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With embedded finance, all that glitters may not be gold — but plenty is

By Ahon Sarkar, General Manager of Helix

The other night, I was watching a documentary about the California Gold Rush and it got me thinking. Prior to 1848, if you said you were going to drop everything and head to California to pan for gold, people would have thought you were foolish or crazy — or both. But once gold was found in the Sacramento Valley, tens of thousands headed west to seek their fortune. Gold fever swept the nation. Of course only a few struck it rich and within a few short years, most of the prospectors headed home and people were asking if the gold rush was a bunch of hype. 

The story struck me because of its similarities to what we’ve seen with BaaS (Banking as a Service). When we first started in this business about six years ago and suggested that companies should offer banking as a service, people would say, “Why on earth would I add banking to my product? I’m not a bank.” Fast forward and now it feels like every other company announcement is about adding some kind of financial services products to their ecosystem and virtually every conference has a whole stage dedicated to embedded finance. We’ve seen an interesting evolution from “Why banking as a service” to “Everything is banking as a service” to “Is banking as a service a bunch of hype?” 

It’s almost a crisis of confidence in many of the companies that launched these products. 

To be clear, there is meaningful intrinsic value to embedded finance and it can solve real problems for consumers and businesses alike, but there’s a lot of hype as well and it’s important to be able to separate the two. I’m going to go back to my gold mining analogy. Think of embedded finance as dirt in a sieve. There are absolutely gold nuggets to be found, but you have to shake out the rocks to get to them. 

Don’t be taken in by fool’s gold

In order to understand the true value of BaaS, we first need to determine what part is hype and what’s solving an actual problem. How do you know offering banking as a service is something that you should do and how can you do it in a way that’s going to be valuable, instead of in a way that’s going to waste time, money and resources — and ultimately fail? 

I still strongly believe that the space will grow and change the world, but just using the term “banking as a service” isn’t suddenly going to 10x your valuation. Getting to the value requires defining a sustainable business model and a path for growth rooted in a real competitive advantage. 

We at Helix have been thinking this way from the very beginning. Over the years, we could have gone after certain verticals and worked with multiple companies in each one which would have conceptually given us market penetration, but then we would have been eating our own lunch, so to speak. Ten companies in the same vertical offering different flavors of the same embedded finance product are ultimately going to be competing with each other, so if our goal is making finance human by offering free and fair banking services for every American, that’s not a terribly efficient path to get there. All it does is raise customer acquisition costs for all involved, get consumers 10 versions of the same thing, and limit long term innovation.

Looking at it differently

What we did instead was to look across verticals and ask who the best one was in each space, how we could partner with them, and how we could give them a competitive advantage. Once we picked specific verticals and found amazing partners to work with, we built the core technology from scratch to give they and their partner banks advantages over those built on legacy technology (like user-level personalization, for example), and we helped them design unique products that aren’t just stand-alone banking businesses; they deeply integrate with what that company already does. 

This created something unique — and something designed as an intrinsic part of a foundation that had been built over many years. For consumers, it meant a value prop they hadn’t seen before (whether that was banking rewards earned by playing games, fee-free cash advances that eliminated the need for payday lenders, or new interactions between banking and wealth management that had both sides talking to each other for once). For companies, it meant a product that extended their ‘secret sauce,’catalyzed activity across their core offering, and differentiated itself in the market. 

Between 2020 and early 2022, venture in BaaS became almost a way of printing money. Because of the outsized returns that were driven by inflated perception, venture investors didn’t want to be left behind and would invest in companies that had the BaaS or embedded finance monikers because it was hot and exciting. There were ample opportunities for sizable exits, and it was better for founders to participate with the risk of loss than to not participate if they wanted to be able to raise their next round.

Well, now the economy’s turned. The cost of capital is significantly higher, and investors have become savvier. They are beginning to understand that all that glitters is not gold and are looking past the glint to understand which businesses will actually become category-defining and have longevity and which were ultimately overhyped marketing engines subsidized by venture investment.

Think about it

If my whole product hook is basically giving away all of the money I earn in order to have an appealing product, it’s hard to build a standalone profitable business.  

So that begs the question, how do you build a business using embedded finance that is a net add to your business, a net add to the customer and helps you generate money (whether by direct revenue or increased engagement, stickiness and retention in your core business)?

The reason that embedded finance has value is because it allows you to combine the fundamentals of accounts and cards and solve a problem for your existing business, which makes your existing business more effective.

For example, in offering a bank account that is seamless with an investing account, Betterment gets people to invest more dollars towards their long term financial wellbeing. In offering a way for people to get fee-free advances on their next paycheck, Gusto increases employee retention and happiness and solves a real problem for underserved people across the country. In Acorns’ case, the reason their product is so good is because all you have to do is buy the things you want to buy and everything else just happens. Your investments happen, your retirement savings happen — it’s all deeply integrated. 

The future of embedded finance

As embedded finance continues to evolve, I believe we’re going to see more consumer companies that initially started as a neobank try to pivot some part of their product into infrastructure. Once they realize that they may not be able to compete with a big bank or other company on their whole product, they will capitalize on the one thing they have that’s unique. Second, the companies that launch embedded finance that’s deeply integrated with their existing ecosystem at scale are going to get an unbelievable amount of value for it and create unique new products that are impossible to replicate unless you can rebuild their entire ecosystem. 

Third, those companies that personalize their products to the user and leverage context as a competitive advantage will win in the long run. This creates dynamics similar to what we see in video games or streaming services, where the more you use it, the more you get from it, and the moment you leave, it all goes away. The goal is not ‘signing a user’, it is building a long term win-win relationship where you meet your customer’s needs better than anyone else because of how well you know them and in turn they look to you to help them meet their goals as their life evolves.

What others are just realizing now — but we’ve known from day one — is that launching a standardized sidecar offering does no good for anybody. Embedded finance’s real value is in combining it with other ecosystems to make unique products and building those around people so that they get a better product than they can get anywhere else.

Now that we’re able to separate the hype from that real value, we can look toward the next great challenge, which is driving profitability through engagement and retention. 

Those who succeed will be nobody’s fool.