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Embedded Finance Briefing: Plaid acquires Cognito to enhance onboarding capabilities

  • This week, we look at Plaid's acquisition of identity verification and compliance platform Cognito, in a deal valued around $250 million.
  • Plaid putting the pieces together for a complete onboarding program.
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Embedded Finance Briefing: Plaid acquires Cognito to enhance onboarding capabilities

The Plaid jigsaw

Since Plaid’s proposed merger with payments giant Visa fell through early last year, the firm has sought to deepen its footprint in embedded finance. Last week, the firm acquired the identity verification and compliance platform Cognito for around $250 million. Buying Cognito expands Plaid’s current suite of services by adding the capabilities to power identity verification processes, know-your-customer protocols, and anti-money laundering requirements.

Cognito is employed by some notable digital providers in the space, including Plaid’s own clients, like Affirm, Current, Brex, and Republic. As part of the deal, Plaid is adding all of Cognito’s staff to its ranks, including the three co-founders.

With Cognito, Plaid can offer a complete onboarding experience.

Plaid CEO Zack Perret, in a blog post, said that a complete fintech onboarding process has three critical parts: 

  1. identity verification
  2. account connection
  3. account funding 

While the firm’s existing technology enables it to connect bank accounts with fintech applications and move funds around utilizing APIs, Cognito’s identity verification technology is the last jigsaw piece. Perret also revealed that Plaid’s customers have been asking for quicker user onboarding. So, all in all, while the acquired technology added the last missing piece to Plaid’s offerings, the firm was also feeling a level of demand. 

“With Cognito, the next major step in our journey is to help developers build the best and most seamless onboarding experiences across all of these areas,” Perret said.

The embedded finance opportunity is massive, Plaid and Accenture claim

Plaid’s push to play a bigger role in embedded finance falls in line with the firm’s vision. Last year, Plaid and Accenture published a report that argued embedded finance is the next frontier, for both financial and non-financial businesses. Lightyear Capital estimates that financial service providers could earn an additional $230 billion from embedded finance offerings by 2025.

“An underlying benefit of embedded finance is that it offers ways to monetize without charging customers more, and therefore enables companies to eliminate barriers to adoption of their core offerings.” Eric Sager, COO at Plaid, said.

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For financial institutions, embedded finance presents an opportunity to open themselves up to new markets, and can lower customer acquisition and servicing costs. Customers are increasingly looking at digital solutions for their financial needs. US Bank revealed that, in 2020, customers interacted digitally with the bank 9 times more than in-person. Similarly, as of Q1 2021, 50% of JPMorgan Chase’s new checking and savings accounts were opened digitally. Hence, the report argues, that the availability of financial services on digital channels can provide more access points for customers and more revenue opportunities for financial services providers.

For non-financial services companies, embedded finance can drive greater customer stickiness and open doors to new revenue streams. Plaid’s report noted that retail businesses operate at a 2.8% margin, which is only a fraction of the 20% that banks typically see through providing financial services. By adding embedded finance offerings to their business, non-financial businesses can add a significant source of higher-margin revenue. 
Take Tesla, for example. The electric car company integrates embedded finance offerings cohesively within its customer journey by providing its customers the option of bundling insurance with the purchase of a vehicle. In an earnings call, Elon Musk said that insurance could be a substantial source of revenue for the company, potentially becoming 30% to 40% of the value of its business.

Chart of the week

Embedded finance is being used to create new insurance offerings that are more customizable and personalized. This means that the product requirements are no longer driven by the insurance providers but by the third-parties embedding insurance in their products and services. 

Unfortunately, embedded insurance is generally best suited to simple products. Such offerings are easier to understand for clients, and the claim process is more straightforward. 

Third-party partner distribution, where firms partner with retailers to reach customers as they make a purchase, is an established practice in the insurance business and pre-dates the digital era. The drive is to meet the customer when and where they are likely to purchase insurance.  

Today, however, there is room to upgrade how those partnerships function to better suit our new digital world. Distributors agree that insurance providers need to be more technologically advanced to better suit businesses’ growing needs. In a survey, Dealroom found over half of third-party distributors said they do not find the support provided by the insurance partner to be satisfactory. They attributed this dissatisfaction to legacy systems and a lack of digital competence among insurers, especially when it comes to API integration. 

Embedded finance firms have the potential to fill in this gap in insurers’ service, and upgrade the not-yet-integrated networks into fully embedded ones.

Source: Dealroom

What we're writing

  • SMBs are getting used to the new digital life. Now, with a grown appetite, they want more digital banking options.
  • It's almost as if Intuit already knew. The firm has expanded its suite of offerings for SMBs, adding two new products for early wage access and invoice factoring.

What we're reading

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