Think to yourself: When’s the last time you paid in all cash at dinner, gave your Uber driver a cash tip, or offered cash to a friend instead of Venmo-ing them? For some, cash is king, but most of us are fully embracing cashless transactions that rely on embedded finance at its core. Gone are the days when consumers needed to carry around a hefty wallet filled with 5s, 10s and 20s. Today, all of that can live right within your cellphone.
Put simply, embedded finance involves banking-like services offered by non-banks. For example, when you use Uber or Lyft and the fare is charged automatically at your destination, that’s embedded finance. Or if you’re sending money on a mobile banking app, that’s also embedded finance. According to Visa (an early adopter of embedded finance), these experiences are “so seamless and contextually relevant that you may not even pause to consider that a transaction has taken place” – and embedded finance has been “quietly transforming” the way in which financial services are built, distributed, and accessed.
That quiet transformation has gotten much louder of late, aided by the increasing speed of transactions, digitization of commerce, and the ubiquity of mobile payments. Payments has been one of the first use cases of embedded finance, with many of the aspiring providers originating from the payments industry. Their timing seems apt. Early estimates in the US show that about $7 trillion worth of transactions will be processed by non-financial services businesses through embedded finance by 2026.
The challenge right now is that when you look under the hood of all these sophisticated offerings, the payments system (in the US specifically) is woefully antiquated, largely still leveraging legacy systems that don’t talk to each other. Organizations like JP Morgan are investing billions of dollars to change this (even fueling the connected car economy), but it’s absolutely a massive task at hand.
The future goal is this – give me a single, simple way of paying across any platform, from my local Starbucks to a store in Singapore. What remains to be seen is if it will indeed be one single type of payment, or a few. And who gets to decide?
Condensing all forms of payments into a few platforms will certainly make the process more fluid, but it will also increase the vulnerability of all that data, resulting in lucrative targets for hackers. Risk, fraud, and anti-financial crimes were therefore also popular topics at the forum that demands exclusive focus. Security concerns are seen as the “cost of doing business” in innovation – companies want better customer experiences (CX), and for that, you need better payment systems, and in turn the need for robust risk management. But traditional protective measures quickly become antiquated once you introduce new channels for payments, so practitioners are rethinking how to view security with a different lens.
PAYING IT FORWARD
The future success of embedded finance will likely depend on two key considerations: infrastructure, and incumbents.
Embedded finance has distributors, and products. The distributors would include businesses like traditional retailers, software companies, telecom providers, or OEMs. By products, we are talking about any resulting deposits, payments, issuances (cards), or lending. To enable all this activity, the industry needs better technology.
Like payments, embedded finance infrastructure in the US is light years behind, and it has to improve across the board. As McKinsey points out, “Many banks and legacy financial services infrastructure firms are not yet equipped to externalize their processes and workflows to allow distributors to seamlessly integrate embedded-finance products into their journeys or distribution platforms. Distributors wanting to scale up quickly will need to build a modern developer experience, including the necessary technology to enable it.”
There are many new FinTech’s that are entering the embedded finance industry to solve niche problems. Squire, for example, is using embedded finance to standardize money exchange and make it easier for barbershops to get paid. And that’s an amazing but specific use case being addressed. The potential doesn’t just lie in individual companies building things; it’s in the partnerships with incumbents that develop from there. So, if a company has a strong use case for a very specific segment of society, but may not have the right engineering to expand, they partner with an incumbent provider and the industry moves ahead. It’s this convergence that is bolstering embedded finance – as in the above example the partnership announced between Squire, Ayden and eBay.
In the years ahead, financial traction will increase as embedded finance continues to penetrate across verticals. Until then, the industry is in an interim state and awaiting a time when payments become completely fluid. The wind is at the backs of early pioneers though, and companies willing to invest (or partner) in embedded finance will be well positioned as the line between FinTech’s and TechFin’s continues to blur. As a consumer, the way one experiences money by 2030 will change forever, and as Scarlett Sieber and Sophie Guibaud call out in their book Embedded Finance when Payments become and Experience, “2030 is not far away. It’s time to get ready.”
By: Parijat Banerjee, Global Business Head, LatentView Analytics