Embedded fintech, in which financial institutions integrate fintech services into their platforms, is the financial technology area that should see the most growth in coming years. But to many, it still remains a black box – even though Barclays Rise anticipates that the payments segment revenue of the sector alone is set to grow from $16bn last year to $141bn by 2025.
To maximise this huge opportunity startups and investors need to focus firmly on the real value of embedded fintech: which is about creating lasting customer relationships, rather than enabling transactions.
London is the acknowledged capital of fintech in Europe, but it must evolve and embrace embedded fintech if it is to live up to its full potential.
To get to the real point of the sector, it’s time we replaced the buzzwords of BaaS (banking as a service) and BNPL (Buy Now Pay Later).
What we are really talking about is financial orchestration, or interoperable finance. But even these words obscure the whole point.
Financial outcomes over financial products
Ask the everyday consumer or business customer what they want from fintech and you’ll probably be met with blank faces. What most people care about is not the product as such, but how fintech can solve their problems.
They want to know how these services will improve their lives and make their business operations more efficient and productive.
They care that they can access the same experiences on mobile, on web or face-to-face. And in an increasingly digital and connected world, they care about how these services live up to their expectations from other user journeys.
Ultimately, they care about financial outcomes rather than financial products.
Enabling outcomes for the benefit of everyone
The real value of embedded fintech will be achieved when software startups focus on solving customers’ very real problems, rather than the products themselves.
Take buying a car, for instance. Today this still requires multiple calls to finance providers, insurance companies, admin fees and emailing or even posting documents – and that’s if the process works effectively.
If embedded fintech is to solve this problem it needs to deliver interoperability and collaboration. You should be able to agree, finance, insure, and transact from the comfort of your armchair on a mobile device, or from the finance manager’s desktop. Legal documents, identity verification, anti-money-laundering steps, know-your-customer, and payments should all be made seamlessly behind the scenes. Each step in the transaction focuses on the outcome, rather than the product.
Founders who build, and vendors that adopt, embedded fintech as a key orchestration point need to have a customer-centric mindset: how can I delight, and through delight retain and grow the customer value? These customer engagements are deeper, providing a better assessment of risk and product suitability. This is fundamentally a hyper-personalised financial experience – lower risk, lower loss, higher utility experience. It’s a win-win for all.
Changing the embedded fintech narrative
The tech shift to cloud-based mobile fintech is underway but we need to understand embedded fintech as more than just another layer of technology. It’s about embedding finance to cement lasting customer relationships, rather than simply enabling transactions.
Marc Andreessen’s seminal line “software is eating the world” in 2011 largely turned out to be true, but we shouldn’t yet overplay his colleague’s equally pithy vision that “every company will be a fintech company”.
It’s true to say some high-profile software companies could be considered payments companies. For example, 80% of end-to-end restaurant platform Toast’s 2020 revenue came from “financial technology solutions”. In other words, fees paid by its customers to facilitate payments. Shopify, the more than $100bn ecommerce behemoth, generates approximately 65% of its revenue from merchant services. But, these are early steps on the path to the full vision, and payment is just the start.
The most exciting investments in embedded fintech are with the founders who understand why simply providing better products is not enough. Those founders who understand how fintech can create long-term relationships with financial services providers are the ones who will create the lion’s share of the opportunity that is anticipated.
Jay Wilson is investment director at AlbionVC.