Embedded Finance is taking Banking-as-a-Service a step further, all achieved through API integrations. Are we about to see a plethora of non-financial companies offering financial services?
In 2019, Andresson Horowitz’s Angela Strange made headlines by predicting that in the near future “every company will be a fintech”. This, she claimed, was due to the possibilities that Embedded Finance was bringing.
However, that enthusiasm among VC firms is still in its early days among the majority of businesses. According to the largest ever independent study into attitudes around Embedded Finance, conducted by OpenPayd earlier this year, a staggering 91% of business leaders only have a partial understanding of what Embedded Finance is.
What is Embedded Finance? The ‘buy-now-pay-later’ example
Embedded Finance is the integration of financial services within traditionally non-financial companies. It’s a form of Banking-as-a-Service (BaaS), allowing businesses to offer their customers financial services (including banking, payments, insurance, lending and more) without needing to form partnerships with individual providers or go through the usual compliance and regulatory processes.
Through the use of APIs, non-financial companies can simply ‘plug in’ the services they require and package them within their own design ecosystem. In one of the most common examples, a consumer could be shopping using the app of their favourite retailer, and when they come to checkout they are offered a ‘buy-now-pay-later’ scheme. This is a form of lending delivered by a third-party financial services provider, but there is nothing to make the consumer think they are interacting with any business other than the app. No links to other sites, no repeating information they’ve already provided.
This arrangement offers four key benefits to the retail app. They can offer a new, highly desirable service to their customers. They can do so without the rigmarole of building the technology and complying with regulation in every market they serve. They can reduce their rate of cart abandonment and their buy-now-pay-later offering will be, in the short-term at least, a plus point over their competitors.
But this example takes us back to the point at hand. Whilst still very much being a retail business, the ‘buy-now-pay-later’ payment option means the app is now providing digital financial services to their customers. They have become a fintech business.
So are we indeed heading into a new era in which fintech dominates the global economy? Or is this just something only a handful of companies, relatively speaking, will take seriously? What does the future look like?
The potential for Embedded Finance
Embedded Finance is still very much in its infancy, but the above example gives an indication of what it can do. It allows businesses to identify how their products can be more useful to their customers, and makes that change quick and simple - adjectives that would never be used to describe incorporating financial services in the past.
At this point sceptics may say ‘that’s just one example, that hardly means all companies are going to become fintechs’. Perhaps, but maybe we need to think bigger? What Embedded Finance brings is enormous possibilities. No business will be integrating financial services immediately into every product, but over time it will become clear how specific Embedded Finance use cases will help them address specific organisational goals. For some this may be creating a new revenue stream, for others it may be about enhancing customer experience or reducing purchasing friction. Embedded Finance is a tool that can help businesses achieve these targets.
In the future your supermarket may offer to round up your purchases and invest the loose change on your behalf. Shopping through social media such as Instagram will become even more streamlined, with bank details only added once. See, click, pay. Instead of holding money in one single account, your customers will have multiple bank accounts with different services they use frequently, each offering specific benefits. They’re likely to have another service which allows them to manage all their accounts at once, moving money between them quickly and efficiently.
The very way in which we understand personal finance is likely to change, if not in the short-term then almost certainly in the medium to long-term. Embedded Finance will drive that, and while we can do our best to predict what developments may unfold, businesses will utilise it in ways we can’t even currently imagine.
Enough about potential, is the desire really there?
As much as we may wax lyrical about the possibilities of Embedded Finance, if the view isn’t shared by others, how far can it go? Do businesses want to become fintechs? And what about consumers?
So far, the evidence suggests that Angela Strange’s initial prediction is not one that should be sniffed at. In the aforementioned study on Embedded Finance, a staggering 92% of business leaders interviewed plan to launch Embedded Finance within the next 5 years, with 73% planning to launch within 2 years. In terms of reasons why, retaining the front-end customer experience (85%), increasing the number of customer touch points with their brand (84%) and offering mobile wallet or current account options to customers (79%) ranked as the top three most appealing impacts of Embedded Finance for businesses.
Clearly businesses are taking Embedded Finance seriously, however, it’s also important to note that this desire is not top-down. A recent EY study noted that 63% of consumers would “highly value” Open Banking and Embedded Finance solutions that connect and personalise their experiences across third-party ecosystems.
Customers are demanding new services, and businesses are investing in meeting these needs. This is customer-centricity at its clearest.
The concept of all businesses becoming fintechs doesn’t mean every company is going to become a regulated financial institution. The beauty of Embedded Finance is that it enables businesses and consumers to benefit from improved products and services, which solve genuine problems, without becoming more finance orientated.
Embedded Finance is about possibilities, so while we believe it is true that in the future every company will be a ‘fintech’ - as we understand them to be now - our entire definition of fintech is likely to change. Today a fintech company is a tech firm in financial services. Tomorrow, it’s going to be any company that is using technology to streamline the financial component of their product offering and deliver a better user experience.
At OpenPayd, we can help you do just that.