Embedded finance: we’re all bankers now


Is it just me or is there suddenly a surge in payment options creeping into my online shopping experience, enticing me into pre-approved lines of credit or to spread my payments out over a few months? And, for my business account, the options to create QR codes and smart invoices are also making an appearance. ‘Is this a result of Covid?’, I ask myself, or is there something more to this seemingly new cache of real-time payment solutions.

As someone who was an avid Uber user (when we could go somewhere), the idea of having seamless payments via an app is nothing new. In fact, I got so used to it that I stopped carrying cash most of the time – much to the annoyance of the occasional black cab driver whose path I crossed.

Of course, employers, retailers and other businesses offering financial products themselves is nothing new; this year saw the failure of British high street rent-to-own retailer Brighthouse, in operation since 1994. Retailers offering products on various forms of credit engage in a practice as old as the market economy itself.

So why are we suddenly seeing a surge in real-time, in-experience payment solutions and where do they live in the spectrum of financial products and services?

Embedded finance

The term used to describe this explosion of financial products offered outside or beyond the traditional banking ecosystem, often online and often in the burgeoning tech sector – is known as embedded finance, and represents a quiet but radical reshaping of the way we’re paid, and the way we pay each other.

What is driving this growth? The twin factors of opportunity and technology.

Clearly, buy now, pay later is not a new thing. In the days before enabling technology it was known as ‘lay away’, and in the days when we could go to a shop and buy a large ticket item in person, we could also sign up to a point-of-sale financing agreement to spread the cost.

But this was really more Baby Boomer territory, and as millennials and a growing cohort of adult Generation Z ‘internet native’ consumers join the market for financial services, existing businesses see opportunities to make their services ‘stickier’, preventing the costly loss of customers to the competition.

The technology that underlies many examples of embedded financial services is new, too. Because building a proprietary solution can be costly, businesses have increasingly looked to middleware or even wholesale turn-key technology stacks that can be integrated into their existing product. Providers of these solutions take on varying roles – sometimes providing the products themselves, other times licensing APIs or other software solutions that allow businesses to set up their own embedded services.

Klarna, recently in the news after an FCA review raised concerns about rising consumer debt levels, is a payment processor that works by offering online shoppers the option to pay for products in a single transaction up to a month after they order them, or in instalments over as many as three years. The most valuable business in the burgeoning BNPL sector (that’s ‘Buy Now, Pay Later), Klarna charges no interest and no fees, making it significantly more attractive than other forms of buying products on credit. Retailers themselves take on the costs, paying around 3% per transaction in the belief that customers are more likely to buy if the option to pay later without fees exists.

The uncertainty around pay and income that is a result of various and staggered forms of government stimulus support, and the global boom in online shopping during the Covid-19

pandemic, have further bolstered both online retail and BNPL specifically, fuelling further investment into embedded finance around the world.

With vast amounts of venture capital flowing into the embedded finance space, should existing players be concerned? Shopify, whose valuation has tripled over the course of the pandemic, now offers a business banking product – perhaps as much of a challenge to fledging business banks like Starling as it is to the established retail banking sector.

On the other hand, disruption in finance often works in mysterious ways – predictions early in the new millennium that Visa and MasterCard would be victims of the internet have proven unfounded. And on the incumbent side, embedded finance enablers such as Plaid offer infrastructure that connects established banks and a broad network of startups that offer everything from automated trading platforms to peer-to-peer lending, proving partnerships and collaboration can be mutually beneficial.

There’s a lot happening in fintech and payments! If you’re interested in learning more why not sign up for our Certified Fintech Practitioner course? The next session starts on 1 March 2021.

Helene Panzarino is Director of the FinTech Programme for the LIBF Centre for Digital Banking and Finance. She is an experienced FinTech ‘sherpa’, programme director, exited entrepreneur, educator and author.

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