Embedded Finance Explained, by François de Witte

08-12-2022 | François de Witte | treasuryXL | LinkedIn |

As embedded finance continues to evolve, there is an opportunity for treasurers to explore how these developments could help their businesses. The present article explores what embedded finance really means, what’s driving progress in this space, and where should treasurers begin.

In the current article, François de Witte will explain Embedded Finance to us:

  1. How to define Embedded Finance
  2. What is driving development in Embedded Finance
  3. How can treasurers leverage developments in Embedded Finance and banking-as-a-service
  4. What sort of companies are likely to benefit from Embedded Finance
  5. The impact of Embedded Finance on the competitive landscape
  6. How the rise of Embedded Finance and BaaS might affect the relationships between companies and banks in the future
  7. How Embedded Finance will develop in the future

 

  1. How would you define Embedded Finance?

Embedded finance is the integration of financial services like lending, payment processing or insurance into non financial businesses infrastructures without the need to redirect to traditional financial institutions.

In other words, it the use of financial tools or services, such as lending or payment processing – traditionally obtained through a bank – by a non-financial provider, through its technology platform (proprietary or outsourced).

Generally, we see following contributors to embedded finance:

  • The end customer.
  • A platform.
  • A software and data provider.
  • A regulated entity.

As such, embedded finance actors are also providing their licenses (e.g. Payment Institution, Licensed Deposit Taker, ….).

Typical examples are embedded payments, embedded lending and embedded insurance.

 

  1. What’s driving development in this area?

The barriers to entry that have traditionally protected the financial services sector are beginning to fade away, and incumbents now face a multitude of disruptive shifts. On the other side, customers expect real- time, seamless, and intelligent financial services. Regulation drives further competition.

This has brought new providers to come up with new solutions competing with the incumbent banks, which we call “Embedded Finance” Solutions. They leverage on a greenfield environment to benefit from innovations such as cloud, microservices and APIs.

Silvia Mensdorff-Pouilly, Head of Banking and Payments, Europe at FIS, cites two key drivers of development. “On the one hand, digitalisation and interactable technology is enabling the embedding of financial services in customer journeys,” she says. “On the other hand, consumers are increasingly expecting transactions to become easier, faster, and more transparent.” (source: https://treasurytoday.com/regulation-and-standards/standards/unlocking-the-potential-of-embedded-finance)

  1. How can treasurers harness developments in embedded finance and banking-as-a-service?

Corporates need to actively follow the developments of solutions by entities other than financial institutions. Typical such providers are FinTech and new platforms.

Corporates can get access to an array of accessible, flexible, and more affordable financial services. They can cater for customized financial solutions that fit their requirements perfectly. It results in an improved end-user experience on the platform.

Embedded Finance offers to corporates huge opportunities to decrease the costs and increased customer loyalty and retention, thanks to amongst others an improved UX and a better service.

  1. What sort of companies are likely to benefit from embedded finance? What are the possible use cases?

For corporate and institutional organizations, embedded finance provides huge opportunities in areas such as:

  • Embedded payments: With Embedded Payments, consumers make payments with the touch of a button. It allows them to make payments without switching between apps, which speeds up the checkout and payment settlement processes, thus offering an excellent user experience. By providing embedded payments to customers, companies can increase their revenue, customer sign-up rate, customer loyalty and gain powerful analytics insights.
  • Embedded Lending: Embedded lending lets someone apply for and get a loan right at the point of purchase. The BNPL (Buy Now Pay Later) scheme is an example. This removes the need for excessive paperwork and cumbersome processes and enables the customer to get loans at the tap of a button. Another example is B2B lending.
  • Embedded investments: This simplifies the investment process by offering a single platform for investing and managing money. It allows users to put money in different financial instruments without leaving the platform, which is a safety measure.
  1. Impact on the competitive landscape:

The rise of embedded finance comes against a backdrop of fading barriers to entry that have traditionally protected the financial services sector, with incumbents facing a multitude of disruptive shifts. “On the other side, customers expect real-time, seamless, and intelligent financial services,” he says. “Regulation drives further competition.”

With new providers working to compete with incumbent banks, they have been prompted to produce new solutions that leverage a greenfield environment to benefit from innovations such as cloud, microservices and APIs, The new challengers are born native to the cloud and provide ‘build-your-own-platform’ solutions via modular, microservices-based and API-first architectures.” These challengers include both aggregators and orchestrators.

  1. How might the rise of embedded finance and BaaS affect corporate banking relationships going forward?

Embedded finance has brought challengers and tough competition in the banking landscape.

When considering these new providers, corporates must also consider other factors such as the trust: Do you have enough trust in the brand to interact in a financial context? Will you feel comfortable sharing your financial data with this new provider and trust that your privacy will be protected? Does the provider has the capacity to process a very large number of transactions?

When Corporates look at embedded finance proposals, they should raise the following questions:

  • Trust: Does a corporate have enough trust in the brand to interact in a financial context? Will they feel comfortable sharing their financial data with the embedded finance provider and trust that their privacy will be protected?
  • Relevance: Does the financial solution make sense for the corporate?
  • Business impact: Can the solution provide sufficient value to the corporate, such that it incentivises adoption and usage?What is the value that this generates for the business? Will it be meaningful to the business?
  1. How do you see this topic developing in the future?

it is likely that future developments in embedded finance will result in more opportunities for treasury teams.

The challenge will be for the new players to provide the necessary trust to move away from incumbent players. This could be possible by cocreation between banks and fintechs, which could form the basis of solid relationships in this new era of collaborative working.

According to a recent study of Bain& Company (https://www.bain.com/insights/embedded-finance/), Payments and lending will continue to be the largest embedded financial services but will be bolstered by the growth of adjacent value-added services, including insurance, tax, and accounting.


Francois de Witte

François de Witte