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Embedded Finance

Gen-Z & Embedded Finance: Is Fintech Ready to Embrace the Future?

Gen-Z represents a large, untapped market for fintech. Together with Gen Alpha (those born in 2012 or later), these consumers will soon be the principal consumer market for banking. They will reinvent the rules for digital engagement, finance, and payments for the future.

The trouble is, even though this age cohort represents $300 billion in spending power, the legacy banking industry hasn’t figured out how to really “talk” to this generation.

Marqeta recently released a report detailing Gen-Z’s role in finance and their interest in non-traditional banks. Being digital natives, they favor diversity of options over a one-stop solution, and are open to different providers. The existing banking industry, for the most part, struggles to communicate effectively with this generation.

So, does that mean the kids aren’t into finance? Not at all; banks can still connect with these customers. But, they’ll need to appeal to them more directly and meet them where they’re at.

What is Embedded Finance?

It’s highly probable that Gen-Z’s financial allegiance won’t lie with traditional institutions. Rather, it will belong to brands that incorporate financial services into their current offerings. “Embedded finance” is one potential solution.

Embedded finance is the integration of financial services into non-financial platforms. It’s a model that allows businesses to offer financial products or services directly within their existing customer interfaces, such as eCommerce websites, social media platforms, or even ride-sharing apps.

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For instance, picture an online retailer that offers a buy now pay later option directly on their checkout page. Or, maybe a ridesharing service that provides insurance options for its drivers within the same app.

Embedded finance offers a unique opportunity for brands to distinguish themselves. In turn, they can increase customer engagement, resolve customer issues at their root, and boost revenues.

Why Does Embedded Finance Appeal to Gen-Z?

Gen-Z appears to be the generation least engaged with the current financial system. The report shows that 83% of Zoomers express dissatisfaction with their banking experience.

Legacy financial services are largely designed with older clientele in mind. Thus, they fail to meet the expectations of a generation that values financial autonomy, knowledge, and seamless digital interactions. Gen-Z measures their banking experiences against the personalized, mobile-first approach they enjoy with popular apps and services from tech giants. Sadly, current banking practices don’t measure up.

Embedded finance provides brands with a unique chance to foster customer loyalty and enrich their overall user experience. This appeals to Gen-Z for several reasons:

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Embedded finance presents an opportunity to meet Gen-Z where they are. It offers a way to provide financial services that are more in line with their lifestyle and expectations. In the process, it makes banking more seamless, personalized, and integrated into their existing digital lives.

What Must Legacy Institutions Learn?

Traditional banks are not going anywhere; they’ll continue to hold a crucial position in the financial ecosystem. 

Like we mentioned before, though, young consumers crave diversity of options. They’re open to maintaining multiple connections with various financial service providers. But, Zoomers’ skepticism also outshines that of preceding generations, with fewer than half of Gen-Z choosing to bank where their parents do.

According to the survey, trust is vital to this generation; almost half of them consider “trust and security” a top priority when selecting a financial provider. They don’t always find conventional banks up to the mark in terms of trustworthiness, which leads them to look elsewhere.

So, what’s the implication for traditional banking? Simply put, if these institutions wish to engage future generations, they must meet them where they are and provide goods and services that cater to their unique preferences.

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Embedded finance aims to enhance consumer experience by integrating it into products or services that are already trusted. With embedded finance, banking becomes less about an institution with which you engage, and more about an activity you perform.

Four Ways in Which Legacy Banks Can Benefit From Embedded Finance

Numerous fintech firms and smaller banks are beginning to pay attention to this largely untapped market. A growing number of “neobanks,” fintechs, and other brands not traditionally associated with finance are aiming to move in and attract this younger generation. 

It’s already in progress; the report shows that 26% of surveyed Gen-Zers who hold traditional bank accounts also possess a digital bank account. So where does this leave traditional banks? If we apply insights from this report, there are several strategies banks can adopt:

#1
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Enhance Credit Opportunities

Gen-Z seeks opportunities to climb the credit ladder and establish their credit score, given their challenges with the tough job market, rising living costs, and inflation. Companies like Credit Karma, recognizing the importance of credit score as a cornerstone of financial health, use engaging games to teach the younger generation about credit, going beyond just a free credit report. 

Services like Credit Karma Money, an integrated bank account, help Zoomers build credit by using regular deposits to pay off a secured spending card. This activity is then reported to major credit bureaus.

#2
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Embrace BNPL (With Caution)

Buy now pay later has gained immense popularity with Gen-Z. User adoption is already higher within this demographic than in any other. It allows users to split purchases into manageable installments, a flexibility that young shoppers with limited credit really appreciate. This payment method is expected to account for approximately $438 billion of eCommerce transaction value (5.3% of the global total) by 2025.

Many retailers now integrate BNPL into their checkout process, offering short-term lending without the risk of underwriting. However, this should be done responsibly; overextending credit, especially to young people, can cause major problems.

#3
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Offer Personal Finance Management (PFM)

Personal finance management is now being integrated into various consumer experiences. For PFM to be truly effective, though, it needs to collect data from diverse sources like investment accounts, credit card statements, peer-to-peer activity, and more.

Fintech firms like Wealthfront and Betterment are leading the way, offering PFM experiences at the heart of their service. They use customer data to make highly personalized recommendations, offering a more holistic view of a user’s financial status.

#4
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Introducing Services at the Point of Need

The user experience improves significantly when financial services are integrated efficiently into other platforms. For instance, embedding lending products into the auto buying journey allows buyers to know what they can afford and shop accordingly.

Tesla incorporates this strategy by offering car insurance to its customers during the purchase process. In doing so, it creates a seamless buying experience tailored to customers’ needs.

What’s Next?

Whichever way banks decide to get a handle on this situation, some action is required.

Gen-Z is only starting out on their financial journey. For legacy banks and fintechs, the opportunity to hook the largest consumer group early in adulthood must be a top priority. However, that won’t be possible without an embrace of embedded finance and other moves aimed specifically at attracting young consumers.

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