Simon Wu
Stripe recently made headlines with its entrance into the banking world with Stripe Treasury. The news follows Google’s banking and payments announcement along with IPO bound companies such as Airbnb, DoorDash and Affirm all mentioning “financial services” in S-1 filings — a clear signal of how the sector will continue to stay red hot for the coming years.
What do all of these companies have in common? The subtle, almost unnoticeable, embedding of financial services. There has been an influx of new fintechs democratizing how to embed financial services across the spectrum, from investing, insurance, lending to banking. While many of these companies are in their nascent stages, they are achieving increasingly high valuations. Why?
Because today, customers yearn for greater personalization and less friction while brands are looking for ways to improve monetization seamlessly. The ability to be at the right place at the right time, supporting consumers and merchants alike, where they want it, how they want it and when they want it — cannot be understated.
At the heart of embedded finance is the benefit of enabling any brand or merchant to rapidly, and at low cost, integrate innovative financial services into new propositions and customer experiences. To avoid developing noncore product additions in-house, companies will look to “building blocks” (or APIs) to take advantage of the big opportunity to extend customer lifetime value and address a wider variety of needs in one place.
This holds true for startups, digitally native brands and established brands, online and offline. For fledgling fintech startups or brands that want to provide financial services to their customers, working with APIs are often a no-brainer given the costs associated with building integrations in-house.
But imagine if you are a global airline company and the benefit of not having to staff a know-your-customer compliance or fraud detection team. Or for lenders who can minimize risk and increase speed by not having to request a pay stub or personal information verification?
The end goal is to earn and build customer loyalty while generating new revenue streams. Historically, established brands have been served by banks with co-branded and “affinity” programs or partnerships. But this “offline” model is usually white-label or very “human-in-the-loop” with limited and inflexible capabilities. However, APIs can change this — a great example is Starbucks Rewards, heralded as a successful case of data, rewards and loyalty. No longer are brands just reselling leads, businesses can now directly participate in the product and distribution to improve margins.
Today, embedded finance is being used in a variety of ways: In the product (e.g., Tesla’s insurance offering), in distribution channels (e.g., a startup selling insurance during car purchases), and in the technology layer (or building blocks) to improve the overall functionality (e.g., a lender leveraging a data API for instant underwriting).
We typically separate building blocks into two buckets: providers (“plug and play” applications) and enablers (those that help financial services to be offered).
There are many new entrants and it’s not one size fits all. Some have data advantages, some distribution while some enable new greenfield opportunities via delivery of the customer experience. While these “digital wrappers” around financial services infrastructure seem to be working, the question remains — who will become a market leader? Do enablers eventually become providers?
Top considerations to embed with success
While the opportunity is clear, we are still in the early innings and there are too many fractionalized solutions when aggregation is needed to scale and create longtail winners. In addition, banks won’t settle for becoming “dumb” finance pipes so don’t discount innovation out of incumbents. Case in point with Chase, Citi and American Express all offering new installment lending features.
We interviewed a number of our ecosystem partners — ranging from operators in the Fortune 500 and leading financial institutions to trailblazers in emerging regions — to see how startups to established brands should think about embedding. Here’s what we learned:
Do’s and don’ts for startups and the digitally native
Leverage data for maximum impact — by combining company and transaction data, you can monetize while creating better user experiences, cross-sell options and risk models that increase client retention and loyalty. But make sure you can hire the expertise or have dedicated resources to support the new services.
Do’s and don’ts for established brands
Embed, don’t resell because context is everything. Winners are those that provide services closest to the context and solve a problem in real-time, instead of reselling something that is boilerplate. By embedding, brands can launch their own financial services for specific demographics and create additional revenue streams (e.g., by capturing interchange fees, interest income, or insurance/warranty premium revenue share). Established brands have the distribution advantage, now take advantage of it.
Incumbents versus new entrants
Choose a solution tailored to specific needs — there’s no one clear answer. Favoring configuration flexibility over speed is critical and always consider the scale of operations as well as geographical limits. Brands, young or established, should be wary of only leveraging one partner, as stability in new entrants could become an issue.
Enablers or providers can help accelerate time to market, but platform dependence can become an existential vulnerability. Large companies like Shopify or Square have outgrown partners and built in-house. While new entrants serve primary functions, switching costs are astronomical and there’s no clear frontrunner. For established brands, it will likely be a waiting game to see which are able to centralize, scale and come out on top.
Winners: Too early to call, but the future is embedded
As global investors, we’ve seen the power of embedding materialize around the world. Just look at the massive success of superapps such as Singapore’s Grab or China’s WeChat, driving and improving usage and adoption with payments, banking, wealth management and insurance services.
Superapps have evolved their value by unifying disparate customer journeys — but this can only happen if information is in one place, programmable and accessible. While the U.S. has no superapp equivalent (yet), and embedded has taken longer with notable retreats from the likes of Uber Money, we’ll continue to see a shift to business models that embed financial services. But keep in mind that there are a number of ways to succeed with an even larger number of providers and enablers to choose from.
While existing financial technology has worked for us thus far, there is an opportunity to make the core services more functional and interoperable. Convenience has been one of the first major outcomes, but the future will have elements of UX consistency and brand uniformity so seamless that customers can’t tell it apart from the original product.
It’s still too early to declare winners, but we are sure to see large category leaders in the coming years — both for the enterprise and SMBs — along with new use cases beyond today’s imagination. Overall, the most successful fintechs will be those that are tools to create tomorrow’s most valuable customers.
Cathay Innovation has a financial interest in FinAccel, Fundbox, Kueski, Igloo and Quantifind.
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