Banking as a service

‘Skate to where the puck is heading’: The state of embedded finance

  • Industry leaders offered their perspectives on where embedded finance is headed at the inaugural Embedded Conference
  • The future of embedded financial services will require better customer experiences and aligning incentives around client performance.
‘Skate to where the puck is heading’: The state of embedded finance

Industry leaders reflected on the growing trend of open banking, APIs, and financial services platforms at the inaugural Tearsheet Embedded Conference held yesterday in New York City.

While much of the industry focuses on the rising popularity of challenger banks, speakers reflected on the introduction of new financial products by companies from outside the financial sector. Walmart, Uber, and Apple were all cited for their work creating and launching branded financial products. It’s early in the move to embedded finance and there’s a lot to be done as finance seeps outside of banking’s four walls into vertical industries and new brands.

Here are four things we learned at Tearsheet’s Embedded Conference:

Non-financial brands need particular guidance when launching financial products

Big brands know their customers and their needs really well but they know very little about what it takes to plan, launch, and manage a financial product. “Our partners are in the driver’s seat — they design the vision,” said Dov Marmor, head of Green Dot’s banking as a service group. “We have to take that and make it safe for the consumer and approved by the regulators, and you can scale from zero to 100 in a very short period of time.”

Launching a me-too debit card isn’t a good example of embedded finance, even if it’s a very popular product. Designing a unique differentiated product, with “intuitive yet surprising experiences that delight your end customer” is paramount to creating a competitive advantage for these brands, according to Cambr’s vp of product and strategy, Ahon Sarkar.

Banks need help competing in this new world, too. They’re getting used to integrating with fintech firms, but having good APIs but a poor UX isn’t sufficient anymore, according to Richard Arundel, general manager of North America at Currencycloud. “Customers expect a seamless experience and banks are better served by keeping their clients within their own ecosystems,” he said. Currencycloud powers international money transfer for firms like Monzo, Revolut, and Brookline Bancorp.

Arundel cautioned banks against creating “parasitic partnerships”. Instead of symbiosis, these partnerships feed off of bank margins from banks’ own customers. Embedded services, on the other hand, are a good option to enable banks to maintain control over their UX.

It’s early and there are lots of opportunities still to invest in embedded finance

As the industry takes shape and leaders emerge, it’s becoming clearer where things are headed and how the industry will get there. That still leaves plenty of opportunity to invest in embedded finance, according to David Galbraith, partner at Anthemis.

In a presentation of a new white paper detailing the embedded finance investment thesis, Galbraith explained that there are two ways to invest in the space. The first is by directing capital to the financial services companies that have components that embed into non-financial services companies.” The other is to invest in non-financial firms that have massive potential in launching complementary financial products. He cited health and wellness, media, education, and mobility, among others, as particular industries prime for their own financial products.

For its part, Anthemis, which has been investing in embedded finance for years, invests in both types of companies because it’s unclear who ultimately wins, Galbraith said.

Trust and data are the new currency in embedded finance

Underlying the embedded finance technology stacks is data. Freely flowing, authenticated, and consumer-permissioned data makes the growing ecosystem work. Data can be considered a new form of currency in this generation of financial services, according to MX’s chief advocacy officer, Jane Barratt.

50 percent of today’s most valuable companies in the world are based on data, including Amazon, Google, Facebook, Alibaba, and Tencent, she explained. That’s up from zero just 10 years ago. The path to data as a currency will require interoperability of data and standard consent frameworks, as well as valuation models for data as a currency. Barratt foresees a future when consumers can quantify how much their data is worth to firms using it. “My family shops for groceries at four stores using three cards — why not figure out how much that’s worth and put a bid out for our business?” she said.

And as data and money flows through the system, it’s still surprisingly hard to open financial accounts. Fraud is becoming increasingly sophisticated, creating a bigger challenge online than in-person. But by using data from the cellular networks, Payfone’s CEO Rodger Desai said his firm has been able to double the pass rate (from 40 percent to 80 percent) for an online lender using passive multi-factor authentication combined with a secure pre-filled loan application.

Desai wants digital finance to work as well for customers as using a phone internationally. By tying a customer’s identity to his mobile device, Payfone creates a Trust Score for its clients, much like the credit bureaus have standardized credit scores. The company’s clients can then more safely approve legitimate customers while improving the speed and usability of their experiences.

Everyone is getting into finance

While retailers, travel firms, and on-demand companies are early adopters of embedded finance, software firms, in particular, are becoming payments companies. Given the structure of the payments ecosystem, they stand to expand their markets, drive more revenue, and improve their UX when taking payments in-house, said Finix CEO Richie Sarna. Software firms like Lightspeed and Clubessential are prime examples of how software firms are becoming increasingly powerful distributors of payments, growing 4x the rate of traditional providers.

In the U.S., where many businesses still prefer to use checks, business payments are undergoing multiple transformations. Control, digital experiences, connectivity and verticalization are all impacting business payment behaviors, according to Lionel Le Meur, a senior advisor at Bankable. The European banking as a service firm, which has worked with Spendesk and Royal Oceanic to create new payments functionality, is planning a launch into the US market soon.

And while firms like Green Dot and Cambr cater to the demand of larger brands to introduce financial products, Synapse wants to democratize the building of financial products for developers. During his fireside chat, CEO Sankaet Pathak shared his product roadmap, which includes a new credit card product, brokerage, and investment advice. The company also plans to move off its legacy processor and on to its own processor before Christmas this year.

Pathak, who struggled to qualify for financial products when he arrived in the U.S. as a new immigrant, envisions a “world where anyone could create a financial product, inspiring new and creative uses and experiences around traditional products.”

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