Will embedded finance increase your organization’s revenue per customer 2–5x?
Embedded finance involves integrating payment, loan, insurance, and investment services into your organization’s technology platform and apps. For consumers, embedding financial services saves time, is more convenient, and can provide a significantly improved customer experience. In the short term, this minimal investment creates direct revenue opportunities for retail organizations by capturing a larger percentage of the benefits of each sale at a marginal cost.(1)
Over the long run, finance as a service provides sales organizations the data needed to fuel a deeper understanding of customer experiences that drive loyalty and repeat purchases. In this contribution, we explore the vision of embedded banking, example use cases, and what next steps can transform this opportunity into reality for your organization.
Market analysts predict that the market for embedded banking will be worth $7 trillion in less than a decade.(2) This market is driven by recent technological innovations and regulatory decisions that have facilitated access to financial services, which up until now have been the privy of traditional banks and financial institutions. Although the design of payment, loan, and investment services has been challenging, current BaaS (Banking as a Service) providers have built the technology foundation necessary to ensure the future growth of embedded finance. As Apple, ING, PayPal, Tesla, and Shopify have now demonstrated, this profitable opportunity is within reach of organizations today willing to invest in the the right knowledge and skill sets.
The precise business benefits of embedded finance depend on where your organization sits in the market. For retail organizations, embedded finance opens up a range of sales possibilities and economic benefits tied to each commercial transaction. For Fintech operators, embedded finance offers a much larger market to grow partnerships and ecosystems across various industries and verticals. For traditional retail banks, embedded finance provides a strategic opportunity to disintermediate retail industries in monetizing their knowledge of consumer spending patterns. For the ecosystem as a whole, the transactional data produced by embedded banking provides unique insights into the reality of each customer journey.
Monetizing embedded finance both requires and delivers more than simply adopting a new sales app. The business problem here is the structural gap in the customer journey between consumers and suppliers that exists whenever prospects must look for short or long-term financing. Finance as a service addresses this challenge by reducing the friction of financing each transaction by embedding payment and investment options in retail business and operating models. Embedded banking allows Lyft’s drivers to get paid instantly using the ride-share company’s debit card. Similarly, Shopify incentivizes small business owners to create a separate bank account in-house to accelerate their sales process rather than to rely on most costly third party checking and savings accounts.(3)
More isn’t necessarily better. Integrating a panoply of financial services does not automatically translate into value for the customer. Which embedded services build customer trust and loyalty, and which services will be perceived as diluting the brand? Given the diversity of customer profiles, which offerings are best suited to specific customer needs and objectives? An intelligent use of demographic and behavioral data is critical here. Artificial intelligence (AI), especially machine learning, can help capture and analyze data points to determine which offerings make sense to which customers. Micro-profiling can help identify which customers can be nudged by which arguments in increasing your organization’s sales effectiveness.
There are a number of scenarios to monetize embedded finance in a broad range of markets and industries. In-house debit cards allow businesses to streamline the process of paying both contractors and employees. Starbucks offers mobile orders with pre-loaded credit card funds in their dedicated smartphone app. Embedded lending allows consumers to obtain a loan at the point of purchase enhancing the attractiveness of the offer. PayPal is a well-known example of a FinTech proposing both options — users have the option of linking their account directly to their bank, as well as using the company’s cash card to access the balance of their PayPal account. Klarna and AfterPay provide integrated “pay later” options to in-store and online consumers to purchase and pay for it later in monthly installments.
The footprint of embedded finance extends beyond purchases to services designed to cater to the consumer’s financial and economic well-being. Acorns invests people’s spare change in financial portfolios with automatic rebalancing and dividend reinvestment. Tesla, ZhongAn, and Salty propose insurance policies that provide customers relevant coverage for their purchases instantaneously. On an even more ambitious scale, energy innovators have bundled pay as you consume options into solar home electricity systems — bringing affordable energy to millions of households without effective access to traditional energy sources.(4)
Companies can pursue several strategies to embed finance into their own products or services. Some companies, like Udaan and Graab, have built proprietary platforms to effectively compete with the Fintechs in offering financial services to small business and commerce. Others, like Plaid, have positioned themselves as open banking platforms in providing data bridges between financial services and non-financial businesses. Most are working with the Fintech industry to embed the required infrastructure into their products and services. Given that these platform ecosystems can quickly expand due to an increasing number of transactions and payment processing, partnering with the traditional banks or Fintechs can help ensure the needed trade and technical knowledge moving forward.
Ease of access and leveraging purchasing power does not necessarily breed financial intelligence or financial well-being. Embedded finance will inevitably develop along one of two paths. Either the technology becomes more and more intelligent and people start to trust the algorithms, or retailers offer consumers the tools to make better decisions in managing their economies today and planning their financial future.(5) Corporate social responsibility takes on new meaning here — maintaining and growing customer trust will be a key success factor for embedded finance in the very near future.
The goal of behavioral economics is to nudge consumers to take better financial decisions. Current personal finance and financial wellness apps use visuals like pie charts and traffic lights to help consumers understand their spending patterns, and to determine where they might make choices more consistent with their financial goals. Once an individual has defined a goal — for example, taking a memorable vacation post-COVID19 — personal financial applications can funnel a percentage of their earnings automatically into this specific “bucket” based on expenses during the year. Cake, Chime, and Qapital are among the Fintechs proposing automated savings applications today.
The online bank ING Direct has developed the widely-used personal financial management app Yolt along the same lines. The bank’s technology platform includes a number of algorithms that analyze customer data to help consumers make better purchasing decisions. An example is a utility contract: Yolt offers comparisons of the cost and quality of the offers from energy providers to help users find the most appealing offer, and ING then proposes to help them switch. Their knowledge of consumer spending patterns opens up a number of monetization scenarios for the bank around innovative financial services that provide a better customer experience.
This discussion of the practice of embedded finance will be the focus of our upcoming webinar on Finance as a Service this March 25th. In this unique discussion with thought leaders from finance and industry, expert panelists will dissect the issues and identify opportunities for leveraging AI in harvesting the benefits of embedded finance for your organization and subcontractors. Participation in this webinar will associate organizations with cutting-edge analysis, inside-track exploration of strategic and tactical considerations, and relationship-building with the industry’s major actors.
As the pandemic reveals financial and economic challenges and opportunities in finance, strategic decision-makers can seize the opportunity to help their organizations create a new normal. The webinar Finance as a Service offers participating organizations needed insights concerning AI technologies and methodologies that will determine winners and losers in embedded finance both now and in the near future.
Lee Schlenker and Thomas A. Campbell
(1) Shen, K., (2020), Fintech Scales Vertical SaaS, Andreessen Horowitz
(2) Torrance, S. (2020), Embedded Finance: a game-changing opportunity for incumbents
(3) Raspa, S., (2020), 6 Examples Of Embedded Finance Changing The Future
(4) Reichert, P. et al. (2015), Increasing energy access: the rise of pay-as-you-go solar and innovative financing partnerships, Enterprise Development and Microfinance
(5) Crossman, P. (2020), Banking 2025. The rise of the invisible bank
Dr. Lee Schlenker is a Professor of Business Analytics and Digital Transformation, and a Principal in the Business Analytics Institute (http://baieurope.com). His LinkedIn profile can be viewed at www.linkedin.com/in/leeschlenker.
Dr. Thomas A. Campbell is Founder and CEO of FutureGrasp (https://www.futuregrasp.com/), a global technology advisory group focused on emerging technologies, especially artificial intelligence (AI), and their trends and implications in geopolitics, national security, and economics. His LinkedIn profile can be viewed at https://www.linkedin.com/in/thomasandrewcampbell/.