Jeff Tijssen from Bain & Company helps differentiate Embedded Finance from BaaS, who stands to benefit from them, and how the future might look like.
How can we differentiate between Banking-as-a-Service (BaaS) and Embedded Finance? We are curious about the nuances that set them apart. Could you clarify the distinction between these two concepts and how they relate to each other? We are particularly interested in hearing your definitions and insights on the topic.
We define Embedded Finance as a nonfinancial software platform providing an adjacent financial service, for which it takes some degree of economic ownership. This allows platforms to offer banking, payments, lending, or insurance services in the context of everyday life.
The rise of Embedded Finance marks a new era for how customers manage relationships with financial institutions. Whereas banks are still at the centre stage of the relationship with consumers and businesses, Embedded Finance may become a catalyst to change this scenario. Customers increasingly prefer the convenience of using payments, lending, and insurance embedded in their day-to-day platforms.
In the past few years, ecommerce, food and delivery platforms, and mobility providers form the lead use cases. Gaming has also a strong potential to drive Embedded Finance use cases.
Other industries have been slower to advance digitally, because of a lack of disintermediation, regulatory influences, or customer preferences, and are harder for Embedded Finance to penetrate. Buying a house, for example, is extremely complex – disrupting and digitising that process end-to-end is extremely difficult.
That’s why currently there’s a tendency for Embedded Finance to be targeted to platforms with the potential for a fully end-to-end digital journey.
In the traditional banking value chain, banks were front and centre in the distribution of financial products. Embedded Finance has the potential to turn this dynamic upside down and threaten banks’ primacy.
Profit pools will favour platforms and enablers that understand how to leverage superior technology, algorithms, and contextual data to target the most creditworthy customers. In the future, only unprofitable or higher-risk consumers may default to traditional channels.
Traditional institutions should view Embedded Finance as an opportunity to reinvent their core business, build new growth engines, and offer more interoperable services. These require a fundamental rethink of the capabilities needed, especially in terms of risk.
The first step for banks is to define where to play in the value chain early, leveraging areas of strength and core capabilities. Will you only focus on the distribution of financial products? Or services such as KYC, AML, and credit decisioning?
The second step is then assessing how to win. If the decision is to partner with a BaaS provider, banks need to make considerations around the fit of the provider’s product offer, geographic synergies, technology infrastructure and APIs, regulatory compliance, data security and privacy.
Our report suggests a revenue growth of 2.5x over the next five years and a 3x growth in embedded value transacted only in the US. So, you can probably multiply that two or three times globally. As embedded services evolve, enablers will move into new value-added services, including insurance, tax, payroll, regulation technology, and compliance functionality.
Regulation will centre on those providers who assume too much capital risk without the right controls. Ultimately, the underlying credit provider might not know to whom the company is facilitating credit – this will probably lead to regulation. Also, data sharing between organisations will be a future focus of regulation.
This article 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.
About Jeff Tijssen
Jeff Tijssen is the global head of Bain & Company’s Fintech practice. With more than 15 years of experience in financial services consulting, Jeff’s work has spanned across Europe, North America, Asia, Africa, and the Middle East.
About Bain & Company
Bain & Company is a global consultancy that helps the world’s most ambitious change-makers define the future. Across 65 cities in 40 countries, Bain works alongside its clients as one team with a shared ambition to achieve extraordinary results, outperform the competition, and redefine industries.
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