The Future of Finance is Embedded

It’s hard today to imagine a business without a website. In 5 years time it will be just as hard to imagine a business that doesn’t offer some kind of financial service alongside its core product offering. Welcome to #embeddedfinance.

Embedded finance refers to the integration of financial services into the value proposition of a non-financial business, made possible by the growth of banking as a service platforms. 

By providing a connection to core banking systems through APIs, fintechs are able to abstract banking features to give merchants the ability to integrate and configure innovative financial services into their user experiences. This could be a function to transfer value from one account or payment device to another, account services, loans, payment instalment products, virtual or physical cards or various types of insurance.

Not only can this be done quickly and at low cost, but it also gives the merchant the ability to customize how, and importantly when, the customer interfaces with the financial service. Long gone are the days of clunky, administrative and non-targeted reselling of financial services and the need for a tripartite communication between the customer, bank and merchant.

Embedded finance is gaining traction

Although we are at the start of this journey, there are some great examples of how early adopters have been able to seamlessly adapt embedded finance into their customer’s experience.

The most obvious example is catching a taxi using Uber. Your payment at the end of your ride is embedded into your user journey (excuse the pun!). At no point do you have to hand over cash or get out your payment card.  This use case becomes especially interesting when considering Uber Money – where Uber provide accounts and debit cards to their drivers. Not only does this create a payment infrastructure where Uber control the flow of funds between their customers and their drivers, offering treasury and cost benefits, but also creates a differentiator to help with the recruitment of drivers – For example in Mexico, Uber can now offer debit cards linked to Uber accounts to the 35% of its new drivers who have never accessed banking services before.

When we are talking about offering financing solutions to consumers, it is hard to look past Shopify as a leading example. In the past merchants utilised Shopify’s services to sell products via their marketplace, facilitating a quick and easy set up when starting out. Now these merchants can allow their customers to purchase their items using  a buy-now-pay-later option at the point of check out (through Shopify’s partnership with Affirm) – simply and seamlessly.

While reselling financial services has been around for some time, comparing reselling or white labelling to embedded finance is like comparing the telephone box to the iphone. 

Embedding financial services is significantly more attractive to both customers and merchants and I am very excited to see how more and more brands start to innovate and incorporate finance solutions into their product. In addition to driving new revenue streams, this level of innovation can act as key differentiators for merchants, who by offering the right product at exactly the right time, can enhance the customer experience, drive up checkout conversion rates and create a stickier customer base.

Ultimately, savy merchants will utilise embedded finance to create much better and much deeper customer relationships. And importantly, all of this can be done at a low incremental cost, given the financial products on offer will be sold to the merchants existing user base.

Embedded finance will penetrate across industries

The success of embedded finance and overall increase in penetration of financial services will be predominantly down to the following:

1) Distribution

The emergence of API led banking services means that distribution is no longer an issue. That layer of friction has now been removed, with any digital company being able to offer a financial service without the headache and complexity that offering financial services used to bring.

What WordPress did for the internet, fintechs are doing for finance.

Merchants will not be developing their own credit-scoring or insurance based algorithm and it is very unlikely they’ll be lending from their own balance sheet – all of the data, credit scoring, legal, compliance, regulatory and financial services etc can flow freely via API from the underlying core banking system.

2) Trust

People no longer trust banks. There have been too many failures in the banking industry, ranging from mis-selling scandals and hidden fees to financial over-engineering seen in the financial crises of 2008. 

In contrast, people love brands. Everyone has a favourite brand whose values and principles are aligned with their own - Are consumers more likely to borrow from their beloved brands and in return receive perks or loyalty points, or give money directly to the big banks, whose application processes and customer service even today remains underwhelming? For me it’s a no brainer.  

3) User Experience

Offering the right product at the right point in the customer journey, when the customer need is most acute, via an interface the customer is familiar with, is much more likely to result in an uptake of the product or service than say, being redirected to a third-party site. 

The way in which a merchant offers the product can also impact customer behaviour. One example of this is a consumer loan service, who offer payment instalments at the checkout with real credit-scoring to determine the interest payable by the customer on the short term loan. What is really interesting is that of their customers who chose to pay in instalments, one-third scored in the highest bracket for credit worthiness and as a result “paid” 0% interest. If their credit rating was so good, why therefore did the customers choose to pay in instalments? Either the algorithm used by this company needs some work (!), or by embedding the financial service at the right point in the customer journey and with the right information, merchants can influence the customer’s behaviour. 

The good news for Intergiro customers is that we’ve been thinking about embedded finance long since before there was a hashtag and we will be working with you to bring this vision to life. Please contact me if you’d like to discuss partnership opportunities.