial infrastructure to their fintech partners) minds and what’s keeping them in the embedded finance game.
1. Sponsor banks attribute 51% of their revenue and deposits to embedded finance partnerships.
In embedded finance, sponsor banks lend their financial infrastructure to fintechs. As a result, they earn revenue from fees and deposit and interest income when the fintech successfully delivers its products or services. Sponsor banks reported earning more than half their revenue (51.3%) from their embedded finance partnerships with fintechs in 2024.
Fintechs also acquire customers for banks and credit unions, expanding sponsor banks’ deposit base without necessitating direct customer acquisition efforts. Sponsor banks also attribute 51.4% of their deposit income to their embedded finance partnerships.
2. 20 to 25% of lending revenue will likely be attributed to embedded finance by 2030, according to McKinsey.
Worldpay payment processing data from France, Germany, Italy, the Netherlands, Norway, Sweden, and the United Kingdom show that embedded finance made up 5-6% of lending revenues from retail and small to medium-sized enterprises (SMEs) in 2023. McKinsey analysts project that by 2033, embedded finance could account for 20-25% of total lending revenue, making it a huge opportunity for sponsor banks in these markets.
3. The embedded finance industry is set to grow at a CAGR of 23.8% from 2024 to 2029.
APIs, payment technologies, and strategic partnerships are advancing, causing the embedded finance industry to grow steadily. In the US, embedded finance is expected to reach a CAGR of 23.8% from 2024 to 2029. Researchers predict that revenue from embedded finance will reach $89.59 billion annually by 2029, up from the $30.82 billion estimated for the end of 2024. Globally, that number is expected to reach $1,029.02 billion by 2032 (with a CAGR of 32.4%).
4. 96% of sponsor banks operate more than 5 embedded finance partnerships, with most reporting between 6 and 10 partnerships.
For most sponsor banks, one embedded finance partnership isn’t enough. According to Alloy’s 2024 State of Embedded Finance Report, 96% of sponsor banks have more than 5 fintech partnerships at a time, with most reporting between 6 and 10 active fintech collaborations. This level of engagement showcases how engaged these sponsor banks are while also speaking to the importance of diversifying these relationships to spread risk and maximize opportunities across different markets and customer segments.
Managing multiple partnerships simultaneously requires adaptable and robust compliance infrastructures to ensure each collaboration runs smoothly; as the number of partnerships grows, so does the complexity of oversight and the likelihood of fraud.
Learn more: What fraud risks do sponsor banks face in embedded finance?
5. 80% of sponsor banks find meeting compliance requirements in embedded finance partnerships challenging.
Compliance gets complicated for sponsor banks overseeing embedded finance partnerships, with 80% reporting difficulty meeting requirements. This challenge stems from the need to monitor multiple fintech partners — sometimes across various jurisdictions, each with evolving regulations.
Sponsor banks often lack full visibility into their partners' compliance processes, making it hard to ensure adherence to necessary standards. The rapid pace of fintech innovation further complicates the ability to stay compliant, as sponsor banks must constantly adapt their risk management practices to keep up with new products and services introduced by their partners.
6. Regulatory enforcement actions disproportionately impact sponsor banks.
More than a quarter of formal enforcement actions by the Federal Deposit Insurance Corporation (FDIC) and 1 in 5 enforcement actions by the Office of the Comptroller of the Currency (OCC) have been directed at sponsor banks engaged in embedded finance partnerships.
The Klaros Group used these figures to calculate the odds of banks receiving a formal enforcement order over the last five quarters. Here’s what they found:
- Banks regulated by the FDIC had a 15% likelihood of receiving an enforcement order as a sponsor bank.
- Under OCC regulation, banks’ likelihood of getting an enforcement order in the same timeframe was 10%,
- For banks regulated by the Federal Reserve, the odds of receiving an enforcement order were 9%.
In contrast, non-fintech partner banks faced a significantly lower risk, with only a 1.8% chance of receiving a formal order during the same period.
7. 39% of sponsor banks say compliance violations in embedded finance partnerships cost them a quarter million dollars or more.
Since the beginning of 2024, more than a quarter (25.6%) of the FDIC’s formal enforcement actions have been directed at sponsor banks in embedded finance partnerships. According to Klaros Group co-founder Konrad Alt:
- 75% of sponsor banks say they lost $100k or more to compliance violations in their embedded finance partnerships.
- 39% of sponsor banks report losing $250K or more.
- 6% of sponsor banks report losses exceeding $1M.
Beyond regulatory fines, the failure to detect non-compliant activities in real-time can increase oversight costs. The ripple effects of these violations can damage the bank’s reputation or harm its partnerships.
Download the whitepaper: Embedded finance risks and opportunities
8. Banks are shifting away from contracting through BaaS platforms, with 61% now contracting directly with fintechs.
Bank-fintech partnership structures are changing, with 61% of sponsor banks surveyed in Alloy’s 2024 Embedded Finance Report saying they prefer to establish contracts with their fintech partners directly rather than through a banking-as-a-service (BaaS) platform. By bypassing intermediaries, sponsor banks can engage more deeply with fintech partners, aligning goals and improving collaboration.
While BaaS platforms are becoming less common at the contract layer, they remain prominent in banks’ tech stack. This allows for a more streamlined integration of financial services, enabling banks to tailor their risk management processes and compliance protocols to each partnership.
9. 29% of sponsor banks are considering reducing or shutting down their embedded finance programs due to compliance challenges.
The tension between regulatory requirements and rapid fintech innovation threatens the long-term viability of some embedded finance programs. Despite significant opportunities, 29% of sponsor banks are considering shutting down or scaling back their embedded finance programs.
With 88% of sponsor banks Alloy surveyed agreeing that recent regulatory scrutiny has increased the difficulty of managing embedded finance partnerships, sponsor banks are being called to evaluate whether the benefits of embedded finance outweigh the risks and operational burden.
10. 92% of sponsor banks believe there is a need for more adaptable embedded finance partnerships.
At 92%, most sponsor banks believe that more adaptable partnership models are key to successful embedded finance relationships. These financial institutions agree that a one-size-fits-all approach to handling fintech partnerships is insufficient in a rapidly innovating and expanding industry.
Fintechs want flexible arrangements that allow them to deliver a nimble customer experience. Meanwhile, sponsor banks are adjusting their risk management practices, compliance oversight, and operational frameworks in response to each fintech partnership's unique requirements.
11. 94% of sponsor banks believe investing in new compliance technology and training is important.
Sponsor banks understand that regulatory compliance is critical to the success of their fintech partnerships. As a result, our research shows that they are investing in new technologies and training initiatives to reduce human error and ensure they stay ahead of evolving regulatory requirements.
Technology and training initiatives can help sponsor banks manage new regulations and prevent costly compliance violations. By implementing technology that enables real-time monitoring and offers deeper insight into their fintech partners' risk management activities, sponsor banks can oversee their fintech partners, ultimately taking on a “compliance-as-a-service” or “bank-as-regulator” role. Technology and training are seen as central to sponsor banks’ ability to maintain secure and profitable partnerships in the embedded finance space.
The future of embedded finance regulation is, at least in part, up to the public.
Three US regulatory bodies—the OCC, the Federal Reserve Board, and the FDIC—are currently seeking input on embedded finance partnerships. They are asking financial institutions, fintechs, and the public to help them understand the benefits and risks associated with these partnerships.
The end-goal? To help shape future regulatory frameworks that better manage embedded finance risk. Feedback will be accepted electronically through the Federal eRulemaking Portal or by mail until October 30th, 2024.
To take advantage of embedded finance, sponsor banks must balance opportunity with risk management.
Embedded finance offers various benefits to banks and credit unions participating in this unique business model. Among them, it gives sponsor banks a strategic advantage in maintaining relevance and gaining a foothold in a rapidly changing digital economy. However, succeeding in this space requires financial institutions to manage compliance risk in their embedded finance partnerships.
With the right risk management infrastructure, sponsor banks can achieve dynamic partnerships that align with their fintech partners’ innovation cycles and evolving regulator requirements.
Alloy for Embedded Finance
To help sponsor banks address compliance challenges in their embedded finance partnerships, Alloy has developed a comprehensive embedded finance solution that enables sponsor banks to have greater control over their entire partner portfolio while providing flexibility for fintechs to tailor their policies in line with their unique needs. Our Audit Access Module for embedded finance gives sponsor banks complimentary real-time access to view and audit their fintech partners' risk controls.
Additional features like supervisory transaction monitoring, recurring sanctions screening, aggregated analytics, and policy change notifications are coming. We aim to continuously enhance financial institutions’ ability to manage risk by giving them a streamlined, scalable way to ensure compliance.