What is embedded finance and why is it so important?

Oct 14, 2020 | Tony Byrne's View

Put simply, embedded finance is about enabling any business to manage and sell innovative financial services; seamlessly integrating creative forms of payment, debit, credit, insurance or even investment into their end user experiences. The simplest example of this in action is paying for an Uber ride.  So many of us have used embedded finance without even realising it.

How it works

You don’t get out your credit card at the end of the journey. Uber product designers have enabled payments to be embedded into your experience of getting a lift and, for the driver, into their experience of getting paid the right amount at the right time.

Payment facilitation companies like Stripe and Square have grown rapidly over the last ten years by enabling this sort of capability for digital companies. They are now worth $36 billion and $57 billion respectively and are expanding their capabilities into other areas.

Complexity increases as you move from payments to debit, credit, insurance and investments. But if you are a merchant or brand in any sector you want to make your propositions to customers as attractive as possible.

Today customers have to interact with their banks to get debit and credit cards, loans for a sofa, car or house, and there’s a lot of back and forth between the customer, the bank, and the merchant, with few options personalised to the needs of individual customers.

Klarna has grown into a $5.5 billion company by enabling brands to offer innovative credit solutions at the point of purchase, for example, by paying in instalments.

Lambda School provides online training for would-be coders. It offers various payment options, including an income sharing agreement, whereby the student is charged a cut of his/her future income rather than an upfront tuition fee. The student deals directly with the school for this and the other payment options offered, rather than seeking a loan from a bank. This may or may not be attractive to everyone, but it demonstrates the opportunities for creativity that embedded finance enables.

Embedded insurance is now fast emerging too, enabling your car share service, for example, to come automatically with mobility insurance, or your new camera to come with theft and damage protection right out of the box as part of the overall price.

Some of this happens already today, but it’s clunky. British Airways offers travel insurance on its website when buying a flight. But it’s not quick and cost-effective for brands and merchants to integrate these offers and they tend to be generic and managed by the insurer rather than configured in real-time by the brand. For banks and insurers who today “white label” their products and capabilities to third parties, the timeframes are months or years to conclude deals, and years to implement at scale and see a return.

Today white-labelling financial products for merchants is far from a digital business model for banks/insurers: it has high costs to serve, long RFP(request for proposal)-based sales cycles and lumpy revenue.

Ultimately, financial services will disappear into the background of the solution being offered to a customer. British Gas has already stopped selling “boiler insurance” to customers – a dull product. It now offers “remote boiler maintenance” (enabled by IoT(Internet of Things)-optimised underwriting) – a much more attractive proposition.

Embedded finance – as opposed to reselling financial services – is attractive to digital brands and merchants because it creates new revenue opportunities at very low marginal cost (the brand already has a customer base). It enables new customer experiences that drive loyalty and repeat purchase and allows merchants to capture more of the economics of the relationship.

For pure software companies, it could potentially enable them to increase revenue per customer by two to five times, according to venture capitalist a16z.

For example, Shopify, a B2B e-commerce platform, now makes over $500 million per annum from financial services to its merchants (growing at over 50% per annum). The underwriting costs are much lower, as Shopify already has a huge volume of data about its users.

For many software and platform businesses, financial services are, and will increasingly be, a very lucrative addition to their core business.

So the benefits to businesses that adopt embedded finance are clear but equally, they will result in a much simpler, quicker and hassle-free service for customers too.  I enjoy anything which saves me time and hassle.  I pay for virtually everything by Apple Pay on my phone or Apple watch but better still is paying for an Uber ride or ordering products on Amazon using their one-touch payment method.  

I, for one, am looking forward to saving time and hassle more and more in the future as more and more businesses incorporate embedded finance into their services.  You know it makes sense.*

*The contents of this blog are for information purposes only and do not constitute individual advice. All information contained in this article is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.

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