Digital acceleration is happening unprecedentedly. In the post covid world, combining integrated finance experiences into an offering or an app has become imperative driven by consumer demand for improved experiences. With the opportunity to be immediately assessed for credit, buy an insurance plan, enjoy loyalty schemes and discounts, etc — an all-in-one experience is an enticing future, even for the creation of new revenue streams. Simply building a multifaceted end-to-end fully integrated and seamless experience for users and ultimately expanding the revenue base for players. Expectations are for Fintech offerings to revolve around ease and embedded offerings over the next few years.
What really is embedded finance?
It is in varying forms -when non-financial institutions can offer financial services to their customers/clients to achieve their performance, be it a digital commerce store owner offering insurance or BNPL services for buying on its site or a freight forwarder offering trade financing to its clients or a payment processor adding more value layers for its users. It is simply meeting the customers where they are as an entrepreneur solving in a financial or non-financial sector, to get them to the finish line by providing added value.
Embedded finance is a huge opportunity, trends have shown that it is likely much more beneficial to small businesses looking to scale, particularly in challenging climes like frontier markets, than already mature companies. You will find the big traditional banks, credit providers, and insurers offer their platforms to fintech or non-fintech providers that seek to transfer the cost and accountability for a share of the revenues. Data shows that consumers are willing to adopt embedded financial services if it benefits them to do so. 46% of millennials say they would be interested in opening a checking account with Amazon, and more than 30% would be willing to do the same with companies like Starbucks, Uber, Facebook, or Google.
Convenience is a key driver for consumers willing to adopt embedded finance and the breadth of data will need to be harnessed to yield earnings for service providers.
What kind of embedded solutions exists?
There have been different innovative embedded solutions that have emerged in recent years, such as:
Banking — Banking as a service — providing customers a checking account or a wallet to place funds and make payments, whilst offering various perks and access that only direct customers can enjoy. For example, Flutterwave or Chipper cash offers virtual dollar cards making regular bank customers skip local restriction rules from their banks, or Shopify Balance offering Shopify store owners debit cards and exclusive rewards to skip their banks and get paid faster, and Lyft offering debit cards and checking accounts to its drivers.
Payments- this segment has seen loads of innovative ideas, with early movers like Interswitch, Cellulant, Paystack, Flutterwave, etc, making the payment process easier with a debit card or no debit card required, or one-click payments or with mobile apps or USSD codes; helping small businesses offer their customers ease, discounts and rewards and overall, just improving customer retention rate.
Lending — This has taken off across markets, particularly with Buy Now, Pay Later (BNPL) and other lending offerings by non-financial services companies; attracting customers with credit options so they can complete their purchase — Klarna, Afterpay and I had written an article on BNPL in the Africa ecosystem detailing this. This is unique for the African ecosystem and as always, the context of the consumer behaviour for each market will come to play here. Again, the goal is to get the consumer to the finish line by easing the financial burden of an outright payment.
Insurance — Although in advanced markets insurance embedded in certain purchases — electronics, health, etc. already exists as pure insurance or as warranties. In more African markets, we are starting to see that happen offered when it is needed, with no separate engagement with an insurance agent — already built out into the check-out flow as an add-on for the customer’s purchase. Some companies/platforms underwrite these insurance policies and integrate them into their purchase flow, and some integrate insurance options from their insurer partners to meet this need.
Wealth management — Often not talked about but important, for asset managers, this has become an interesting piece of the puzzle incorporating investments as an add-on to an insurance or lending product or a receivable factoring provider. Embedding these compelling and unique solutions to improve customer stickiness is making the user’s experience easier and increasing the pie for providers.
What does the future of embedded finance look like?
Partnerships- Typically, when a non-financial company wants to offer a new financial product or service, they have three options: build, partner, or buy. Today, the embedded finance revolution has largely been about partnerships and that trend has definitely taken over in the ‘big four’ African markets. Financial and non-financial operators collaborating with themselves and even traditional banks, insurers, pension funds, etc. showing that financial providers and brands can forge lasting (and highly beneficial) partnerships. This trend is here to stay with these partnerships providing the experience and skill sets that brands need to offer embedded finance without hiring whole teams of financial experts and software developers.
Regulation — This will become increasingly important as more services are integrated, navigating the terrain will be key for operators. Regulators will need to get creative in governing such services from crypto to BNPL to insurance to ensure customers' interests are adequately protected across this boutique of offerings.
New revenue streams — By integrating financial services into established buyer journeys, many new revenue streams have already been established. Additional revenue streams are likely to continue popping up as companies, particularly enablers, (Startups, Telco, banks, etc) find new and creative ways to add value through embedded finance.
New competition as embedded financial services become widespread and more non-financial companies start wading into these new waters. Financial services companies will need to rethink business models as they compete for new frontiers. With more companies acting as financial companies, financial providers will need to become more accustomed to sharing customers with non-financial companies for services only they used to provide.
The future for ambidextrous fintech and non-fintech players is finding the right balance in executing their embedded business models. This will definitely be one to watch- a key critical success factor. The control points for end-to-end players can quickly become battlegrounds from digital wallets to open banking data or aggregators, the competitive landscape will definitely change.