Embedded finance goes beyond just payments. It provides finance at the point of context for users and offers solutions that benefit customers' financial health - all within the technology solutions that businesses and consumers use daily.
Sophie Guibaud is the Co-Founder and CC&GO at Fiat Republic and co-author of the book, “Embedded Finance.” As we continue our deep dive into embedded finance, NMI’s Payment Playbook host Greg Myers joins Sophie to discuss:
- The embedded finance ecosystem and its key players
- How this trend will impact banking and technology services providers
- The opportunity for brands looking to add value to their customer relationships
We’ve highlighted a portion of their conversation below. Listen to their full discussion here.
Greg Myers: Let’s start at the highest level - what is embedded finance? How do you define it?
Sophie Guibaud: Embedded finance, at its simplest definition, provides finance at the point of context for users. For example, take a look at finance and insurance products. If I go on a website and buy a trip to Asia and I’m offered travel insurance, that’s embedded finance. Or, if I want to buy a TV and I’m offered a loan based on my profile, that’s also an example of embedded finance.
So it’s really about providing these financial, insurance and lending products to customers exactly where they need them, with the least friction possible. Embedded finance essentially provides anything related to the financial health and life of customers when they need it.
Myers: Many companies started this embedded journey by integrating or embedding payments into their solution. But embedded finance is so much bigger than just payments - it’s embedding financial products like lending and insurance. Embedded payments are part of the picture, but that’s not all. So, who are the key players and technologies in the space today?
Guibaud: Embedded finance is part of an ecosystem that has developed over the past 10 years. If we look at specific character actors, the first would be external (and maybe the most important) - regulators. Local regulators are empowering competitive companies to use the licenses of other regulated entities to provide services to their own end users. Embedded finance has been unlocked thanks to this type of arrangement.
In Europe, for example, we talk about an agency becoming an agent of an EMI (electric money institution) or an agent of a bank that can take a different legal form. Without regulators putting in a framework to make this work, we wouldn’t be as far as we are right now when it comes to embedded finance.
When we talk about the value chain itself, retail companies own the audience and specific data sets on that audience. They know their users very well. These companies don’t have experience when it comes to financial services. Still, they realize that providing those services at the point of context with their users will not only bring revenue to them but more value to customers and a better customer experience. That adds stickiness to their brands.
For revenues - that’s quite an interesting part of embedded finance. When companies launch an embedded finance service, they need to consider how they’ll do it. Will they get a banking license and create a separate entity, or will they do everything internally? How will they meet the capital requirements necessary to get a license, and how will they set up processes? All of those things are required for a full-on approach.
There is another approach that involves cooperating with a bank and using the bank’s license and capabilities to actually service end users. Then you have another approach where you work with a middle layer. Businesses in that middle layer are regulated entities contracting with banks. They aggregate different banking facilities, banking providers and products across geographies.
This third option, for example, is what we do at Fiat Republic, but in a crypto context. We are a regulated entity in the U.K. and will be in Europe within the next few months. We contract with banking partners, but our customers are using our license. We enable them to offer services to their end users - finance at the point of context.
So you have plenty of different setups that are possible depending on what kind of investment you want to put in and whether you want to handle the operations or not.
Some players, some tech providers, might want to focus on interacting with their consumers and not want to own operations. Others may want to own operations because they think it’s close to their brand and see it as a strategic move. It’s a patchwork - there’s such a vast range of options, so brands can create the experience they want for their users.
Myers: There are a lot of players and different technologies in this ecosystem that have all come together to enable embedded finance. Brands are trying to create something that adds value to their customer relationships. What is the opportunity for those brands?
Guibaud: Do you remember the first time you used Uber? How did it make you feel to get out of the car without “paying?” You didn’t have to get your card out or get a receipt from the driver. I personally started using Uber more often than traditional cabs because I could use a virtual card, and I knew my receipt would be in my email later. These simple things just make life easier. The way Uber makes us feel about payments explains what embedded finance can do for brands.
Another quite new example is Amazon Fresh. You go to the shop, put everything you want in your baskets and then you leave. That’s it - you don’t need to queue or scan, you don’t need to do anything. The shops recognize you when you arrive. It’s linked to your cart on your Amazon accounts. You just leave, and a few minutes later, you get the full details of your purchase. It’s just taken from your card - it’s a great experience.
Now, it benefits everybody to some extent to have cash on hand to control expenses. When you go to these shops and make purchases, it’s more difficult to track what you’re spending. For example, some people prefer to have cash when Christmas shopping to make sure they’re not overspending and are budgeting correctly. I would say those are potential limits to embedded finance, but I’m sure those issues will be covered in the next few years with notifications that tell you what you can afford.
The benefits of embedded finance are providing improved customer experiences and removing friction from payments.
Myers: We discussed how embedded finance impacts consumers, and you gave a few good examples of how it makes our lives easier. Considering how embedded finance impacts different groups, what broader impact will these solutions have on technology companies?
Guibaud: That’s a good question. There is a data play that tech companies can enable to provide better financial terms because they better understand their users’ businesses. They generally have much more data than banks, but even if they don’t have more data, they at least understand it more in-depth. They have the right systems to understand it, while banks might not have as accurate systems. So that’s the broader impact - it’s not only about the experience, it’s enabling [businesses] to improve financial terms and inclusion for end users.
For tech companies, embedded finance presents a massive opportunity for what we call banking-as-a-service (BaaS) providers. BaaS providers have existed for almost 15 years now. The first range of providers enabled fintech companies to launch, while the second phase brought a one-size-fits-all approach to banking-as-a-service. This embedded finance revolution allows BaaS providers to specialize in specific niche segments where they can develop services to answer the needs of specific markets.
This BaaS niche brings a lot of opportunities to tech providers. However, these moves need to happen right now. For banks to consider embedded finance in five years’ time, there will already be a stickiness between tech companies and their existing providers. There is a first-mover advantage that needs to be taken into account when it comes to the timing of when banks enter embedded finance.