People get things wrong about embedded finance and fintech experts are tired of hearing their misconceptions. Moreover, those mistakes could prove costly as the fintech subsector is expected to be worth $138bn by 2026. Companies like Modulr, Flexiloans, Weavr and Toqio are just some of the companies that have picked up millions of dollars in investment by riding high on the embedded finance wave.
Interest in the sector has exploded over the years. The number of worldwide Google searches for “embedded finance” has surged over the past 18 months, highlighting the buzz around the industry.
However, it's not that odd that people get things wrong about embedded finance. After all, it's a reasonably complex topic spanning different sectors like open banking, buy-now-pay-later (BNPL), banking as a service (Baas) and insurance – and even experts seemingly can't agree about whether or not all of those should be considered to be part of the embedded finance sector or not.
No wonder people get things wrong about embedded finance.
What is embedded finance and why do people get it wrong?
So what is embedded finance? Embedded finance refers to the integration of financial services into companies' normal services. These can include digital wallets, different payment options at the checkout, insurance or transfer of money – basically, anything to do with the management of money falls under this umbrella
One of the most discussed, and therefore probably over-used, examples of what embedded finance can be comes from Uber. Back in 2019, the ride-hailing giant announced its Uber Money initiative, which saw it creating credit cards and instant earning services for its drivers.
"This new form of partnership between banks, technology providers, and distributors of financial products via non-financial platforms underpins what has been hailed as the embedded-finance revolution," consultants at McKinsey wrote in a recent article.
"Sitting at the intersection of commerce, banking, and business services, payments has been one of the first use cases of embedded finance, and a large number of the aspiring embedded-finance providers originate from the payments industry."
Some market watchers have even warned that integration of financial services by big software companies could mean that they could come for incumbent financial service providers' lunch money. In other words: embedded finance is a big deal.
Why do people get things wrong about embedded finance?
That seems rather straightforward, right? So why do people get things wrong about embedded finance?
The first reason why people get things wrong about embedded finance is that it is complex. To implement it, you often have to explain things like open banking.
Open banking forces big banks and financial institutions to share customer data with other firms, provided clients have consented for it to be shared.
The idea is that smaller startups, by plugging into the data feeds, will be better placed to compete against dominant incumbent players and provide better services as a result. This is usually done via an application programming interface (API).
While it’s hotly debated in the fintech sector how successful open banking has been and whether it was worth the cost of implementation, several startups have attempted to tap into this new market over the past five years.
Embedded finance takes this concept just one step further by expanding it to not just fintech players, but to any company.
The second reason why people get things wrong about embedded finance is that the concept is very similar to other parts of the fintech segment.
For anyone reasonably familiar with the fintech babble may recognise the similarities with BaaS. The difference between the two is that embedded finance is the actual service provided whereas BaaS provides the rails for it. Think of it this way: if an app provides different checkout options via APIs, those options are embedded finance services, whereas the app itself that made the integration of those services possible, is BaaS.
What makes the concept even more complicated – upping the risk of people getting it wrong – is that embedded finance has become a bit of a buzzword. Like artificial intelligence and the metaverse, a lot of startup founders are using the word even though their services may not be what others perceive as embedded finance or not.
What do people get wrong about embedded finance?
Given that embedded finance is more complex than what it might seem from the get-go, it's hardly surprising that people get things wrong when it comes to this fintech segment.
In light of this, Verdict reached out to the fintech community to ask them what they hate the most about the things people get wrong about embedded finance.
Scarlett Sieber, chief strategy and growth officer, Money20/20
The financial services industry has undergone a significant digital transformation at an accelerated rate, as a result of the pandemic. However, digitization in the B2B payments space has not kept pace with the rest of the sector. For example, paper checks still account for nearly 50% of B2B payments in the US. As a result, these manually intensive and inefficient payment processes are costly, prone to errors, and come with increased security risks.
Embedded payments deployed correctly have the potential to, not only correct these issues, but also offer businesses a competitive advantage, by delivering greater value to their customers and offering new revenue streams.
Although this could be revolutionary for some companies, embedded finance is not for every bank or every company: You have to have the strategy, culture – and, most importantly, the tech stack and value proposition to make it work.
Ultimately, embedded finance isn't a finance consideration, it's a tech consideration. Payment infrastructure, banking as a service and all the things that enable embedded finance are just tech rails, designed to run in the background. Embedded finance has the ability to make people’s lives better – if it performs as intended, most people won’t even realize how frequently they interact with financial products on a day-to-day basis.
Karan Shanmugarajah, CEO, WealthKernel
Embedded finance enables customers greater access to payment, lending and insurance from non-traditional providers. We encounter embedded finance daily, but a common misconception is that it appeals exclusively to Gen Z and millennials due to its simplified user journeys.
For example, embedded lending products like [BNPL] are often pigeonholed as a popular form of credit amongst young adults. However, research by BNPL provider Klarna suggests otherwise, with a rapidly growing demographic using such lending services between 35 and 55+ years old.
It should be no surprise that with 200 banks expected to close by the end of 2022, any offline older customers that were previously reluctant to use online banking and other services, will make the transition. Embedded finance providers must ensure this generation is not underserved as they also seek simple, embedded, direct experiences.
One thing to consider is that this generation is far likelier to have concerns about falling victim to fraud when sharing data with online services. With Age UK highlighting that an older person in England and Wales becomes a victim of fraud every 40 seconds, their concerns are not unfounded. However, creating an onboarding experience that is both informative and accessible is crucial to address any concerns around handing over personal data.
Ultimately, embedded finance is here to stay. Every generation will engage with an embedded product at some stage in their daily lives, so it's crucial not to let assumptions about its users get in the way and for service providers to prioritise dispelling any concerns."
Henry Newby, partnerships director, Superscript
What most frustrates me is how often people claim something is an example of embedded insurance, when in reality it’s not. ‘Embedded’ is such a buzzword now that people don’t actually know what it is – jumping on the phrase to be part of the conversation.
When I talk to my peers in the industry about it, no one definition is the same and people often struggle to point towards specific examples. The thinking has evolved around this topic to such an extent that what might once have been an example of embedded insurance, now seems outdated.
A nice technical integration or affiliate marketing partnership in isolation no longer cuts the mustard. Embedded insurance must mean that the insurance proposition is seamlessly contained within the core flow of the buying journey for the user, and is an intrinsic part of the overall customer value proposition.”
Jeannette Kescenovitz, senior director solution management, Finastra
Embedded finance is an evolution of the banking industry. Even the oldest banks still in operation today have the same basic principles as when they opened. However, technology has evolved to make opening accounts, transferring money, making payments and borrowing a completely different – and better –experience.
Embedded finance is part of this evolution. This is where people can often trip up – by not keeping up. As technology enablers accelerate the development of embedded finance through [BaaS] offerings, the space will continue to evolve rapidly.
One aspect people get wrong about embedded finance is the interchangeable use of the term with [BNPL]. BNPL does not equal embedded finance. Embedded finance is a method of providing access to financial services, such as lending products, and BNPL is a type of lending product. A well-designed BaaS solution should allow financial institutions to choose which products they want to offer in the market, and which merchants and verticals they want to serve.
Enablers also make the key mistake of not looking wider in their engagement of smaller financial institutions alongside bigger players, fintech companies with bank charters and neo-banks. Technology has levelled the playing field, and anyone can play.
Finally, a common mistake people make is in the process of building a BaaS solution. A well-designed BaaS solution should be built with open APIs on a modern scalable cloud platform, provide access to data analytics to help drive business decisions, and be highly configurable to give the financial institution control of product, underwriting processes and loan servicing.
Anthony Oduu, CTO and co-founder, Verto
Embedded finance doesn’t only have applications for consumers but also for businesses. The startup success stories for embedded finance usually involve companies that help consumers solve a big problem, for instance, how Stripe is a payment gateway for SMEs.
Other B2B use cases that are less talked about is how ecommerce marketplaces could offer financial services that enable merchants to get paid, for instance.
Another thing people get wrong is when they focus on volume and not data. It's exciting to see fintechs capturing billions of transaction volumes through their own new innovations, but what they tend to overlook is that the heaps of consumer and user data collected are actually equally as valuable.
And finally, although banks are doing the underlying transaction, they are getting pushed further down the payment chain – fintechs usually don't have the full obligation to share the wealth of collected user data with the banks. This slowly relegates banks to becoming infrastructure providers with smaller margins.
Meeri Savolainen, co-founder and CEO, INZMO
The B2B2C embedded finance arrangement is often seen as too much of a headache and off-putting to potential partners.
Of course, as an insurtech founder, I would say that embedded insurance is a no-brainer and a win-win for all parties involved – the fintech, the customer-facing organisation and the end customer.
And when it comes to effective B2B2C partnerships – one way to mitigate risk is to ensure the prospective partner has skin in the game, is an active part of the build and is committed to achieving the joint goals. This will make the journey into embedded finance much easier with success predicated on developing this mutually beneficial partnership.
Another common misconception is the inflated claims around embedded finance solutions being rolled out in a matter of days or weeks. Because of the nature of these collaborations, the sheer number of stakeholders from numerous business divisions involved, combined with the level of compliance and due diligence required, particularly within insurance – these collaborations can take time. However, the process is still significantly faster than the consumer-facing organisation building the product from scratch which could take years.
Noam Shapira, co-founder and president, Pattern Insurance
The Pattern Team gets peeved when embedded insurance is 'half-baked'. In the past the insurance offerings did not use available data to understand the risks associated with a customer booking or purchase. The protective offers were broad based and weren't personalized to individual needs.
The customer journey was often clunky and disjointed. With embedded insurance trending it's time to follow best practices to make relevant offers, seamlessly embedded to correctly protect the consumer.
Ivan Maryasin, co-founder and CEO, Monite
People need to first understand why embedded finance even exists. Historically, financial products have been one size fits all, with very little offered in the way of customization for different types of businesses.
Obviously, in the wider world, there are tons of different sizes and types of businesses, so we are looking at a big gap between what exists and what should exist. At the same time, creating financial products is difficult and there are tons of regulations that need to be considered – obstacles that will keep many if not most businesses from customising financial products or making their own. So there has been a tremendous need for embedded or fully customized finance products for some time now.
The second important point that I think people are still catching up with is that embedded finance itself is only as useful as the specific problem that it solves for businesses. So now we are seeing a ton of BNPL providers and payments providers and they are flooding into the B2B segment, trying to convince every business that they need their own card to offer customers.
But does every business need a card? I don’t think so, at least not without the proper context for that card to be meaningful. One of the things that Monite does is embed the ability for these other products to make sense for businesses; we literally are building in the accounting automation that gives these other products a place to plug into. Otherwise, ultimately a lot of these embedded finance products end up becoming another headache for businesses, another thing to keep track of.
Manuel Silva Martínez, general partner, Mouro Capital
In general, I think we suffer from a lack of imagination when it comes to embedded finance.
Let’s start with the definition of the financial services industry itself, which dates back to the 1950s at least and still drives the design of many financial products. The opportunities at stake are far greater than ‘how do I embed a payment in this app’ or ‘how do I process a loan in this ecommerce transaction’. There’s a whole other universe by thinking about financial services as a utility, and rethinking what utility can be infused at the intersection between fintech and other fast-changing spaces like mobility, manufacturing, and real estate, to name a few.
Then, if we turn to the concept of ‘embedding finance’, it creates a directional view that points only one way: from financial services provider to the receiver. But think about reverting that flow and the opportunities that open up from accessing a wealth of consumer data, and integrating processes upstream to create product feedback loops and so much more.
Lastly, because APIs are not a tangible product, many entrepreneurs build value propositions solely on the premise of being cheaper than their competitors. The real challenge here — and the real opportunity — is in building products that are truly unique in their technology, the data access they have, the distribution they can reach and that, as such, have a differentiated and sustainable business model. Competing only on price triggers a race to the bottom that will force a constant reinvention of companies just to be able to keep charging for something.
Vishal Shah, head of embedded finance, SAP Fioneer
A misassumption is that embedded finance is inherently risky. This is often evidenced through the projected high rate of default with [BNPL]. [BNPL] was one of the first consumer success stories of embedded finance, but has been tainted by some teething issues, caused by a lack of regulation and new entrants to the market that lacked understanding of the risk dimensions of this product.
However, now we have a greater pool of data from millions of consumers using BNPL, we instead see low risk and stability, with organisations being able to make better, more informed credit decisions. [BNPL] is also proving to lower risk in the business-to-business world, using real-time data to underwrite business loans and make global trading more efficient.
Secondly, many financial services organisations assume that adopting embedded finance technology requires an overhaul of existing infrastructure. This is not the case.
The channels for embedded finance are already in place, with many options across ecommerce platforms such as Amazon, as well as enterprise resource planning with SAP. It is simply a case of surfacing a financial offering, such as a loan or insurance product, to the end customer through these existing channels.
Andrea Ramoino, chief strategy officer, Contis
Isn't embedded finance just banks selling to other banks? This couldn’t be further from the truth, it's commonly financial service firms that aren’t banks, selling their solutions to non-financial organisations such as retailers or technology brands.
The core purpose of embedded finance is to improve the user experience when purchasing goods with a single brand, from integrating insurance into a purchase or offering buy now pay later options at the point of purchase.
Ove Kreison, co-founder and CTO, Tuum
“Embedded finance is usually talked about in two contexts: how non-financial companies and ‘brands’ are offering financial services such as loans, or how fintechs like Klarna are enabling this.
How come everyone forgets about banks? Embedded finance has actually given banks a huge opportunity to reach a broader audience and create new revenue streams by offering their own products to consumers not directly but via third parties.
There’s a clear gap in consumer understanding too, that’s hurting embedded finance reaching its full potential. Our recent consumer survey found many were reluctant to take out embedded finance products from non-financial companies because they didn’t trust them as much as, say, their banks.
If consumers actually knew that trusted legacy banks were often behind the finance services their favourite brands are offering them at the point of sale, consider how many more would be willing to embrace it.
Daniel Belda, head of product strategy, OpenPayd
A pet peeve of mine is that people always use the same tired examples of embedded finance. These use cases tend to focus on open banking giving insights into spending habits or consumer-facing companies using embedded finance to improve the front-end buying experience. This is great, but in reality, it’s not the main driver of embedded finance.
A lot of the most exciting embedded finance projects are happening behind the scenes. Businesses are looking for ways to minimise operational bottlenecks – reducing payment times, eliminating human errors, and automating processes. By fixing these things that customer’s never see, they’re actually creating a better customer experience because they’re resolving real pain points.
That’s why the most successful businesses are designing these operational improvements with the customer in mind, Trading platforms are great examples of this. Traders want to cash in and out easily and with embedded finance APIs, exchanges can virtually eliminate the possibility of human errors in payment reconciliation, significantly speeding up payment processing time in the background.
This isn’t to discredit the front-facing use cases, I just think there’s way more to embedded finance than seamless payments on a ride-sharing app.
Tariq Zaid, CEO and co-founder, Cheddar
One area of frustration when it comes to embedded finance is retailers that use old or readily available technology without researching and utilising the new innovations out there. Doing this means these businesses aren’t truly able to differentiate themselves from their competitors, because the technology may not match with their business or customer needs.
I would urge retailers to consider working with smaller, innovative fintech companies which could be far more beneficial in driving that point of difference. New fintechs can provide a more tailored service yielding detailed data and useful customer insights that old technology may not be equipped to deliver.
From retailers offering lending at the point of purchase to ride-sharing allowing instant payments in-app, interest in embedded finance has seen a steady rise in non-financial sectors, as businesses compete to offer customers the most frictionless experience possible. But this means competition is high.
Retailers must be hunting for the best-in-class fintech partner, not simply implementing what is easy, or risk falling behind the curve of ever-increasing customer expectations.
Steve Round, co-founder, SaaScada
One of the things that people get wrong about embedded finance is that they think it’s just about providing finance to get the sale – but the benefits are much greater than that.
Embedded finance creates significant customer engagement building opportunities, enabling better customer insight, bigger share of wallet, accelerated growth and customer profitability. For B2B companies in particular, embedded finance can help their customers grow their own businesses through streamlined lending based on an in-depth knowledge of the business, supply chains and operating models.
By embedding banking services into the customer journey, firms can capture more data to better understand customers, addressing the needs gap by providing more relevant products – and create new revenue streams.
Yet, to do this effectively, they need to ensure they can capture and own that data – the single point of truth. The best way to do this is by building financial products in-house using a cloud and API-driven core banking platform – rather than outsourcing banking as a service product.
In doing so, organisations have much greater flexibility to innovate and create their own financial ecosystem that integrates seamlessly with their existing service, while collecting the data they need to unlock customer insights.
Gary Prince, chief strategy officer, SimplyPayMe
What does embedded finance actually mean? As always, the industry is great with coming up with a snazzy phrase or buzzword (e.g. open banking), however thinking as a customer so what?
The industry is great at creating technical solutions/ideas then pushing them out to customers and expecting them to be used, without properly explaining the benefit to the user. The recent announcement of the closure of Paym is a perfect example of this happening, where vast amounts of money were spent (paid for by the banks, so effectively money from their customers), however, the solution was never effectively communicated to bank customers (that you can send someone money by just using their mobile number).
Customers don’t really care that there is new plumbing behind the scenes, and that data is being exchanged in real-time. However, they are interested that loan decisions, and credit card applications can now be made almost immediately instead of having to wait. That is the benefit which interests them and needs to be focused on and explained in the future.
The emphasis and focus need to be on the benefit to the consumer, and what is it doing for them, by answering the “so what” question.
Philipp Buschmann, CEO and co-founder, AAZZUR
What people get wrong about embedded finance is that it's not new, but already here. Every time you pay with a card that is embedded payment, a subclass of EF.
The trick is that you have to connect the right financial products at the right time to the journey the customer is taking. For most, it has not clicked yet, what the potential is and how this reduces churn and increases customer satisfaction whilst creating a new revenue source. It's win win win.
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