The Rise of Embedded Finance
Article 1 in 'The Transformative Potential of Embedded Finance'
A few years ago, a well-known comedian ruminated on how the evolution of technology can make old habits look bizarre. He said that before we each had our own phone, there was THE phone for the household – and now, we all walk around with phones in our pockets. Or that before ATMs were widespread, one needed to go into a bank to withdraw cash, something that is completely unimaginable today.
As more and more tech native generations become financially mature, the traditional model of how banks were the epicentre of all things financial is slowly being eroded as we see the companies behind the Frappuccino and the iPhone facilitating payments or the biggest book store and taxi company enabling loans to small businesses. Financial offerings are becoming intertwined into our everyday lives with the advent of embedded finance, i.e., the phenomenon of non-financial companies (corporates) offering financial services to their customers and suppliers. To that end, in a few years we are likely to look back on the early 2010s and find it astonishing that payments used to be facilitated by banks, and not by the company that made your phone, your laptop, or even your dishwasher.
In the first series of articles for Tech Tok, we have thus decided to explore the world of embedded finance, one of the most pertinent topics in finance in recent times. The potential that companies have to offer financial services from their own balance sheet opens up the ability to serve more customers, drive new business models, and expand to new geographies. Through this series of posts, we will explore that potential for dynamic change across the breadth of financial services.
What is Embedded Finance and why are corporates focusing on it?
Embedded finance enables the offering of financial services by corporates across industries by integrating a financial service into an everyday customer journey. Though this can take many forms and leverage different kinds of technologies, it can broadly be thought of as activities that are traditionally done by a bank being done by a company that is not a bank:
Sainsbury’s providing savings accounts and loans to their customers;
Walmart facilitating a sustainable supply chain finance program to ensure that their suppliers utilise ethically sourced products and materials;
Starbucks enabling payments via their ordering app.
The different forms of embedded finance all provide corporates and their ecosystems with a common benefit: friction – or rather, the reduction of friction for their customers and suppliers. Reducing friction allows them to take advantage of opportunities to vertically integrate and increase control of their value chains; provide a holistic, unified experience to customers and suppliers; and most of all, enhance the stickiness that entices users to keep returning to their ecosystem.
Tactically, most corporates use embedded financing to provide financial products or services that amplify the value of their primary products, like ridesharing companies such as Uber and Grab offering debit cards, lending services and digital wallets to their customers and drivers. Corporates are also using embedded financing to further monetise their current products – this is best exemplified by Google Maps announcing that users would be able to find and purchase parking directly through the app, or by Apple enabling the use of the iPhone as a credit card or payment device.
Why is Embedded Finance growing?
The primacy of data-based business models, changing consumer behaviour and the increasing disruption of the banking industry have combined to create the perfect environment for large corporates and tech companies to utilise the strength of their balance sheets and reap the financial benefits of offering embedded finance. The catalysts behind this environment have been the rise and rise of technology, the proliferation of smartphones, and the rapid emergence of APIs. These factors have not only changed our behaviours and interaction points, but also made financial offerings more accessible to customers. A noteworthy example is eBay’s acquisition of PayPal, which has made financing easier for customers focused on auctioning collectibles and selling used items.
In our next article, we will dive deeper into how the confluence of these factors has created the ideal circumstances for the rise of embedded finance.
Articles in this Series
Article 2:The Perfect Storm
Article 3: Exploring Models of Embedding Finance
Article 4: Embedded Everything
Article 5: The Evolution of Embedded Finance
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