I guess this is the next big groundswell that a number of players are trying to take advantage of. Afterall, McKinsey’s market-sizing model pegged embedded finance revenue in the US alone at $20 billion for 2021!
But is embedded finance really new? How many times were you asked if you would like to take advantage of a certain retailer’s private-label store card and save an additional percentage off your purchase? Or, finance a big appliance and even your new (or used) car at a dealership? Airlines, hotels? Better yet, how many times were you offered to finance your online purchase during the checkout with one of these Buy Now Pay Later (BNPL) providers; affirm, klarna, afterpay and many others.
These are perfect examples of embedded finance that are part of the customer journey and experience outside of traditional banks and FI’s.
While at Citi in the partnership group, we managed a number of these private-label (and cobrand) card programs. At e-Citi, I was the first on the scene in Mountainview, CA to make sure when Google was going to hit the online e-commerce market, Citi was the first choice when it came to the user’s “source of funds” for their payment. We all remember Google Checkout for Merchants that pretty much mirrored Paypal’s tiered cost structure but with the added benefit of discounts to those merchants using AdWords.
That Was Then This Is Now
So what has changed or needs to change today from what we have seen over the past years. According to McKinsey,
“The evolution of embedded finance has been enabled by fundamental changes in commerce, merchant and consumer behavior, and technology. The digitization of commerce and business management has massively expanded opportunities to embed finance in nonfinancial customer experiences. As much as 33 percent of global card spending—50 percent in the US—now takes place online, with a large portion of small and midsize companies in the US relying on software solutions for managing their business. In addition, as digital natives came of age, they expanded the pool of consumers and businesses open to receiving all their financial services via digital platforms. Finally, open-banking innovation, supported by mandates in the European Union and market-led adoption in the US, has helped unlock latent demand by enabling third-party fintech players to access consumers’ banking data and even conduct transactions on their behalf.”
–McKinsey & Co. Embedded finance: Who will lead the next payments revolution?
All of this needs to be done in the spirit of improving the customer experience as demand will continue to grow to meet these needs.
“Several platform archetypes have emerged, including e-commerce (such as Shopify), food delivery services and rideshare apps (Uber, DoorDash), and wellness (Mindbody). These offerings are supported by an army of well-funded fintech enablers, which help platforms deliver products and services. End users increasingly prefer the convenience of using payments, lending, insurance, and other financial services embedded in their day-to-day software, rather than accessing standalone services from traditional financial institutions. “
–Bain & Co. Embedded Finance: What It Takes to Prosper in the New Value Chain
Value-added companies offering up services like payroll, P2P, insurance, tax, point-of-sale (POS) financing and more can benefit from reduced costs and risk. For example, Wells Fargo has a team dedicated to working with the Zelle’s® product, architects, and fraud and claims management (FCM) leaders to design solutions that balance risk management, regulatory considerations, and customer experience.
Goldman Sachs is the FI behind the Apple Card and GoBank offers Uber drivers debit accounts with cash back. Amazon works with Affirm which leverages platform lenders Cross River Bank and Celtic Bank. Marqeta is able to offer its customers realtime issuance on a faster timeline as part of Mastercard’s Network Enablement Partner (NEP) program.
Remember the days when banks looked at fintech startups as competitors? Not anymore when you take into account the total addressable market (TAM) for embedded finance growing to $50 billion in revenue by 2026.
“Many banks are concerned that distributing their products through partners threatens their client relationships, but if end users begin adopting embedded finance in significant numbers, banks may have little choice,” McKinsey says. “The good news is that enabling partners to distribute banking products can be a low-margin, high-volume business for banks. Banks often struggle with their cost structures, which are frequently based on legacy technology and enabled through manual processes and operations.”
Just like the legacy technology that is still very much prevalent in banks, so are employees that need to be upskilled if possible (can’t teach an old dog new tricks) and the need for new hires. I definitely see this firsthand when engaging with a number of banks and FI’s.