In 2020, of the US$240 trillion in global payment flows, approximately US$1.1 trillion came from embedded payments, a new research by JP Morgan found.

Wearables (US$347 billion), the Internet-of-Things (US$240 billion) and virtual worlds (US$182 billion) made up for most of embedded payment volumes, but banking-as-a-service (BaaS) and buy now, pay later (BNPL) are amongst the fast-emerging trends to watch closely.

Embedded payment solutions are payment processing functionalities included within various software solutions and connected devices to provide a new level of convenience and speed.

These solutions make financial transactions contextual and contactless, and are part of the broader invisible banking concept where financial services are seamlessly embedded into daily activities and become so automated and frictionless that consumers no longer notice them.

Although embedded payments currently make up for a small portion of global payment volumes, the growth of neobanking and the rise of the BaaS platform model are some of the key trends which JP Morgan forecasts will be fueling growth in the embedded payment space.

BaaS refers to a business-to-business (B2B) service where a bank leases its infrastructure. Clients like fintechs, challenger banks and other third parties can then connect with the bank’s systems directly via application programming interfaces (APIs) and build banking offerings on top of the provider’s regulated infrastructure.

The BaaS platform model has been around for a decade but it wasn’t until open banking regulations were introduced that the concept reached mainstream adoption. Today, 66% of banks around the world are using a BaaS platform, according to the 2021 World Retail Banking Report.

BaaS adoption amongst banks, Sources: Capgemini Financial Services Analysis 2021; World Retail Banking Report 2021 Executive Survey

BaaS offerings are currently centered around bank accounts, branded cards and payment solutions but they will extend to lending, investing and other fintech products in the near future, JP Morgan says. The bank estimates that embedded finance enabled by BaaS could be worth US$3.6 trillion by 2030. In 2020, they accounted for US$100 billion in payment volume.

BNPL, a type of short-term financing that allows consumers to make purchases and pay for them at a future date, is another emerging segment within the embedded finance landscape that’s poised for long-term growth.

BNPL enables retailers to provide their customers with access to credit through their e-commerce app, payments processor or other channels. Fintechs like Klarna, Afterpay and Sezzle provide the necessary technology and data for this service.

European BNPL players raised EUR 930 million in Q1 2021, nearly surpassing the total amount raised for the whole year 2020 (EUR 1 billion), according to Exton Consulting.

By 2025, JP Morgan estimates that BNPL could top US$1 trillion in annual gross merchandise volume. Growth will be largely driven by Millennial and Gen Z shoppers who are increasingly demanding more flexible, inclusive and transparent ways to pay rather than traditional interest-bearing options like credit cards.

Embedded payments, Source: JP Morgan, via Payments are eating the world, Oct 2021

Digital platforms, wallets amongst other emerging trends

Embedded payments are one of the five key trends identified by JP Morgan that are transforming the global payment landscape. These so-called “mega-themes” amounted for a total of US$54 trillion in global payment flow in 2020.

Digital platforms and “super-apps” made up for 66% of that sum (US$36 trillion) with Chinese entities singlehandedly recording US$32 trillion in payment flows.

Payment flows on digital platforms and super-apps, Source: JP Morgan, via Payments are eating the world, Oct 2021

Next, the online economy, which comprises e-commerce, digital identity, the creator economy and the gig economy, recorded US$6.8 trillion worth of transactions in 2020. E-commerce led the broader space with US$6.3 trillion in payment flows.

Payment flows in the online economy, Source: JP Morgan, via Payments are eating the world, Oct 2021

Real-time transactions, another fast-growing trend, recorded US$5.3 trillion in payment flows from money transfers/remittances, and global trade.

Real-time payment flows in 2020, Source: JP Morgan, via Payments are eating the world, Oct 2021

Finally, the last trend, digital wallets, comprises central bank digital currencies (CBDCs), cryptocurrencies, stablecoins and US wallets and loyalty. These recorded a total of US$4.4 trillion in payment flow in 2020.

Digital currencies have risen in popularity over the past few years. Since 2015, the number of blockchain wallet users has grown 23 times, surging from just 3.12 million to more than 75 million in July 2021.

Stablecoins, cryptocurrencies that are pegged to other assets such as fiat currencies or tangible commodities like gold, have caught the eye of financial institutions and payments giants. Visa has started directly settling payments with stablecoin USD Coin. Facebook has been leading the Diem stablecoin project, formerly known as Libra, since at least 2018.

Since May 2020, the supply of stablecoins has increased 13 times to reach more than US$100 billion, according to Blockdata.

Payment flows through wallets, Source: JP Morgan, via Payments are eating the world, Oct 2021

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