Embedded Everything
Article 4 in 'The Transformative Potential of Embedded Finance'
As we hit the middle of February, the frequency with which we have heard lamentations about how our friends, family, colleagues (and we ourselves) have not kept up to new year resolutions has gone up significantly. Consequently, in a last-ditch attempt to stop us from deleting the file named ‘2021 Resolutions’ from our laptops, our friendly neighbourhood social networks chose to target us with ads that prompted us to purchase and read Atomic Habits. James Clear’s theory posits that our habits and identity are inextricably linked, and the best way of sustaining change is through identity-based habits, built on small wins rather than being outcome focused.
Reading this, there definitely appear to be some similarities with the financial industry, where many of the leading banks view themselves as semi-technology companies. They are taking the outcome-based approach of being tech-led, rather than building the habits and processes that sustain lasting change, with the result that their identity is very much that of a bank.
Leading technology companies today have the customer at the heart of their identity and this is supported in their outcomes and processes, especially when it comes to embedded finance. Instead of Amazon declaring itself to be a bank, it built small wins through Amazon Pay and Lending products, all of which sustained its identity. It is this reason that non-financial companies have made recent strides into the financial space, and why Jamie is keeping a close eye on them.
There are a lot of ways to build small wins for corporates looking to offer financial services. They can, however, be broadly categorised in the following ways:
Embedded Payments
Payments has been an entry point for many corporates on their journey into embedded finance, as it both increases the user experience through seamless payments, and impacts their Profit & Loss Statements without dependencies on third-party payment providers. Corporates can become payment facilitators (payfacs), actively processing payments and charging fees of 0.75% to 1% on the transaction volume which can earn an additional 80 bps per transaction.
A prominent example is Uber, which has so seamlessly integrated the payments technology within its app that hailing a ride and paying via cash is seen almost as an inconvenience today. Becoming a payment processor is lucrative since each transaction made by a customer on the platform is doubly important in serving as a form of recurring revenue. It also reduces friction in the customer experience by not requiring them to leave the app to make a payment, increasing stickiness. FinTechs like Finix, Stripe, Infinicept and Square help corporates become payfacs.
Examples
Shopify and Toast offering integrated payment services to their customers, thus earning payment processor fees on transactions occurring on their customers’ platforms. The payment processing fees Shopify earned from Shop Pay generated almost $940 million in revenue in 2019, accounting for over 50% of its revenues of $1.6 billion.
Amazon Pay is an online-only solution for businesses to handle their credit and debit card payments. They charge competitive fees of 2.9% + $0.30 per transaction for domestic transactions and 3.9% + $0.30 per transaction for cross-border transactions, with no monthly fees or minimums, and utilising Amazon Pay is a frictionless, easy option for sellers already on Amazon’s platform.
Embedded Lending
Lending has become particularly prominent, especially for marketplaces such as Amazon and Alibaba, which can help businesses within the market ecosystem get access to credit lines that perhaps would not be available from traditional sources. The data edge and subsequent understanding of their customers that corporates have, makes lending the ideal financial service to offer. New lending services by corporates (and alternative lenders who also make use of alternative datasets) are able to proactively:
Suggest pre-approved financing opportunities for customers across channels;
Customise offers and reduce lending time;
Provide greater insight into understanding customers’ credit risk, leading to reduced risks of loan provision;
Reduce wait times by introducing instant and seamless loan disbursal.
The best-in-class example of embedded lending was Ant Group before the clampdown by Chinese authorities in October 2020 forced it to alter its business model. Ant Group still represents a north star in its approach to embedded finance.
Ant Group started life out as Alipay in 2004 to provide payment services for Taobao and Tmall (and more than 460,000 online and local Chinese businesses). Alibaba’s scale has allowed Ant Group to easily reach a substantial user base for its products, which include the online only MYbank. MYbank creates risk profiles by analysing >3,000 variables and 100,000 metrics, leading to 4x higher approval rates; it also has the famed 3-1-0 model for SME financing, which uses alternative data obtained from Alibaba’s platform and China’s social credit system to offer a collateral-free business loan that ‘takes less than three minutes to apply for on a mobile phone, less than one second to approve and requires zero human intervention’. This system has very low NPL loan ratios, around 1% (much lower than the average NPL of 2.75% for SME loans in China), showcasing the efficacy of the data models used.
Examples
Grab has partnered with Citi to offer consumer lending from Grab’s application using Citi’s new API. Citi is enabling its customers in Singapore to apply for a Citi loan directly in the Grab app and receive installment options ranging from 12 to 60 months.
Shopify offers cash advances and loans to eligible businesses via its Shopify Capital service.
Embedded Insurance
As with lending, insurance is a prime financial service for corporates to bundle together and provide natively with their products, services or platforms. The demand for products has increased, especially in the gig economy, where risk has been transferred from the corporate to the individual as a cost for greater flexibility.
Data to underwrite for insurers is patchy and pales in comparison to the real-time, rich data that corporates can offer. The data that corporates have about their customers can be used to craft more bespoke insurance products and create more accurate credit risk models to improve underwriting processes. Collaborating with corporates has allowed insurers low-cost access to a large user base and use the obtained data to improve their product pricing and innovation and enhance their claims management systems.
There are numerous FinTechs such as bsurance, Oyster and Qover offering services to corporates to easily provide insurance products. In an example of Model 1 (Partnering with FinTechs), Trov has partnered with Waymo, a self-driving tech company, to implement an on-demand insurance engine to automatically insure all passengers of the company’s autonomous fleet. The engine provides access, tracking, forecasting and analysis of all relevant data, Waymo supplies the driverless fleet and the underwriter insures all of Waymo’s passengers.
Examples
Uber has partnered with INSHUR to offer insurance products to its drivers. INSHUR uses information about average trips, location and driver ratings in near real-time. The data is then used to calculate risks and pricing, and reward safe driving with cheaper policies.
Airbnb’s Host Protection Insurance grants primary coverage of $1 million to all hosts and landlords using the platform for bookings.
Embedded Credit Cards
Corporates have been working with card issuers to issue private white label credit cards. These cards allow corporates to offer their customers a revolving line of credit and more lenient and extended terms whilst increasing customer loyalty to the brand.
Customers can build up loyalty points when they use the card, which encourages repeat customers who spend up to 300% more money on the business than regular customers. The cards can be issued in collaboration with FinTechs (Model 1, Partnering with FinTechs) or Banks (Model 3, Partnering with FSIs) who offer issuing, funding and payment collection services. As with insurance and lending above, the data edge that the corporate provides aids their partners in mitigating underwriting risk and allows for better terms of credit to be offered.
The private label credit card market reached a value of $210 billion in June 2019 and will continue to grow as more partnerships with corporate payfacs offer private label card holders like JCPenney the ability to add their cards to the Apple Pay wallet. There has been further expansion into the Buy Now, Pay Later space with Alliance Data’s $450 million acquisition of Bread, a BNPL provider. The deal highlights BNPL’s potential, with specific private cards that can be issued by Alliance Data that can allow it to tap into the $73 billion market which is projected to grow at a CAGR of 21.2% to a size of $336 billion by 2027.
Examples
Unit has raised $18.6 million to allow third parties (i.e., corporates) to integrate banking services like payment cards into their businesses via an API. This is in line with Model 1 (Partnering with FinTechs).
Corporates like American Eagle, Amazon, Gap, Banana Republic and TJ Maxx all offer private label cards via Synchrony Financial.
Embedded Banking
Traditional embedded banking used to refer to how corporates allowed their customers to open bank accounts with a trusted brand to engender customer loyalty. Sainsbury’s supermarket, a staple of the UK community, created Sainsbury’s Bank to build off their brand and offered their customers another indispensable service. Now, embedded banking is particularly focused on banking the unbanked, especially in markets where traditional bank accounts are still difficult to come by, e.g., in South East Asia and South America. For instance, Gojek, a ride-sharing platform in Indonesia, is aiming to provide bank accounts to their drivers who would conventionally have found it difficult to join the financial ecosystem.
Companies like CVS Pharmacy and Walmart work with Green Dot to offer an unlimited cash back mobile bank account that offers 3% cash back for online or in-app purchases, a 3% high-yield savings account and free cash withdrawals. Debit card users can also have their salary payments made onto the card via direct debit, with the card acting as a current account. These services enhance customer retention and help diversify the revenue streams of corporates.
FinTechs like Stripe, in a twist on Model 3 (Partnering with Banks) are partnering with banks themselves to offer corporates the ability to open bank accounts. Through its API, Stripe Treasury has enabled corporates to hold funds, pay bills and earn interest, and has also managed the upfront bank negotiations, compliance processes and regulatory requirements. They have partnered with banks like Goldman Sachs, Citibank and Barclays who manage the deposits currently. As their balance sheet grows, Stripe could take on the task of managing the deposits themselves and decouple themselves from the banks.
Examples
Green Dot has partnered with Uber on a business debit card for Uber Drivers to be able to get paid weekly or immediately through Green Dot's instant pay service by depositing earnings on to a debit card.
TreeCard (an eco-friendly debit card company backed by search engine Ecosia) is using Synapse’s technology to release a wooden debit card, with TreeCard aiming to plant one tree for every £45 spent on the card.
Embedded Everything
The above examples are not exhaustive, but are good examples of non-financial institutions adding further functions to their platforms and ecosystems in pursuit of helping their customers. The small win approach has created long lasting products and processes which are adaptable to the rigours of financial services. As corporates increase their momentum in the embedded finance space, new horizons beckon with a wide variety of simple and complex financial products that corporates can embed into their services.
Our next post, thus, will cover the brand new world of possibilities that these products will open up for corporates and their ecosystems.
Related Reading
Atomic Habits by James Clear
The Four by Scott Galloway
Articles in this Series
Article 1: The Rise of Embedded Finance
Article 2: The Perfect Storm
Article 3: Exploring Models of Embedding Finance
Article 5: The Evolution of Embedded Finance
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