Embedded finance – the distribution of financial products and services through non-finance companies and products – isn’t new. Consumers have been getting auto loans at car dealerships and credit cards in department stores for decades now. This isn’t a new idea.
However, the opportunities to distribute financial products and services through non-finance companies and products have exploded in the last decade thanks to the digitisation of every aspect of our lives. Today, any embedded finance idea is just a few lines of code away from being a reality.
What’s most exciting about this shift is that we are still in the very early innings.
The most prominent examples of current embedded finance can be seen in the streamlined customer interactions that leading digital platforms are facilitating; interactions that require a financial product or service.
This is what I like to call embedded finance 1.0 – embedding the required financial products and services (usually payments) directly into a non-finance transaction or experience, with the goal of making the required financial component melt into the background of the consumer’s experience.
Said more simply, the objective of embedded finance 1.0 is to ensure that financial services don’t trip up, slow down, or stop the customer in their pursuit of what they want to do.
That’s great, but embedded finance is capable of much more.
Instead of just facilitating a non-finance transaction or experience, embedded finance 2.0 will empower companies to enrich their core products with complementary financial products and services that strengthen the overall relationship with their customers.
The financial services won’t be invisible, they’ll be additive.
With embedded finance 2.0 – the financial product isn’t necessary, but it is designed to make the overall experience of using the service significantly better. The goal is to create an ecosystem for consumers to make easier transactions within the product which ultimately leads to loyal customers.
Creating an ecosystem – a contained environment that meets the needs of those within it – should be the primary goal of any business. You want customers to spend as much time engaging with your products as possible because that engagement translates into two valuable types of opportunities: monetization opportunities and data-gathering opportunities.
The value of monetization opportunities is self-evident. The more time a customer spends engaging with your product, the more opportunities you have to cross-sell, upsell, and upgrade.
The value of data-gathering opportunities is subtler, but just as (if not more) important.
Every time a customer engages with your product, they’re generating data. The insights gleaned from this data can be used to improve the product itself or wrap additional value-added services and experiences around that core product.
For example, Lyft offers financial products – a digital bank account and debit card – to its drivers. Now imagine if Lyft used the data that it gathered from its drivers’ use of this card – their cash flow and spending patterns – to underwrite and pre-approve them for auto loans, at rates that those drivers couldn’t get anywhere else. Imagine the experience of a Lyft driver being able to go to a car dealership, upgrade to the car of their dreams, and pay for it with a virtual debit card funded by the pre-approved auto loan that they had accepted in their Lyft app earlier that day.
Or, for a business-to-business example, imagine a company that provides point-of-sale (POS) solutions to restaurants and event venues to accept payments. Today, the payments collected via the POS might take a few days to show up in the restaurant’s bank account. But imagine, if the POS solution could offer a deposit solution so that payments processed via the POS can be immediately disbursed into this account as soon as a customer makes a payment. This solution will also have lots of insights not only on how much revenue the restaurant makes but also where the restaurant spends. This insight can help identify potential cashflow shortages and the POS can then proactively underwrite the restaurant for working capital loans at much better terms than an entity outside the ecosystem. Picture the experience – a restaurant owner who just realised that she is going to have a cash flow shortage next month, presented with an offer from her payments company for a pre-approved working capital loan that she can accept and receive funds from instantly.
The possibilities for leveraging embedded finance to create more comprehensive and rewarding ecosystems for customers are endless.
Embedded finance 2.0 isn’t without its challenges, which include technical, operational, and compliance hurdles.
To overcome these challenges, companies aspiring to create financial ecosystems for their customers must select the right partners. Requirements will vary, depending on the use case, but in general, companies should look for the following attributes when selecting an embedded finance partner:
An all-in-one platform. Much of the pain associated with embedded finance comes when companies attempt to assemble a full technology stack out of a collection of point solutions. Selecting a partner that can bring all the needed capabilities to the table, in one comprehensive platform, can reduce technical and operational headaches significantly.
Flexible modern technology. The potential use cases for embedded finance are practically unlimited. This makes it exciting in theory, but often difficult to enable in reality. Choosing the most flexible, modular technology platform possible will ensure that you have the control to support the use cases that are most relevant and valuable for your customers.
A partner that can grow with you. Embedded finance is in its infancy. As such, selecting a partner that is prepared, technically and operationally, to grow with you is critical to ensuring that your company will be able to reap the full benefits of its embedded finance strategy and future proof you.
The time to jump in is now. The embedded finance 2.0 wave is just starting, and your customers are ready for it. The question is – are you?
Deb Bardhan is the Chief Business Officer for Highnote. Deb has extensive domain expertise in fintech, payments, and SaaS, having built and scaled a number of successful companies through various stages of growth. Prior to Highnote, Deb led the revenue functions at Synapse – a Banking-as-a-Service platform backed by A16Z.
Highnote is the world’s most modern card issuer processor and program management platform, purpose-built to grow customer loyalty, engagement, and revenue through embedded card issuance experiences.
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