Arthur D. Little sees embedded finance growth to $350b in 2024

Generative AI and the expansion of fintech brands into the insurance sector are predicted to propel the industry’s advancement to new heights.

A robust growth in embedded finance has been witnessed by the industry, amounting to $58.7b in 2022 whilst predictions expect higher market share in the coming years, according to a research report by Virtue Market Research.

Justin Tan, Partner and Head of Financial Services at Arthur D. Little, South East Asia, said the industry is bound to surge to $350b by 2024. “I wouldn’t take that as the gospel truth. But I think we are going to look at within the next one, two years, quite an exponential increase – an explosion,” Tan told Asian Banking & Finance magazine.

The continuous growth of embedded finance, according to the research report, is mainly influenced by incorporating artificial intelligence (AI) into lending platforms, applying machine learning to embedded investment programs, and integrating the Internet of Things (IoT) with embedded payment options.

“I think the market is huge in Asia, especially… a lot of things must be on the lookout such as data security. It’s mostly integrated AI within the embedded finance proposition. All these foundation blocks you’ll see big jumps in 2024. And with that in place, potentially 2024 onwards, you’ll see a big jump in the industry – both deeper and broader in terms of reach,” Tan said.

On the other hand, Virtue Market Research predicts a market scale of US$313.8b by 2030. Throughout the projected period from 2023 to 2030, the market is expected to experience a Compound Annual Growth Rate (CAGR) of 23.3%.

The notable expansion of fintech brands into the insurance sector, coupled with the development of inventive platforms offering contextual insurance products and services, stands out as the primary catalysts propelling the industry's advancement.

AI intertwines with the future of finance

As industries gear up for this imminent revolution, the integration of AI in embedded finance is set to redefine customer experiences, reshape financial landscapes, and open doors to a more inclusive financial future.

The synergy between AI and embedded finance, as articulated by Tan, promises a dynamic and transformative journey ahead, outlining what he foresees as key trends and significant advancements in the next year.

He said the industry should pay attention to the fusion of financial services with non-financial sectors, envisioning a future where AI propels customer journeys, fortifies risk management, and expedites fraud detection.

The “marriage” of AI and embedded finance serves as a catalyst for personalised and seamless customer experiences, he said.

“AI in the background powers that experience, that journey, understanding you — not just your financing, but what is your payment behaviour like, what kind of person you are and, therefore, provides a product or, in this case, a loan that’s tailored to something that you might want to take up,” Tan explained.

Citing examples, he said the possibilities range from frictionless car financing to AI-driven insurance tailored for individual travel patterns.

In the scheme of things, data security remains a grey area most especially when striking a delicate balance between personalisation and safeguarding sensitive information. Tan told Insurance Asia that he advocates for localised data storage, ring-fencing AI algorithms, and utilising AI as an additional security layer to mitigate risks.

What’s of top importance is access control, which means limiting the information passed between barriers to minimise potential risk exposure.

What ADL can do

Tan shed light on the consultant’s role in bridging the gap between technology and business. ADL, for instance, excels at navigating the intersection of strategy and technology. It is of utmost priority that the consulting firm understands both sides to successfully translate advanced analytics technology into practical and impactful solutions.

Looking ahead, Tan said he envisions a future where AI and machine learning take embedded finance to new heights and predict a shift towards a more individualised approach.

“AI is the intelligence behind that concern to see different facets of life: from taking the train, from travelling, from buying a house, buying a car, [to] education… and so forth,” he said.

In conclusion, Tan highlighted the vital role of AI in empowering a broader audience, promoting financial inclusion, and providing tailored solutions to underserved segments.