Banking as a service, Finance Everywhere

For retailers, embedded finance solutions are still confusing

  • Embedded finance is growing in popularity, aiming to attract companies in any industry that are looking to implement financing solutions to their business.
  • However, adding financial products is easier said than done - in retail, one of the biggest markets for embedded finance solutions, many decision makers are still trying to understand what this would mean for their business.
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For retailers, embedded finance solutions are still confusing

Embedded finance is growing in popularity, and many are looking to implement financing solutions to their business. But there are two sides of the coin – some believe that embedding financial solutions can bring great value to a business, while others are more skeptical over what embedded finance could really offer. 

Retail is a large market opportunity for embedded finance solutions. Big players like Walmart already made some moves in this space, creating fintech Ribbit Capital to deliver tech-driven financial experiences to its customers, and partnering with Affirm to provide point of sale financing.

And within retail, e-commerce is growing fast – sales increased by 50% to $870 billion from 2019 to 2021. It now represents 13% of all retail sales in 2021 in the US, according to the US Department of Commerce. 

As the market expands, competition intensifies, pushing merchants to look for new ways to attract and retain customers. Embedded finance could be a strategy that drives up revenue, loyalty and retention, but it’s still a nascent idea. 

There is still a lot of confusion when it comes to what embedded finance means, said Omar Haque, Head of Group eCommerce at Nexi Group, on a panel discussing how embedded solutions could be leveraged by e-commerce and retailer players at Money 20/20 Europe

“I have no idea what we’re talking about when we say embedded finance, and I’m on stage, I’m on the panel. A recent survey said that 39% of senior decision makers at retailers don’t know about embedded finance,” he argued.

For retailers, Haque noted that there’s a huge pain point in terms of mindset and understanding how financial products either help or hurt their checkout, loyalty, retention or lifetime value. This is where embedded finance partners play a huge role in helping retailers understand the benefits.

With e-commerce businesses mostly focusing on their core competencies like products, supply chains, etc, they won’t have the resources to figure out how to add financial products to the list. 

Another issue is that it could be dangerous for retailers to try and do this by themselves – it’s not a clear cut strategy to take financial products and make them part of the offer. Only the largest e-commerce platforms could afford dedicated teams – any mid-market player would need to partner, and will do so if they see a clear benefit to the business.  

“If you’re one of the big guys, you have already thrown away the money on your cost of customer acquisition, and you’re looking at monetizing your customer base. You’ve got a huge cash flow and balance sheet, and start offering insurance products or all kinds of crazy things – this approach tends to implode on you,” Haque said.

But some digital retailers are finding value in embedded solutions, although it takes time. At Wayfair, product group lead Matteo Gamba said that it took the company a few years to have a good understanding of its customer needs, and how to fulfill them with specific payment methods and loyalty mechanisms.

“You could look at embedded finance as a marketing and retention tool as well, something that helps a merchant to augment the shopping experience for its customers. But merchants should really understand the incrementality that it drives from a business perspective and the value that it brings, not just think of it as an additional cost,” Gamba said.

Retailers could move beyond embedding financial services and towards banking as a service, and then focus on deepening that relationship with the customer over time. Most retailers (40%) choose to do this to boost revenues, grow the shopping basket and improve customer loyalty, according to research.

“It’s not about card transactions, possible credit, security, digital assets – those are all commodities. The value creation is in the ecosystem, where you generate a lot of interest in that data and use it to the benefit of the customer, the provider and all the suppliers,” Roland Folz, CEO at Solarisbank added.

The deeper value embedded finance can unlock is how to implement an ecosystem around financial solutions in the retailer’s wider community, Folz argued, and turn this from a cost center into a profit center. 

“We don’t want to do a PR solution which is costing you money, we want to use the ecosystem and data that we generate, and have an interaction that goes far beyond the payment solution,” he said.

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