Most companies just don’t want to become fintech companies, writes Vicki Gladstone, CEO and COO, Moorwand.
Embedded Finance has become one of the hottest issues in the fintech space. Embedded Finance is where a brand, often a non-financial brand, embeds financial services into its offering from a third-party financial service provider.
The term was coined by Angela Strange at VC firm Andreessen Horowitz who also asserted that in the future “every company will be a fintech company” because every company will be able to embed financial services.
And they have good reason to.
It’s reported that brands expect Embedded Finance to add an additional €720.78bn in revenue over the next five years.
Take Starbucks’ loyalty app. The coffee giant holds more than $1.5bn in balances. And according to the Federal Deposit Insurance Corporation, this amounted to more than that of 3,900 US banks who held less than $1bn in total assets. The loyalty card not only improves the customer experience and boosts loyalty, Starbucks also has an interest free loan from its customers and much less pressure on its cashflow as a result.
With big brands like Starbucks, Uber and McDonald’s embedding financial services into their offerings, will every company soon become a fintech company?
I don’t think so and for one key reason. These brands simply borrow financial elements from fintech providers, they don’t own and operate these elements. Just like how Starbucks isn’t a bank and will never be a bank, I believe that every company won’t become a fintech.
Where does this leave Embedded Finance?
Collaboration is the new competition
At the heart of the shift towards Embedded Finance is the wider ‘rebundling’ of financial services, where brands seek partnerships with banks and fintechs to offer financial services that would be too complex and costly to build and offer themselves.
In an attempt to catch-up with the burgeoning demand for Embedded Finance, financial institutions and fintechs are offering banking-as-a-service (BaaS) to allow brands to offer financial services without investing in the licenses, technology and know-how.
By effectively outsourcing financial services through BaaS, brands can improve the customer experience, expand into new markets and customer segments, and launch new products and services, without changing their entire identity or learning how to enter a new industry.
But the question for brands is – who and how should I outsource to so that I can best embed financial services?
Beware the Toys’R’Us of fintech
When it comes to embedded finance providers, the market is split between specialist partners that provide a specific service, or generalist partners that provide a range of services, ‘all under one roof’.
In the wake of the Wirecard scandal of 2020, there was a great deal of soul searching across the industry. How could one firm create havoc at such scale across the industry? One of the reason’s discussed was the fact that many brands and fintechs work with multiple regulated suppliers, which in creates fragmentation and compliance issues due to the fact there is no overriding owner of compliance.
Peter Cox, Executive Chairman and Founder of Contis, went so far as to argue in an article that a brand “requires a single, focused, firm (in) control of all the moving parts.” So does that mean it’s best to have a single, general partner rather than a number of specialists?
I don’t think so. And for three reasons. Firstly, the Wirecard issue was primarily about access to customer funds due to insolvency. The problem wasn’t working with multiple suppliers, and arguably if brands had used more of Wirecard’s services the impact would have been greater, not less.
Secondly, discussions within the industry shows that most brands, especially fintechs, have and continue to work with multiple suppliers to build out their technology stack without issue. Firms want best of breed services and solutions, and don’t want to put all their eggs in one basket.
And finally, having a single provider is a threat to operational resilience. The FCA launched a consultation into the issue in 2019, with measures expected to be put in place in March 2022. In the consultation it ask firms to map the providers it has to identify potential “vulnerabilities and/or weaknesses (which) may include lack of substitutability, high complexity, single points of failure, concentration risk, dependencies on third-parties and matters outside of a firm’s control e.g. power failures.” The regulator is pushing more diversity in partners and suppliers, not less.
For many brands working with a generalist provider - if one thing goes wrong, then everything goes wrong. But it doesn’t have to be this way.
Generic providers result in generic services
Brands are rapidly outgrowing the white label solutions offered by generalist providers and are seeking the more bespoke and developed offerings that specialists offer.
Generic providers result in generic services after all.
And if a brand is looking to embed financial services to differentiate it in the marketplace, in the same way Starbucks has from other coffee outlets, it needs to work with a specialist with expert knowledge to create a unique proposition.
Talking to brands and fintechs in the market, the more established firms rely on specialist providers. Why? Generalist providers don’t allow them to differentiate properly, and as their firms expand into new markets and launch new services, things frankly become too complex to be solved by one provider.
Every company certainly won’t be a fintech
As Rita Martins, Fintech Partnerships Lead at HSBC said in response to Strange’s 2019 speech, “Will every company be in this space? Probably not. Financial services are a complex industry with considerable global and local regulations to be abided by.”
I would go further and argue that quite the opposite is true – most companies don’t want to become fintech companies.
Just look at Google Plex. It’s highly likely that Google’s flagship consumer focused banking and payments offering was canned because Google wants to sell to financial services firms, not become a financial service firm. Like Amazon, big tech and big brands have woken up the fact that being a fintech means a lot of complexity and cost. And Embedded Finance is a way of avoiding this complexity and cost.
The fact is that Embedded Finance helps brands sidestep the majority of what it really means to be a fintech – from risk management to compliance and capital. And the benefits of Embedded Finance are best reaped from fintech specialists that avoid a single point of failure and help brands use financial services to truly differentiate and better their business.