The Decline of Traditional Banks and the Rise of Embedded Finance in 2025

The financial landscape in 2025 is undergoing a seismic shift. Traditional banks, once the bedrock of global finance, are losing ground to a new breed of innovators: fintechs and Banking-as-a-Service (BaaS) platforms. This transition isn't just a trend-it's a structural realignment driven by technology, consumer behavior, and capital flows. For investors, the message is clear: the future belongs to embedded finance and the platforms enabling it.

The Erosion of Traditional Banking

Traditional banks are hemorrhaging market share. By 2025, 55% of U.S. consumers primarily use mobile banking as their preferred method of account access, a stark contrast to the 7,500 physical branches shuttered between 2017 and 2021. These closures, particularly in low- to moderate-income neighborhoods, reflect a broader disconnection between legacy institutions and evolving consumer needs. Meanwhile, the BaaS platform market-valued at $4.9 billion in 2025-is projected to surge to $19.3 billion by 2035, growing at a 14.7% CAGR. This growth is fueled by open-banking regulations, digital transformation, and the integration of financial services into non-financial platforms.

The SME segment is a critical battleground. Small and mid-sized businesses are adopting BaaS platforms at an astonishing rate, capturing 56.20% of total revenue by 2025. These enterprises, which account for 74% of business owners planning to expand, are leveraging BaaS to offer embedded lending, payments, and insurance without the overhead of traditional banking infrastructure.

The Rise of Embedded Finance: A New Financial Ecosystem

Embedded finance is no longer a niche concept. The market, valued at $85.8 billion in 2025, is projected to reach $370.9 billion by 2035 at a 15.8% CAGR. Another report estimates a more aggressive trajectory, with the market growing from $148.38 billion in 2025 to $1,732.53 billion by 2034 at a 31.53% CAGR. This divergence in projections underscores the sector's explosive potential, driven by digital payments, AI-driven tools, and the seamless integration of financial services into e-commerce, SaaS, and retail platforms.

Key players are redefining the rules. Stripe, Adyen, and PayPal dominate payment processing, while Marqeta's card-issuing platform and Affirm's BNPL solutions are reshaping consumer finance. SoFi's acquisition of Galileo and Solaris's regulated BaaS offerings highlight the diversification of financial infrastructure. Meanwhile, companies like OpenPayd and Redberry are enabling non-financial businesses to embed multi-currency accounts and compliance tools.

Investment Opportunities in Fintech and BaaS

The capital markets are voting with their wallets. In 2025, global fintech funding hit $10.5 billion in Q2 alone, with $21.2 billion raised in the first half of the year. Late-stage deals like Ramp's $200 million Series D and Persona's $200 million Series D signal confidence in scalable BaaS models. IPOs of Chime ($9.8 billion) and Circle ($6.9 billion) further validate the sector's maturation.

AI integration is another tailwind. The AI in fintech market, valued at $30 billion in 2025, is projected to grow to $83.1 billion by 2030. This surge reflects demand for fraud detection, personalized financial advice, and automated lending-services that embedded finance platforms are uniquely positioned to deliver.

The Bottom Line: Reallocate Capital to the Future

For investors, the calculus is straightforward. Traditional banks are struggling to adapt to a world where convenience, speed, and integration trump legacy systems. Meanwhile, embedded finance and BaaS platforms are building the infrastructure of tomorrow. The U.S. embedded finance market alone is projected to reach $115.66 billion in 2025, with transaction volumes expected to exceed $7 trillion by 2026.

The winners in this new era will be those who embrace innovation. Stripe, Adyen, and Affirm are obvious plays, but the ecosystem extends to AI-native fintechs, SME-focused BaaS providers, and development firms like Computools and Redberry. As the financial world shifts from branches to APIs, the question isn't whether to invest-it's how quickly.