The European market of integrated finance is growing at a double-digit rate and is becoming increasingly important for banks, merchants and other customer-facing platforms. So much so that, by 2030the integrated finance market could surpass the 100 billion euros and represent the 10-15% of the banking sector’s revenue pool. This is what emerges from a report by McKinsey & Company on the development of integrated finance.
In detail, according to the McKinsey forecastsrevenues from integrated finance (EF) – the provision of financial products by non-financial institutions within their broader offerings – could exceed €100 billion in Europe by the end of the decade. The distribution of financial products and services, such as loans and insurancethrough third-party channels is in fact gaining increasing importance, as technology and data allow instant and uninterrupted experiences for customers, who increasingly expect to find financial services when and where they need them, such as when making a major purchase. In many sectors, customers expect merchants and other platforms for consumers and small and medium-sized enterprises (SMEs) to provide integrated finance products and services. In parallel, banks are intercepting the importance of integrated finance as a distribution channel. It is also estimated that the integrated finance market in Europe will generate between 20 and 30 billion euros in 2023, around 3% of total banking sector revenues. Over the past ten years in Europe, integrated finance volumes have grown three times faster than directly distributed loans.
THE business leaders of the integrated finance value chain – according to McKinsey’s analysis – predict that the volumes of consumer credit will continue to migrate towards the integrated loans. For SMEs, leaders expect factoring and other simple types of financing become integratedas enterprise resource planning providers and SMB vendor marketplaces will provide them when needed. Integrated finance channels could initiate 20-25% of retail banking sales to individuals and SMBs and account for 20-25% of retail and SMB lending, up from the current 5-10%.
Online channel
In 15 years, the online has become the dominant retail banking channel. Between 2019 and 2023, the mobile channel became more dominant, supported by physical distancing due to the pandemic. As banks add remote banking functionality and advice through mobile banking between now and 2030, this channel is likely to continue to earn shares at the expense of all other banking channels.
Buy Now Pay Later
Over the course of 7 years, from 2016 to 2023, the share of “buy now, pay later” (BNPL) in e-commerce sales in seven European markets went from 2 at 10%. This growth has been accompanied by an increase in the share of e-commerce in retail sales, further cementing the rise of BNPL in the total retail payments mix. In the Nordic countriesthe loan volumes for Point of Sale financing, including BNPL, are grew by 8-10% per year from 2016 to 2022, while loan volumes for other retail lending products grew by 4-5% per year. In Europethe channel of Integrated finance will represent 5-6% of revenues from retail and small and medium-sized enterprise lending in 2023 and could reach 20-25% by 2030.
The drivers of growth
On the demand side, the Customers increasingly expect convenience and fluidity in their purchasing journeys. According to a 2023 McKinsey survey on car financing, 40% of consumers prefer online channels to finance a car purchase. Consumers want instant access to convenient financial services such as loans and insurance, when and where they need them, with as few clicks as possible. In an unpublished June 2021 McKinsey survey of six European markets, consumers said that expect to use more integrated financing solutions in most retail categories. At the same time, SMBs have similar expectations for bundled finance. From a merchant perspective, bundled finance increases sales through higher conversion rates, larger average baskets, and greater customer lifetime value.
On the supply side, the cost of integrated finance has significantly reduced in recent years thanks to technological advances, such as application programming interfaces (APIs), which make it easier for systems to interoperate, and better electronic identification systems. Underwriting decisions for loans can now be automated at almost zero marginal cost through instant connections to public and private data sources. Future regulatory developments, such as the proposed Financial Data Access Framework (FIDA) and the third European Payment Services Directive, will further facilitate integrated finance.
