Platformization of Banking — Part 4 — Embedded Finance to uplift TOI

Chris Shayan
9 min readFeb 22, 2024

Among embedded-finance distributors and their end customers, demand is already maturing for a range of deposit, payment, issuing, and lending products. In addition to these traditional financial products, novel use cases are emerging. For example, embedded-finance distributors are offering prepaid cards to employees as part of earned-wage access programs; giving merchants the option to use their deposit accounts for instant-payments settlement. Some are providing just-in-time funded debit cards for gig economy workers to use when making purchases for members of delivery-service platforms.

The pre-reads:

Digital Banking = ∑ (Execution + Generate Data + Learn + Experiment)

What is Embedded Finance?

Embedded Finance (aka embedded banking) threats and opportunities are influencing strategic thinking in many banks and non-banks across the globe. Embedded finance is reshaping the banking industry. It is enabling new competitors to enter the market and transforming the delivery of banking products to retail and corporate customers alike.

An embedded finance strategy includes two intents — the enterprise’s consumption of an embedded service, or the enterprise’s distribution of an embedded service. The embedded services consumed or distributed by banks can be financial or non-financial in nature.

Bank products and services are rarely exciting for retail customers, and for corporate customers, they are too often delivered through fixed channels. They are a means to an end, enabling customers to transact, acquire products and consume services that they need to live and operate. However, that status quo is being disrupted, as financial services are embedded at the consumption level, in the very products, services and supply chains that they are supporting. The financial services components are being distributed to the points at which customers need and consume them. As a result, access to a payment solution or a line of credit doesn’t require the customer to engage with the bank-owned distribution channels anymore.

Gartner Framework

Gartner uses an embedded finance framework to help describe the embedded finance market space, focusing on components that combine to address the customer need or want. The framework then offers a perspective on whether banks should consume a component from an external provider, or distribute those components themselves. The framework uses two axes to describe:

On the x-axis — The nature of the embedded services and the types of financial and nonfinancial components that can be combined. Financial components might include anything from a payment to an anti-money-laundering capability. Non-financial components may include an ability to organize transportation and mobility (for example, ride hailing or renting a car), a digital commercial capability (for example, online ordering services and ticketing), or a carbon footprint dashboard.

On the y-axis — The source of the embedded services and the options to source or distribute those financial and nonfinancial components. Nonfinancial components would include a bank consuming services provided by an external banking-as-aservice provider, or distributing those components itself as the service provider. Equally, a bank might be sourcing a range of external nonfinancial components, and orchestrating an ecosystem to help a customer buy a property or a car. Equally, a bank might be distributing financial accounting or e-invoicing solutions to its small midsize corporate clients.

  • Augment. This is where existing or future financial services offerings are augmented with financial components sourced externally, or from other parts of the enterprise. This segment would describe scenarios where a product marketplace approach has been adopted, such as Starling Bank’s eponymous product marketplace or the more distributed offering from Revolut. Or the scenario is where specific financial capabilities have been added to an existing portfolio, such as the integration of Wise’s foreign payment capability by Stanford Federal Credit Union or Dutch digital bank bunq.
  • Productize. This approach describes how financial components may become products in their own right, and the bank looks to distribute those functional components as products to other enterprises that might wish to offer that functionality to their own customers. This approach will encompass many of the developing banking as a service (BaaS) models that are being more commonly offered by many banks and technology providers. One example is Solarisbank’s know your customer (KYC) as-a-service offering. However, it will also include wider distribution models — for example, where the financial component is integrated into the back-office environments of customers, such as those provided by Nordea to its customers. The wider flexibility of the model — expanding thinking on BaaS to include capabilities consumed directly by customers — is illustrated when looking at another KYC offering. The Nordic banks have collaborated to offer a utility KYC service supplied by a collective, Invidem, accessible by both banks and their customers. In the context of its consumption by their corporate customers, the KYC component becomes a product, and sits in this productize segment. However, as the Nordic banks will also consume these KYC components, the model enables the user to describe those contexts in the augment approach.
  • Contextualize. Moving into the non-financial half of the framework, start to describe components that either individually, or in combination, address specific customer issues or problems. The immediate intellectual challenge for many banks will be that these components address customer problems or issues that do not immediately align to “traditional” banking products or services. One example is the storage and analysis of a digital receipt generated by a payment transaction, such as that offered by Flux. Another example is the provision of a carbon tracking application to enable retail customers to understand the impact of their day-to-day payments, such as those offered by Cogo, Doconomy or Svalna. Combined examples would include offerings from the likes of DBS in Singapore, with its “buy a car” marketplace. This helps customers find and purchase an appropriate motor vehicle, and embeds insurance, maintenance and funding components in the purchase transaction. Similar examples from DBS exist to help customers purchase property, arrange holidays and travel, or even make regular e-commerce-type purchases.
  • Diversify. The diversify approach supports banks that have developed clear insight on the opportunities that derive from nuanced and sophisticated ecosystem strategies. With this approach, banks will distribute nonfinancial components to third parties. This may be in a proxy BaaS model, through provision to other banks — for example, Ålandsbanken’s provision of its Åland Index carbon tracking product. For example, invoicing software is integrated into the banking package provided to small and midsize business clients, from the likes of Mettle in the U.K. and DBS in Singapore. Similarly, carbon tracking analytics is integrated into customer dashboards, by the likes of BBVA in Spain, or operational business data is integrated into a customer-facing dashboard by Barclays in the U.K.

Embedded Finance for Commercial Banking

Commercial banking is being reshaped by technology and by disruptions such as new entrants, new ecosystem-driven value, changing client demand, and recent bank failures. Most commercial banking business leaders are evaluating or enhancing their existing business model and developing strategies for growth, while simultaneously addressing efficiencies, cost optimization and ecosystem participation. In response, commercial banking C-levels are rolling out new solutions and creating roadmaps for their digital platforms and technology adoption. To succeed, future commercial banking business and technology strategies will require resilience, adaptability, composability and agility. While this is a good starting point, there is also a need for even greater alignment between business goals and IT deliverables as digital enabler

What Products to offer?

Among embedded-finance distributors and their end customers, demand is already maturing for a range of deposit, payment, issuing, and lending products. In addition to these traditional financial products, novel use cases are emerging. For example, embedded-finance distributors are offering prepaid cards to employees as part of earned-wage access programs; giving merchants the option to use their deposit accounts for instant-payments settlement. Some are providing just-in-time funded debit cards for gig economy workers to use when making purchases for members of delivery-service platforms.

The embedded-finance product portfolio is likely to expand further as customer-onboarding and product-servicing processes are gradually digitized and real-time risk analytics and services grow more sophisticated. Risk is likely to remain a constraint on growth, however, as products that require case-by-case assessment, in-person touchpoints, or regulatory waiting periods, such as commercial real estate financing, are less susceptible to end-to-end digitization. Despite these constraints, we estimate that products suitable for offering via embedded finance could account for as much as 50 percent of banking revenue pools.

Balance sheet providers (licensed or chartered financial institutions) are responsible for manufacturing embedded-finance products, providing risk and compliance services, and offering access to funds for lending and deposit products. Balance sheet providers sometimes partner directly with technology providers to create an integrated embedded-finance offering for distributors. For instance, Stripe is partnering with Goldman Sachs and other banks to offer embedded finance to platforms and third-party marketplaces.

There are three main sources of differentiation for embedded-finance distributors, balance sheet providers, and technology providers:

  1. Product breadth. Many distributors are adopting a “land and expand” approach to embedded finance. They start by offering payment acceptance or deposits and then extend their product portfolio to lending products or more complex offerings to address customers’ broader financial needs. Some distributors prefer to shape their strategy around a one-stop shop developed with a single trusted technology partner that offers a wide array of products, while others opt to work with several technology providers to avoid over reliance on one partner.
  2. Product depth. A few technology and balance sheet providers are building deep expertise in specific embedded-finance categories such as issuing, in order to claim outsize market share in these niches. They develop innovative use cases — such as just-in-time fund deposits into cards or crypto-linked payment authorization — as a basis for creating novel financial products for end customers. Over time, however, the demand for integrated financial solutions and the synergies that can be captured across product categories are likely to prompt these providers to protect their flanks with product breadth as well.
  3. Program management support. Many distributors that are new to embedded finance are understandably concerned about how to build, sell, and service a financial product for end customers. Some of them may see the regulatory and reputational risk attached to financial products, especially lending, as an insurmountable hurdle. To help them overcome the risk, many embedded-finance technology providers are offering sales, servicing, and risk management expertise or are orchestrating other partners providing them. The ability to provide distributors with this kind of program management is likely to be a key source of differentiation in the long run.

Simplified Embedded Finance Conceptualisation & Architecture

Embedded finance works such that it leverages technology to create a digital ecosystem whereby users can access financial products without having to go through or be redirected to multiple user journeys. Financial Services (FS) providers generally connect their financial products with non-FS firms through APIs to facilitate the transfer of data between one another. Non-FS firms offer their functionalities through their products and technology capabilities to seamlessly embed FS’ financial products into third-party customer journeys.

An example would be building real-time RNN powered feed-forward networks to improve channel experience, streamline and consolidate customer payments journeys, and even enable real-time advice and education on financial well-being. In addition, the reference architecture would enable a modular blockchain-based augmentation with existing core banking systems to launch credit cards for cheaper cross-border payments, reducing overall cost, and improving security which can also enable an embedded finance.

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Chris Shayan

Purpose-Driven Product Experience Architect. I’m committed to Purpose-Driven Product engineering. My life purpose is Relentlessly elevating experience.