What the next phase of embedded finance looks like
Embedded finance will enable the creation of entirely new consumer experiences and business models, writes Nigel Verdon, CEO and co-founder, Railsbank.
By the end of this decade the embedded finance economy is estimated to be worth $7.2trn. For those of us in the space, that number might even feel a little conservative, especially when you think about the vast number of consumer brands that are set to benefit.
While consumers will be unaware of, nor really care about, embedded finance, we are on the cusp of some of the world’s biggest brands making it part of their loyalty strategies, and fundamentally changing the nature of brand/customer relationships for good. Why do I say “nor really care about”, well if you think about it, consumers wake up in the morning thinking about buying a car, not buying a car loan. The car is the experience consumers crave.
The initial success of embedded finance has so far largely been driven by a wave of fintech companies around the world offering new banking, payment and lending products to consumers. Without wanting to invest in all the infrastructure (e.g. technology, regulation, operations), these brands turned to Banking-as-a-Service platforms to launch their own branded bank accounts or debit cards. This has educated large sections of the population that banking can be trusted beyond traditional banks, and opened their eyes to totally new ways of thinking about financial services.
However, forward-thinking non-financial consumer brands such as highstreet retailers, online car dealers and sports clubs are catching on and the opportunities are tenfold in scale for them. Until now, many embedded finance applications have been product-based, but we’re only scratching the surface.
The next phase of embedded finance will be focused on embedding finance seamlessly within an existing customer experience and will be driven by your favourite brands. Take the car example again - BMW having a car loan embedded seamlessly into the car buying experience means you can buy and finance a car in 40 seconds! I call this the emergence of a new world of embedded finance experiences and the rise of the embedded finance experience platform.
Consumer brands and their digital grip
To understand the growing appetite from consumer brands to embed finance, you must understand the growing pressures they’re under. The digital attention economy, built by Facebook, Netflix and Amazon, has disrupted how brands and their customers connect.
Typically, most consumer brands rarely engage with their customers after an initial purchase and so the relationship is limited. Reputations are built on relevance, and continuous relevance breeds customer loyalty and increasing wallet share (also called revenue!).
The importance of finance products to consumers, and the daily frequency of their use, offers these brands an opportunity to go from intermittent interactions to constant connection. At the same time, consumers want to do more with the brands they love.
Think about the gravitational pull of Nike or your favourite football club. If brands want to forge meaningful connections and offer continuous relevance, they need to create finance experiences. A debit card alone will increase transactions, but how much affinity do you have to your bank that already offers that?
From product to embedded finance experiences
A good example to put this into perspective is the supermarket banks. Supermarkets already have a relatively loyal customer base and they attempted to build on that loyalty by offering traditional banking services. However, this foray into banking didn’t meaningfully add any more value to customers than traditional banks, which has led to several high profile about-faces including Tesco Bank shutting its current accounts.
While that move looks like a failure, it has forced Tesco to reconsider how it can build loyalty with its customers, and through its Clubcard Pay+ debit card it has created a true embedded finance experience. The card has the Clubcard loyalty scheme baked in, allowing customers to claim loyalty points on every purchase a customer makes, even if it’s not at Tesco itself. This shows how much more powerful a loyalty scheme with embedded finance can be, as it makes Tesco and Clubcard part of the customers' daily purchasing habits.
Tesco is one example of how retailers are looking to integrate finance into their existing customer journeys to deliver relevant and meaningful experiences. Think about the way you can buy a coffee today. You can pre-order, pay, skip the queue, get discounts and extra perks with the Starbucks app. The financial experiences are so deeply baked into your digital experience you hardly notice them.
The opportunity for sports brands is particularly ripe, thanks to their ultra loyal following. Take your favourite football club for example. What if your club’s app not only enabled you to buy matchday tickets or finance your season ticket but also away day hotel and travel deals, together with exclusive services for fans such as car hire and insurance.
These are all financial journeys that typically would detour fans away from the club app and impose friction on the fan during the purchasing experience.
But these embedded finance experiences don’t simply have to be relevant in this practical sense. They can be rewards based too. As an example, the McLaren Racing team is launching its own branded debit card experience with loyalty rewards like exclusive access to the pit lane. This experience is going to get F1 fans excited, in the way that interest or cashback from your traditional bank can’t.
The future of consumer finance lies with brands
The shift from product to embedded finance experiences is enabling the creation of entirely new consumer experiences and business models. The opportunity is vast and untapped for forward-thinking brands in any sector that want to form a closer digital bond with their customers or fans. It is a kind of Net Promoter Score (NPS) arbitrage away from the traditionally low NPS world of old finance, to the high NPS world of brands people love.
Consumers want more from the brands they love and trust, but that must go further than a debit card. Instead, brands must deliver relevant experiences that enhance their brand value. Embedded finance experiences have the power to enable a relevant and meaningful change in the way we interact with our favourite brands.
The views and opinions expressed are not necessarily those of AltFi.