Digital-first banking generations want a combination of ease, speed, customization and yet, select higher-touch service when it comes to more complex transactions.

And because digital access has been a gateway to a flood of information, peer sharing and product choice, these banking generations place a lot of significance on financial well-being.

It is through embedded finance that many younger banking generations have their earliest introductions to financial services. Credit unions are smart to recognize this shift and see the valuable role of embedded finance within what’s on offer to members and prospects, say proponents of the technology.

The embedded finance marketplace, which might include buy-now-pay-later functions through a retail site or on-site sales financing with quick approvals for big-ticket electronics, just to name a few examples, reached $20 billion in revenues in the United States alone in 2021, according to McKinsey’s market-sizing model. According to McKinsey estimates, the market could double in size within the next three to five years.

In a way, embedded finance isn’t new. Think of private-label credit cards at retail chains or airlines. But, as McKinsey consultants suggest, what makes the next generation of embedded finance so powerful is the integration of financial products into digital interfaces that users interact with daily. And not necessarily because they automatically think of their bank or credit union first. These days, the embedded finance list extends to customer loyalty apps, digital wallets, accounting software, shopping-cart platforms, among others.

The upside may be even greater, which means banks and credit unions who see embedded finance as an opportunity to grow longer-standing banking relationships can’t stand aside and let pure technology competition take over. For one thing, open-banking innovation, supported by mandates in the European Union and market-led adoption in the U.S., has helped unlock latent demand by enabling third-party fintech players to access consumers’ banking data and even conduct transactions on their behalf, as McKinsey analysts note.

Credit unions should feel they can have a solid standing in this competition. In fact, the membership format at credit unions may lend itself to the holistic view of their own financial transactions and financial wellbeing that digital-native consumers embrace.

That’s according to a prediction offered by Union Credit, a digital consumer credit-approval marketplace catering to credit union partners.

Barry Kirby, co-founder and chief revenue officer at Union Credit, said credit unions feel rising competition from traditional banks, nonbank fintech platforms increasingly offering financial products, and neobanks that blend traditional financial services with digital CX.

And credit unions feel empowered to reach younger potential members early in their banking journey. These youngest Millennials and Generation Z have only transacted in a world in which the smartphone exists.

“Credit unions are looking for ways to increase brand visibility and strengthen member acquisition,” Kirby says. “Embedded offers are proving to be an effective way to reach new audiences that may not be aware of the benefits credit unions provide.”

What’s more, says Kirby, credit unions can leverage reputations for fostering member relations not just on a transactional basis, but emphasizing overall financial literacy and smart decision-making.

“More credit unions are meeting more Americans in their shopping and e-commerce experiences and helping to improve their finances,” says Kirby.

The top three marketplace shifts that can help direct credit unions through the adoption of embedded finance include:

Leading with your brand first. This is the evolution of indirect lending. Embedding offers such as personal loans and credit cards directly into consumers’ shopping experiences boosts a credit union’s visibility and fosters new relationships with consumers. This approach supports the credit union movement, using financial opportunities to successfully connect with the next generation of members.

Expanding financial access to low-income communities. Community Development Financial Institution (CDFI) credit unions are using embedded finance to expand their reach and meet their goals for low-income communities. By leveraging census data, they can better identify and serve their target communities, broaden their digital reach and increase accessibility to financial services. This approach not only demonstrates their commitment to low-income communities but also helps them maintain their CDFI certification.

Balancing portfolios. Credit unions are working on balancing their portfolios in the current economy, which has seen high inflation hold back a mostly positive recovery from the worst of the pandemic. With greater portfolio balance in mind, credit unions can leverage embedded finance to make their loans more accessible to all credit-worthy consumers. Targeted offers attract new members and foster long-lasting relationships by effectively meeting consumers’ financial needs. By integrating embedded finance into their strategies, credit unions can achieve sustainable growth and maintain a balanced financial portfolio.

For Kirby and others tracking the growth in embedded finance, financial services firms must meet consumers where they transact, and with the products and services that consumers have shown they truly want and need.

“Credit unions that understand this shift will win lasting relationships within their communities and play a vital role in our financial landscape,” Kirby said.

Rachel Koning Beals is Senior Editor at BAI.