Embedded Finance involves implementing (as seamlessly as possible) fintech services into non-financial use cases, which in turn makes these use cases better and more lucrative. The concept of embedded finance is far from new; what is different today is the prevalence of software in several verticals, which provides a strong platform for allowing a fintech service to be frictionlessly embedded within a broader use case. We summarize client types and product domains in the table below.
Banking-as-a-Service is one of several business models that provide Embedded Finance (others include embedding payments acceptance into software, Open Banking enablers, Cards-as-a-Service, Payments-as-a-Service, etc.). The BaaS business model provides a bundle of licencing, payments, banking, and other fintech services, historically to other fintechs (e.g., neobanks) but are now targeting corporate customers. Embedded Finance is a much broader concept that includes many other business models.
The most common Embedded Finance use cases focus on commerce enablement, for example, frictionless shopping (e.g., Amazon) or frictionless mobility (e.g., Uber). Other common use cases involve retailers and corporates promoting co-branded cards and/or offering end customers financing options (both of which have existed in less technically sophisticated forms for many years). We summarise key Embedded Finance client types and use cases in the chart cases below.
The key roles in Embedded Finance are end users, clients (e.g., a non-fintech), and suppliers of Embedded Finance. Key value chain elements are licencing, products (inclusive of technology), integration into the client (typically via APIs from the supplier’s integration layer), and supporting services and back-office processes.
We summarise 11 key business models in the chart below:
Key opportunities for banks are (1) to become a direct provider of Embedded Finance via a BaaS business model (e.g., Starling Bank), (2) partner with a broad-based BaaS provider (e.g., NatWest with Vodeno), (3) be the balance sheet provider for Embedded Finance service providers, (4) utilise an Embedded Finance service provider as a vendor to fill out the bank’s own product suite, or (5) enable an Embedded Finance service provider to cross-market to the bank’s customer base.
Regulators typically play a critical role in creating the statutory and regulatory framework for Embedded Finance to thrive. Regulators can widen their scope to promote standardisation of the enabling technology required (as they appear to be doing with the European Commission’s proposal for PSD3). A case in point is the UK FCA’s active role in establishing the regulatory and technical framework for Open Banking/Finance which has leapfrogged the UK as the leading European country in Open Banking adoption. Regulators can also play a role in creating a universal framework for Embedded Finance, reinforcing measures for fraud prevention, data protection, data sharing and liability shifts. Such a framework protects participating entities and allows for increased innovation in embedded finance use cases.
This interview was first published in The Paypers' Embedded Finance and Banking-as-a-Service Report 2023, which is the latest comprehensive market overview and analysis focusing on the key products and players within the Embedded Finance and BaaS ecosystem.
Erik is a Partner at Flagship and has worked as a payments specialist for more than 22 years. He is a leading advisor and recognised thought leader on Embedded Finance, payments processing, and consumer lending, and has advised 100+ clients globally.
Flagship Advisory Partners is a boutique strategy consultancy and M&A advisory firm focused on payments and fintech. We deliver 80+ engagements per year with our team of 30 payments and fintech experts. Our key differentiators are deep expertise, practical operating experience, strong track record, unique IP, and leading-edge insights.
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