Embedded financial services – a disruptive threat or a competitive opportunity for traditional banks?

Goldman Sachs (GS) just announced that it released software which allows clients to embed banking services into their own products. With their new offering, they address a tendency in banking that has been growing over the past year – enabling every company to become a bank by using Banking-as-a-Service and Open Banking. At the same time, Goldman’s decision to offer this product is based on an old wisdom: “If you can’t defeat them, join them”.  

Let’s recap on the evolution of today’s banking. Traditionally, banks were the core of every business until Banking-as-a-Service (BaaS) evolved some 12 years ago. At that time, very few banks sponsored fintechs with their banking license, holding the ultimate responsibility vis-á-vis the regulators and customers. BaaS enabled the challenger banks and innovative banking products such as Revolut, N26, Monzo, to name a few, to offer banking services without being a bank.

Not too long ago, new regulations and technologies spread around the globe: Open Banking - BaaS on steroids. Regulations and laws with the purpose to enable customer-friendly and convenient banking offerings, forced banks to open their inner sanctum and give any regulated entity access to their customer data, at the request of their customer. As a result, banks were forced to move outside of their comfort zone by handing over the bank’s keys and technology to the newly emerging fintechs. At the same time, Open Banking enabled fintechs to offer almost every service that was previously privy to banks. As a result, fintechs did a better job by being faster, more customer friendly and more convenient than banks. 

Open Banking opens up huge opportunities. The most recent development is Embedded Financial Services, a technology that seamlessly integrates into any platform, offering financial services which are fully embedded in the platform’s user environment. A technology that enables every non-bank to become a bank.

What is Embedded Financial Services

Imagine that you have been running a successful webshop for a year, selling dog accessories, your revenues know only one way – up.  You use Shopify as your shop technology, where all your purchases and payments are being processed. Now you wish to increase your inventory for the holiday season, and you ask your bank for a loan. Your bank tells you that you do not qualify as you do not have the necessary credit history. As well, alternative lenders are hesitant to offer you a loan for similar reasons. Your only option is to rely on someone offering a loan based on your future revenues. As it happens, Shopify Capital offers fast and uncomplicated loans to Shopify merchants.  In order to do so, Shopify taps into your historic transaction data to predict how your products will sell in the future AND, since they process your payments, they can deduct your weekly loan repayment for you directly from each settlement.

This example shows the win-win situation for platforms and platform merchants. The superior historical platform data available to score merchants becomes the primary loan decision making factor – criteria not available to traditional lenders. What is also not available to traditional lenders is the weekly (or daily) payments settlement data – directly reflecting the borrower’s sales and the financial health of their company.

While platforms such as Shopify can offer all kinds of value-added services to its merchants, lending will be the key customer retention factor. With Embedded Financial Services, business customers can choose to use an already existing trusted provider, such as your largest vendor or enabler – Shopify in the example above – reducing the bank’s role to a pure BaaS provider.

Embedded Financial Services can be a real “killer” for traditional banks, unless they think like GS, which has been among the most innovative banks in the US. With its new offering, it embraces Embedded Financial Services by enabling every one of their corporate customers to become a bank. Other providers such as Bond and Wise in the US and Banxware in Europe have built solutions that allow any bank to empower their customers to offer banking services embedded within their platform – not just for customers of GS.  

Embedded Financial Services include all core banking services such as the opening and maintenance of bank accounts, loan scoring and loan decisions, loan management, loan securitisation, card issuing, treasury, securities trading, payments, and transaction- and retail banking, etc.  While in general, any service a bank offers could be embedded into any platform, the key product for success and monetisation will be embedded lending.

When we started Banxware, we took the challenge to build a middleware technology bridging the gap between traditional banks and modern tech-driven platforms such as Shopify. This means we can serve both, those banks that want to offer embedded services to their customers as well as companies that want to become a bank.

Banxware has challenged the traditional banking set-up by viewing banking from the customer’s point of view and has asked: “Why not entrust those that know your business best with your financial services?” 

Banxware’s conviction – supported by the announcement of Goldman Sachs – is that the platform that supports the vast majority of your business – whether it be e-commerce, Payments Services, Cashier Systems, Food Delivery, SaaS, Accounting, ERP, or others - knows your business best and therefore should be the preferred financial service provider.

To stay afloat in the long run, with the fast-changing banking environment, banks need to embrace this new approach to lending and business - and transaction banking. To do so, they require tech companies such as Banxware to digitalise their banking services and give them access to platform merchants through Embedded Financial Services, as evidenced by Goldman’s new offering.

About Jens Röhrborn 

As CEO and Founder at Banxware, Jens Roehrborn is responsible for the fintech’s strategic direction and operative management. He is a qualified lawyer and brings over 20 years of experience in the payments and bankingindustry working for companies like Wirecard, Deutsche Handelsbank, Orderbird, IC Cash, PPRO,Stocard, and many others. His work entailed financing, M&A, regulatory and compliance matters, including applications forbank- or e-money-charters in Germany and other jurisdictions, including Luxembourg, the US, and Lithuania. Next to his role as a lawyer, he served as a member of the board at among others Lieferando, PPRO, Medici Co-Living (Quarters), Wirecard Bank (until 2010), and was a venture partner with Earlybird.