Will Embedded Finance Transform Banking Forever?
While the term FinTech was first coined in the early 1990s, it isn’t until the last decade that we’ve seen massive expansion in this industry. And the start of the pandemic has meant that consumers have really begun to pay attention to the significant technological gap between traditional banking and competitive FinTech solutions. Today, FinTech is a booming industry. Research from Statista shows that in the past three years, the number of FinTech companies in the EMEA region nearly tripled. Every year brings large scale developments and innovation in the sector and most recently, we’ve been paying particular attention to embedded finance, which is set to revolutionize financial services. So what is it exactly and how does it work?
Embedded Finance - a definition
At its core, embedded finance is the collective term for a range of financial services which are implanted into non-financial products or platforms.
These services allow users to purchase goods and services online without having to enter their bank details. Embedded finance might be based on a Banking-as-a-Service (BaaS) approach which allows for the integration of financial services using APIs.
Until fairly recently, the implementation of such services meant a large investment in resources, but the use of Application Programming Interfaces (APIs) has made the whole process infinitely easier. APIs essentially offer a service to other pieces of software, and make for example payment process entirely frictionless for users.
Embedded payments and changing consumer habits
Nowadays, many of us use embedded payments without even thinking about them. Popular transport apps such as Uber or Bolt, feature them, as do many food delivery apps. And studies show that consumers (particularly under the age of 40) are increasingly choosing such solutions over those that feature more traditional payment methods. Why? It’s much less time and hassle, and if there’s guaranteed security, it’s a no-brainer, right?
A study by German bank Solaris (a BaaS provider) revealed that 61% of respondents under the age of 40, would be keen to open an Amazon checking account if it comes with benefits such as identity theft protection, roadside assistance, travel insurance or product discounts. This highlights the growth potential of BaaS services in e-commerce and beyond.
The rise of embedded lending (Buy Now, Pay Later)
Traditionally, if you needed to borrow money, you would apply for a loan or a credit card. This often meant several administrative checkpoints and often a waiting period before a loan got approved. Embedded lending has turned this on its head, giving consumers credit at the point of purchase with no additional hassle. There are a couple of key players on the buy-now-pay-later (BNPL) market including Klarna and AfterPay both of which allow consumers to split their purchases into more manageable, periodical payments. This has empowered consumers to shop differently, and has persuaded a whole new target audience (who were previously unable or unwilling to spend a larger amount of money in one go) to purchase higher-value products.
Note that embedded banking is not synonymous with embedded finance - it is merely one element of it. It essentially allows both banks and non-financial institutions to offer banking services to their customers. There are examples of embedded banking at work across many industries. One example is Shopify’s Balance (powered by Stripe Treasury - see more below) - the banking feature that encourages users to set up a separate bank account for business revenue rather than using their personal accounts. They can use it to manage their cash flow, pay bills and track expenses. Businesses also have access to a virtual and physical card, which they can use to access their money and earn rewards for their expenses.
10Clouds is very pleased to partner with Stripe, the complete payments platform that offers our clients excellent solutions when it comes to sending payments, accepting payouts and so much more.
Last year, Stripe added to its extended offer by launching Stripe Treasury. It’s a Banking as a Service (BaaS) API which allows businesses to embed their financial services in their marketplace or platform. It provides the modular components needed to create a complete, scalable financial product which your customers can easily access. Stripe has partnered with global banks, including Citi, Goldman Sachs and Barclays) and has taken care of the upfront bank negotiations, compliance processes, and regulatory requirements.
There are several benefits of embedded banking including the following:
- Clients get a broader choice of offerings when it comes to managing their payments.
- There’s greater transparency around payment methods which breeds loyalty.
- User onboarding is frictionless due to great UX.
- There is inbuilt reliable compliance and risk management.
Embedded wealth management
We recently wrote about how robo advisors are revolutionizing wealth management and opening it up to new demographics. Embedded investment programs make the arena even more accessible, by offering easy and inexpensive access to funds and stocks. A key player in this market is Acorns, an embedded investment app that rounds up its users' spare change from purchases, automatically allowing them to save and invest. They don’t even need to transfer money, as the app does this automatically. Acorns prides itself on its investment portfolios which were designed to maximise returns for the selected level of risk. There are no account minimums and the company doesn’t work on commission. It’s goal is to provide consumers with the tools to seamlessly manage their investments.
Traditionally, insurance was needed for buying property, cars and other large purchases and was separated from the actual buying process. But there are several key players on the market that are driving efficiencies in the sector and have installed insurance directly into purchasing. This means that they can serve potential clients the relevant insurance products at the point of sale or at other appropriate times in the customer lifecycle.
A good example is the insurance technology platform Trov which partnered with Waymo, formerly the Google self-driving car project, to create and embed an on-demand insurance engine. This engine would automatically insure all the company’s passengers, providing access, tracking, forecasting and data analysis. Waymo supplies the driverless fleet, and behind the scenes, the underwriter insures all of Waymo’s passengers.
The benefits of embedded insurance
There are multiple benefits of embedded insurance for all the stakeholders involved.
- For the user, it means getting insured without any additional hassle. Seamless protection without having to reshare personal details is infinitely preferable to having to separately contact an insurer and remaining uninsured until the policy comes into force.
- Tech-savvy insurers have an automatic audience base of thousands if not millions of clients through their partners. Once the automated technology is established, they can return to their own higher-value tasks and work on generating more business.
- Business partners are able to generate additional revenue by providing risk cover to their clients. The insurance coverage might also increase the rate of purchase, because, as the customer no longer has a loss risk.
Embedded financial services in SME & corporate banking
Business clients are often involved in complex processes such foreign trade, investment preparation and more. The complexity is even greater when you think about the numerous activities and transactions involved. That’s why embedding financial services in these processes as observed from the client’s perspective definitely makes sense.
For example banks’ offerings are often focused around trade on domestic and foreign payments, with currency conversions offered somewhere on the way. From the client’s perspective this is a demanding and time consuming process. You can easily define a dozen major steps in foreign trade when observing it from the client perspective. One area of focus is the reliability of the client’s contractor: is it safe to send goods to them? Are there any threats with payments? etc. One example of how embedded financial services could help here is through an instant offer of a contractor check in the transactional platform. Another example could be paying-by-factoring at the point in which a business owner realizes that they cannot afford to pay off their debts. This means that they don’t have to turn up at their local bank branch with a paper application asking for credit. Read more about how the process can be digitised here.
Embedded financial services are just in their infancy and there is definitely a vast variety of applications that are not yet used. In my opinion, it is this area in which the most significant growth is likely to occur - especially that clients point out themselves that they’re already very time-poor when it comes to running their company and that the bureaucracy is overwhelming.
The frictionless future of embedded finance
At its core, embedded finance means greater collaboration between banks, FinTechs and businesses. The whole aim is to build seamless, frictionless user journeys, providing customers with services without them even realising it's happening.
It totally makes sense for companies to start investing in an embedded finance strategy. The first step is to identify what you want to achieve - are you seeking to improve customer service? In that case, embedded payment might be something that you want to explore. Are you a luxury goods provider looking to tap into a whole new group of consumers? If so, a BNPL model would make sense for you, as it would encourage a wider audience to invest without the need to pay a lump sum upfront.
The next step is to understand what function your company would have in the broader embedded finance ecosystem and explore who you want to partner with. There are several different players in the funnel, each with a different function. Service providers give access to the tech stack, while banks or fintechs support the regulatory issues by carrying out payments and giving other financial instructions, while at the same time controlling the financial infrastructure. There is a whole wealth of platforms and providers to choose from, so make sure you do your research.