The world of finance is changing. APIs, cloud technologies and open architecture are rearranging the seats around the finance table. If banking services can be integrated into third party apps and software and pushed out to customers, the definition of who's a bank or who's a payment company is evolving. Banking is no longer somewhere you go -- it's something you do, according to a book by that title, authored by Brett King.
Embedded Finance is becoming an increasingly important topic (Tearsheet is hosting the Embedded Conference in November). Embedded finance is expected to grow to nearly $230 billion in revenue by 2025, up from $22.5 billion this year, according to Lightyear Capital.
What is Embedded Finance?
Embedded finance is the integration of financial services into a business, app, or software, regardless of the industry they serve. When riders step out of an Uber, payment is invisibly drawn off of a credit card stored on the Uber app. This frictionless experience doesn't happen by chance. It happens because Uber has a team of payments engineers, backed by a handful of embedded finance partnerships, designing the experience.
Apple's launch of Apple Card with Goldman Sachs was about more than just introducing an off-the-shelf credit card to its customers. Apple Card is an important, embedded financial tool in the Apple ecosystem.
Intuit, maker of the popular accounting software QuickBooks, recently launched a bank account for small businesses. QuickBooks Cash integrates directly into a user's accounting software and in addition to a debit card and money movement, helps SMBs more accurately forecast their cash flows.
The financial infrastructure-as-a-service industry is emerging. There are players handling banking-as-a-service, as well as payments, lending, brokerage, and insurance delivered as services. These aren't white-label platforms. Instead, these services have been unbundled and can be delivered via API. That way, clients in any industry that want to launch financial products continue to own their customers and the customer experience through an integration into their software.
How will Embedded Finance change banking?
In the embedded finance ecosystem, there needs to be a bank somewhere. The bank could be the one providing the APIs and infrastructure for others to build off of. BBVA has taken a banking as a service approach with its Open Platform. Goldman Sachs has just launched its own banking as a service platform, providing transaction banking to third parties serving corporate clients.
In other models, sponsor banks work with third parties that provide software and services to connect banks with technology clients. Marqeta has worked closely with Sutton Bank to provide modern card issuance infrastructure to companies like DoorDash, Instacart, and Uber. SoFi recently acquired Galileo which serves many of the top challenger banks, like Chime, MoneyLion, and TransferWise. Galileo is integrated into more than 20 issuing banks.
What are banks' roles in Embedded Finance?
Banks are generally resistant to becoming dumb pipes. They want to own their customers and don't want to be turned into utilities. Just a handful have embraced the embedded finance model.
"Consumers want to bank with the brands they love" is a common refrain we use at Tearsheet. The future of banking will be influenced by the popularity of the embedded finance model. Customers, given new options to bank with their favorite retailers (Walmart) and technology firms (Apple and Google), may grow to see these firms as modern-day banks, even though they likely will never hold a banking charter.
It's not that every company turns into a bank with embedded finance. "What’s important about embedded finance is that the digitization of banking has enabled banking to be integrated into other industries," said Ron Shevlin, an analyst at Cornerstone Advisors.