Embedded Finance the next Frontier
Did you use Apple pay, Or Uber pay or Shopify Pay to make purchases or do business ? Then you are using Embedded Finance.
Traditional non Finance brands (Apple,uber,Google, Shopify, Tesla)are starting to offer financial products to their customers to broaden their engagement, improve customer experience and tap in to new revenue lines.
what is Embedded Finance?
Embedded Finance (EF) refers to the seamless integration and provision of financial services within the offering of any business service to customers.
Ex: Financial services like Banking, Lending, Insurance through your trusted brands like ( Google,Amazon,Facebook) and shopify(for Business)
A SaaS Embedded Financial Provider
Shopify continues to make waves as they threaten to disrupt almost every industry that is tangentially related to e-commerce. Recently, they have made a big push into embedded finance, including:
Shopify Capital: A small business loan product for merchants on their platform
Shop Pay Installments: A point-of-sale financing product, in partnership with Affirm
Shopify Balance: A bank account for merchants on their platform to consolidate all their cash flows in one place
Amazon provides financial services to both Retail and Business Customers of Amazon.
Amazon Pay: A e-wallet that allows consumers to checkout via their Amazon account
Amazon Lending: A credit line designed for merchants on their platform, in partnership with Goldman Sachs’ Marcus brand
Amazon Card: A co-branded credit card for consumers, in partnership with Synchrony Bank and Chase
Big Tech like Google will start providing Banking services
According to Lightyear Capital, embedded finance will generate $230 billion in revenue by 2025. As if that is not enough, it has been predicted to grow into a $7 trillion industry in 10 years
Why are Brands Embedding Financial services ?
- Customer demand for integrated experiences. The most significant trend is that customers increasingly seek simple, holistic, embedded, and direct experiences.
- Increase customer loyalty to the platform, Large merchant and consumer networks are sitting on a trove of valuable data that can easily translate into increased engagement and can help customers in the journey to buy more products and services.
- By Providing Financial services the companies can increase their total addressable market. Increase revenue from existing customer, financial services can increase
a) Revenue per user by 2 to 5x* versus a standalone software subscription, Imagine apple Lending money for buying their product and services ,Processing the payment and providing insurance for the customers who buys their product, Instead of relying on third party to provide Financial services .This drastically increases life time value of customers who uses their product and services.
b) Unlocks new verticals where previously the total addressable market (TAM) for software was too small and/or the cost of acquiring customers was too high.
4) Regulatory changes: Numerous rules and restrictions used to hinder non Banking organizations from providing financial services. Open Banking movement, and its supporting regulations like PSD2, broke down the barriers. Today, any regulated entity can connect non-finance companies to banking service platforms
5)Technological changes: Digital technologies like Cloud, Mobile, APIS are disrupting the Banking landscape. And customers are demanding Faster and Better services from their Financial Providers
6)Customer Trust in Consumer Brands : Millennials and Generation z trust Consumer Brands like Apple, Google more than Financial providers
A survey of Generation Z (Born after 2000) found out.
- In the future, they would be most interested in banking with PayPal (44%), Apple (27%), Amazon (27%) and Google (22%).
- More than one in five (22%) say that an easier way to pay through social media would be a key feature in selecting a financial services provider.
- The survey found that 39 percent of customers 18 to 34 years old would consider switching to a branchless bank, compared with 29 percent of customers 35 to 55 and 16 percent of customers over 55.
How BAAS(Banking as service) is enabling embedded Finance?
Banking as a Service (or BaaS for short) describes a model in which licensed banks integrate their digital banking services directly into the products of other non-bank businesses.
The Advent of Modular Banking helps brands creates their own Financial products to cater the needs of their customers.
Underlying Banking services are provided by service providers which would include BAAS provider and a Licensed Bank.
How does BAAS work with Brands.
- Brand: The company that is aiming to embed financial services into its customer offering;
- Service provider(BAAS API Providers): The company supplying modular financial services to brands as a service;
- License holder: Typically, a licensed bank that partners with providers and rents out its license as a service. This enables partner brands to provide compliant financial services.
The Financial stack comparison
Contextual Banking provides more value to their customers which is now possible with Modularization of Banking services. And time to bring financial services to market is much faster than Bank white label cards.(ex: costco cards)
How Companies are Rolling out Embedded Finance?
Payments: . Payments is usually the first service to be embedded being less regulated than Lending, Insurance or Investments. Next comes consumer banking services (cash accounts, debit card, mobile wallets), followed by Lending.
These are services that firms in every industry wants to embed first, driven by a desire to better serve customers, and to create a new source of revenue.: Embedding insurance and investments lag behind offering retail banking services and payments. Tech firms and other non-financial that are rapidly embedding payments/lending have less of a need to embed insurance and investing.
What are the open questions regarding Embedded Finance?
Embedded Finance is still in its nascent stage. There are lot of challenges and unknowns ahead.
How will the role of incumbent financial institutions change as more firms outside our industry natively offer banking services?
Will new Regulation hinder Embedded Finance?
The brands usually use new underwriting tools ,how will recession or a downturn impact the Banks which have these kind of loans on their Balance sheet?
Which industries will lead the charge, and where will new
business models emerge?
Payments and Lending are the first and most obvious financial services to
be embedded, but which services will be next?
What are the prospects for embedding Insurance? Does Investments even stand a chance?
How does regulatory oversight, supervision and risk management need to change? What models will emerge across different regions to embed finance?
