The rise of challenger banks has forever changed the financial services landscape we once knew. Business models have evolved, the dominance of the big monoliths has been questioned, and consumers will no longer tolerate poorly designed services, with opaque and expensive fees combined with archaic support.
But the emergence of neobanks has only been the first act in the ongoing fintech revolution, and embedded finance is the next wave.
What is embedded finance?
Embedded finance has come to the fore in the last 18 months, representing a new model through which financial services can be offered. It allows non-financial brands to integrate banking and payments services into their apps and ecosystems through the use of APIs (application programming interfaces). This means brands can offer financial services to their client base as a part of their existing products, or they can build entirely new ones, quickly and easily using developer-friendly integrations.
So far, this has triggered the unbundling of consumer banking offerings, providing tech to financial institutions, and allowing the neobanks to compete against the slow-moving incumbents. But thanks to the advent of Banking-as-a-Service providers, who lease access to individual parts of the banking and payments ‘stack’, brands can access the specific services that they require, removing major costs associated with dedicated compliance, development and regulatory coverage.
How far have we come?
There are a number of high-profile early adopters of embedded finance. For example, Uber has launched a banking product in Mexico aimed specifically at its drivers and in partnership with BBVA. Meanwhile Ant Financial, the largest fintech company in the world, has launched a core banking product, and is hoping to become the payments provider of choice for global embedded finance applications.
Embedded finance brings an entirely new set of players targeting specific segments into the fold of financial services, through the provision of tech blocks, licences, and operational activities. This specialisation will be one of the defining trends of the coming years, creating a keener focus on tailored services catering for niche target verticals that would have otherwise had to resort to rudimentary, one-size-fits-no-one services.
Already, the possibilities presented by embedded finance are persuading existing tech players that they should be offering banking and payments services to their customers (or their customers’ customers) as it allows them to provide a better, more immersive experience, driving stronger loyalty, increased customer lifetime value, and creating new revenue streams. The addition of Open Banking to the mix provides a valuable extra layer of support for these immersive end-to-end experiences, particularly as we move beyond account aggregation to payment initiation.
We are moving away from the separated world of pay-in providers on one side (open banking players and card acquirers), FX partners in the middle (focusing on currency conversions) and pay-out providers on the other side, to an integrated world where all propositions will become available under a single-provider umbrella. This allows non-financial brands to go to a single provider to launch their embedded finance services. One of the most successful providers doing this to date has been Stripe. Starting out as a payment gateway for SMEs, Stripe has rapidly expanded its product suite to include a large range of currencies, accounts and pay-outs for the digital economy and is now looking into corporate treasury for selected businesses. The successful expansion of Stripe’s product suite, as well as the geographies being served, has been rewarded with a recent valuation on the secondary markets of $115 billion.
Over the coming years, embedded finance will initiate a further fragmentation in finance. Consumers will no longer just bank with banks – they’ll bank with the fintech start-up of their choice, and they’ll conduct specific banking and payments tasks through white labelled systems integrated into their favourite existing apps.
Industry commentators are often quick to cite the ways banks will suffer as a result of these shifts. But in reality, embedded finance presents a huge opportunity for the incumbents. They will step back from their public-facing role, and will instead become the ‘pipes’ on which financial services run. They will lease technology and licences to a vast new ecosystem of fintech players – in fact, we’ll come to think of banks as the ‘utility companies’ of finance and some of the biggest banks are already there. As previously highlighted, Stripe has been an industry champion when it comes to embedded finance and to launch their new corporate treasury proposition they have partnered with Citi Bank and Goldman Sachs. This example, alongside BBVA and Uber in Mexico, demonstrate that banks have an equally important role to play as the innovative fintechs leading the charge.
The embedded finance ecosystem removes many of the most significant challenges and costs associated with building a financial product at any scale. With access to the ‘pipes’ of finance more open than ever, a new generation of start-ups will more quickly and more resiliently be able to achieve stability and growth than the generation we’ve just seen.
Unlocking the next wave
The groundwork is well and truly laid for embedded finance. But there are several things that need to happen for this new wave to gain real traction and fulfil its promise. Amongst these, the most important is a shift in perceptions and behaviours.
Consumers will interact with their finances via brands they may have never expected. Non-financial brands must be willing to seize the opportunity to create new revenue streams. And the incumbents must embrace embedded finance, and at the highest level. Banks are changing their thinking, and understand their role as moving away from that of a gatekeeper and towards that of a facilitator. They no longer have the monopoly on such a wide range of financial products and tools and so they must recognise that their new value proposition is as the utility layer in a more distributed banking stack.
The fintech revolution is now truly upon us. To create true innovation, we’ll need to cast aside our long-held contentions about what it means to access banking services, who we might be willing to access them from and the role that the traditional players will adopt. Only then will we be able to unlock the next wave.