Astonishingly, customer-centricity – an approach to doing business that focuses on providing a positive customer experience at the point of sale to drive profit and gain competitive advantage – has traditionally been an afterthought when delivering financial interactions. This short-sighted outlook left consumers resigned to their fate: to accept the disconnect between themselves and the company they’re doing business with; a gap that’s bridged by a third-party bank they are redirected to, creating an extra layer of friction.
This clunky process is increasingly unacceptable in the modern financial services landscape, where tradition has been replaced by innovation – and customer-centricity is a prerequisite. Embedded finance has disrupted the involvement of third parties through the disintermediation of financial interactions. This seamless integration of financial services by non-financial companies into their infrastructure is not limited to streamlining the payments process; other core interactions have been enhanced by embedding them behind these organisations’ apps and websites, including bank accounts – known as embedded deposits or embedded banking.
Customer retention has never been a huge concern for traditional high-street banks – until now. Their general model is simple and effective: get someone to create an account when they’re young and assume they will bank with them for life because the hassle of changing to another similar high-street institution isn’t worth it.
With their choice restricted to a few brick-and-mortar providers that held a monopoly over the banking space – and offered the same services under different brands – consumers’ access to financial services was limited. Since the global financial crisis of 2008, however, the tide has turned amid the emergence of a broad set of tech-driven financial companies (fintechs). This new breed of provider aims to fundamentally address outdated financial services by offering access to innovation that supersedes the traditional methods used by incumbent banks – a trend that has been accelerated by the pandemic after consumers’ reliance on online functionality increased profoundly.
The conventional banking infrastructures flaws have been amplified in the face of this fintech revolution: slow in undertaking digital transformation, legacy infrastructure that lacks agility, strict regulatory standards, poor customer service, and the emergence of disruptive banking models.
Throw in the odd scandal – notably Payment Protection Insurance (PPI) mis-selling – that’s dented the public’s faith in them, and the banks’ grip on the industry has been prized loose. Take TSB for example, which in November 2021 announced that it was shutting 70 bank branches across the UK the following year as more customers switch to online.
The emergence of disruptive banking models has paved the way for embedded deposits to reshape the banking landscape: the process of incorporating specific banking tools – such as debit cards and checking accounts – into non-financial companies’ products or software, forming part of a larger bundle of services. When banking is embedded into a non-bank environment, it streamlines the customer journey while building more secure, fluid experiences into the tools they already use, increasing retention. By bringing banking to the customer, it creates simple, linear journeys that can be completed without opening a banking app or website.
Examples of popular embedded deposit experiences that are helping to drive a new era of flexible banking include:
While fintechs still dominate the conversation, banks are starting to engage in the embedded banking space. Once considered upstarts in this previously rigid sector, the banks are viewing fintechs as potential co-collaborators to help establish their own digital footprints – commonly known as banking-as-a-service (BaaS). For banks, this can open the door to new revenue streams and expansion into unbanked customer segments. But there is still a long way to go for these traditional players: according to the 2021 Economist Impact report, a little over a quarter (27%) of banks and credit unions surveyed believe their organisation has the necessary technology tools – “to a great or large extent” – to create new digital products and services internally or externally.
Embedded deposits have empowered small businesses to take control of their banking. The monopoly once held by a handful of institutions in the banking space has been broken by the choice and convenience that’s inherent to fintechs. No longer an afterthought, customer-centricity is now a cornerstone of this streamlined approach to banking.
The future of embedded deposits
According to recent research by Finastra, embedded bank accounts and payment cards are poised for 30% growth by 2024. This trend is echoed by Bain Capital research which estimates that by 2021, US consumers and businesses spent $3.60 trillion on their debit cards and $3.55 trillion
on their credit cards – with 3% and 4% of these transactions for debit cards, and less than 1% for
credit cards, conducted using embedded banking services. By 2026, Bain Capital predicts that the nonfinancial services market penetration for debit cards could increase fivefold to around 15%.
Don’t miss next week’s blog instalment! We will be looking at how embedded lending (our speciality) has changed how businesses and consumers have been able to obtain more flexible finance options that traditional banks and lenders have been unable to provide.
Put simply, embedded finance refers to banking-like services offered by nonbanks. This seamless integration of financial services by non-financial companies is a reaction to consumers’ demand for a more digital-first experience, particularly in the wake of the pandemic. One branch of this vast finance revolution has the power to streamline the previously clunky online payments process: embedded payments – but it has been a long journey to reach this inflexion point.
Legend has it that in 1994 an order for a large pepperoni pizza made history when it was placed on Pizza Hut’s new website, making it the world’s first online purchase. Three years later Coca-Cola laid claim to the first mobile payment when it allowed customers to pay for their drinks by sending text messages from their phones. Since then, online payments have become part of our everyday lives amid the exponential growth of the internet and our subsequent reliance on e-commerce.
There’s no doubt that online payments have been a game changer for businesses of all sizes – practically consigning cheques to the history books and spurring conversations about a cashless society. Take Pizza Hut for example: by 2008 its online sales topped $1 billion and by 2013 they reached $6 billion. But in an age where speed and convenience are consumer prerequisites, there is always room for improvement.
Traditionally, online payments have been handled by third parties – either large financial institutions or payment processors. This additional layer of friction means financial transactions are separate processes, with customers directed outside the service. Forced to use these third-party integrations to facilitate payments, vendors experience a disconnect with their customers, creating a disjointed user experience.
A growing expectation among e-commerce consumers that digital ecosystems should encompass every aspect of the transaction process means the middleman’s days are numbered. This has prompted an appetite among businesses for embedded payments solutions that provide the payment autonomy they need to achieve financial independence and enhance the user experience.
An embedded payments strategy – which can be tailored to businesses of all sizes – seamlessly integrates payment processing into the e-commerce shopping journey, eliminating the need for a third-party payment provider or banking service. This empowers businesses to take control of the different payment processes they are exposed to – such as wire transfers for one-off purchases of goods and services and Automated Clearing House (ACH) transactions for managing direct debits – and to harness real-time payments.
With the user experience consolidated under a single brand when making payments, businesses can access a wealth of compelling benefits:
A quick look at the World Bank’s definition of financial inclusion underscores the role embedded payments play in driving this important concept: “Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”
Accessing an autonomous payments network that seamlessly sends and receives money internationally by streamlining processes is no longer a pipe dream for businesses and consumers.
As forward-thinking organisations rethink legacy systems and invest in digital transformation, they are embracing the opportunities afforded by embedded payments – and with third-party friction removed from the equation, it’s never been easier to buy a pizza.
The future of embedded payments
The embedded payments industry embodies everything good about fintech: speed, agility, flexibility, convenience – and it’s going from strength to strength amid consumer demand for streamlined processes, with revenues expected to increase from $43 billion in 2021 to $138 billion in 2026. As embedded payments become ubiquitous throughout the online payments landscape, market research firm IDC predicts that 74% of online consumer payments globally will be conducted via platforms owned by nonfinancial institutions by 2030.
Two new trends could accelerate this market growth: embedded B2B payments and the opportunity for financial institutions to work with fintech partners to support the growing demand for embedded B2B payments. The growth of banking-as-a-service and open-access APIs are presenting businesses with the ability to leverage B2B embedded financial services technology to customise payment solutions for their needs. The IDC report states that 73% of financial institutions around the world have payments infrastructures that are ill-equipped to handle payments for 2021 and beyond. Fortunately, fintech has created a new opportunity for banks to modernise their payment services.
Next week we will be looking at the emergence of embedded deposits and how they have become a central offering of non-bank financial services companies to meet the demands of their customers.
Is it easier for acquirers, platforms, or banks to create brand-new embedded finance products rather than partner with established providers? Well, it depends on costs, available resources, and the relevant expertise required to take on such a project.
Embedded finance is much harder to build from scratch than if you were to partner with an existing, well-established third party. It can be daunting for acquirers, eCommerce companies and SaaS providers to rely on a third-party provider to co-exist within their ecosystem. That said, it does bring lots of great benefits once correctly implemented.
Firstly, using a third-party provider is often faster, more efficient, and more cost-effective than trying to build a solution from scratch. This leads to a quicker, more streamlined launch to market and increased customer satisfaction and retention. This is especially true for transactional products like business finance or insurance. Another great benefit is that trust between the customer and the partner has already been established through existing relationships, so adding new products to your portfolio through partnerships with companies like Liberis means that extra revenue can be generated quickly without the additional costs that would be inflicted on the acquirer, bank or eCommerce platform building the platform from the ground up.
Secondly, providing third-party access to customer data helps the business finance provider tailor the products they can offer to a business, making it relevant to its needs at the right time. With a rich amount of data available, it allows them to target much better and pre-approve businesses for finance, meaning instant decisions, ‘few click’ applications and certainty of funding for the end customer.
Liberis was one of the first major players in the embedded business finance market, at the forefront of innovation. We’ve learned a lot since our first partnership launch in 2016. While tiny gremlins can always emerge, just like with any other integrated tech platform, swift identification and resolution is essential for the embedded finance provider and their partner.
The bigger risk is a lack of alignment and long-term goals, as well as incorporating a clunky customer journey that can lead to a negative customer experience. Through our dozens of partnerships, best-in-class tech, and ability to work with regulated banks and digital leaders like Klarna, we have built up an enormous amount of experience to ensure minimal issues.
In relation to responsibility for errors, a good services contract with industry-standard SLAs will cover most scenarios, just like all other partnerships. With the right tech platform, best-in-class team, and excellent communication with your partner, risks can be significantly reduced if not eliminated entirely.
Now for the marketing! If you were to try and build a product in-house, you would miss out on the benefits of partnering with an all-inclusive proposition that companies like Liberis can provide. We work with you to create the marketing campaigns, taking on all the necessary legwork giving your teams more time to look after other marketing initiatives. If a platform or acquirer were to build a solution from scratch, they would also need to take on the responsibility of generating the revenue themselves.
When entering any new partnership, each company should be aligned in their business, financial, and customer goals. Strong partnerships also need to align on how to treat their end customers, so partnerships tend to be stronger where internal company cultures and processes are similar.
The partner you choose to work with should complement the skills that the other would find difficult to source or embed into their own business. Working with a leading embedded finance provider allows the partner to offer an extra service to their customers along with outsourced expertise they may not necessarily have in-house. This can lead to increased customer acquisition and lifetime value without the need for increased costs associated with building a solution from scratch.
Lastly, another key attribute when choosing the right partner is ensuring that both businesses are transparent in their business dealings.
To sum it up, the chart below says it all…
If you are interested in helping your customers access the finance they need to grow, get in touch with the team to discuss our partnership opportunities.
Many companies are looking for ways to increase revenue and customer loyalty simultaneously by dipping into embedded finance options. And while most companies recognize the need, selecting the right products to offer is the tricky part.
Bridging the gap between brands & finance
Retail embedded finance includes lending, insurance, digital wallets, integrated payments, and debit cards. Many companies have already integrated embedded finance, such as Walmart, Klarna and Costco with their closed-loop credit cards that function like bank-issued cards; but this is just the tip of the iceberg, as they are still using physical cards.
With embedded financial services, companies can offer financial services throughout the digital customer experience and prevent customers from navigating away from their website to complete a transaction.
Various embedded finance products
Examples of embedded finance products that companies can launch include the following:
With more customer data and better financial relationships with your customers, companies can use embedded finance to acquire, retain, and increase customer lifetime value while generating revenue in new ways.
Embedded finance and customer loyalty
Embedded finance is also ideal for loyalty programs and increasing customer loyalty. Plastic loyalty cards are too easily lost or forgotten; digital loyalty programs embedded directly allows customers to make use of rewards instantly. Push notifications can be used to engage customers with further offers, rewards, and new products.
Loyalty programs also incentive further purchases and help generate additional revenue streams via the interchange fee earned with every card tap.
Finally, embedded finance helps a company improve overall customer stickiness; once they find a seamless, user-friendly experience, customers are more likely to be loyal to that brand.
When we talk about fueling economic growth in the SME space, we often consider smaller loans as the catalyst without considering that these game-changing loans aren’t always equally available. Embedded finance, and Liberis as a part of the industry, is helping change that status quo.
What is “redlining” ?
“Redlining” is a practice that started in the 1930’s in the US that enabled banks to deny mortgages to people based on or zip code or neighborhoods with a greater share of people deemed more likely to default on mortgage. Using red ink, lenders outlined on paper maps the parts of a city that were considered at high risk of default.
This largely affected people of color, minorities and low income familities in urban areas, such as Atlanta, Chicago, & Detroit.
How does redlining affect America today?
While the practice was banned via the passage of several laws, some of the effects are still felt today. Many scholars point to redlining as a factor in wealth disparity.
And it doesn’t stop there; today we can see a trend called “reverse redlining,” where banks may engage in predatory lending in the same neighborhoods that were historically redlined.
How can embedded finance combat redlining?
While we’ve largely discussed mortgages and housing, redlining affected (and still affects) other types of loans as well.
Embedded finance options can combat redlining, by not taking zip code into account when considering a loan and focusing solely on business merit. Liberis bases credit-worthiness wholly on revenues, thus evening the playing field.
Liberis also takes a personable approach to credit worthiness; spending time to understand the history of the company as well as future plans while taking a look at current operations to get a deeper understanding of the client in order to make better decisions – for both parties involved.
Using transaction volumes, daily cash flows, and visibility to bank account balances means that Liberis can get an accurate read on feasibility of working together successfully. In this way, Liberis removes location or other demographic details entirely; each application is truly underwritten based on operational merit.
And once a merchant becomes a Liberis customer and everything has already been linked, access to future funds becomes a seamless process – enabling long-term growth and success; in fact, Liberis customers have used funding to grow revenues by 25% on average – half of whom would have delayed their growth plans or given up entirely without Liberis.
In this way, embedded finance not just about fueling economic growth, but it’s also a way to modernize and equalize access to financing.
Contact us to learn more about lending options and revenue-based loans.
The pandemic challenged many things in the past two years – chief among them is the resilience and relevance of financial services business models; banks and financial institutions are transitioning from being the main character to more of a strategic partner in a wider ecosystem of innovation and technology, where payments, lending, e-commerce, and everything in between have edged their way in. And we’ve seen embedded finance take a huge position in leading the charge forward.
A clear example is the emergence and growth in adoption of “buy now, pay later” players in the e-commerce space; at its core, BNPL relies on instant credit & risk management decision engines that work in real time and aim to improve the online shopping experience – for everyone involved. BNPL has shown to increase stickiness for merchants while improving conversion rates, allowing for more personalization in marketing, and optimizing cash flow management. It’s an interesting case study in the intersection of selling, buying, payments, and credit.
At the heart of the embedded finance upswing is the focus on customer experience & satisfaction. In 2021, a McKinsey report found that across 15 key markets in Asia-Pacific, 97% of respondents said digital channels now provide the best experience when interacting with their bank as part of an omnichannel offering that still includes physical branches.
A follow-up statistic in the report said that while 70% of respondents were open to using digital channels for services beyond transactions, only 20% to 30% said they had purchased a banking product (i.e., savings account, loan or credit card) via a mobile app or online.
And this is just in the APAC region, where it is estimated that as many as 73% of the population is still classified as “unbanked” or “underbanked;” the opportunity in more technologically advanced ecosystems is clearly an exciting prospect.
So while the pandemic has accelerated the disruption in the financial services industry – and beyond – we can’t let our feet off the proverbial gas pedals. Embedded finance is here to transform industries where a frictionless digital user experience is crucial to customer retention, growth, and continued relevance.
The pandemic has given us all a chance to become more refined digital natives – including the Baby Boomers and generations that have been historically slow to adopt technology.
Indeed often the generational gaps have different value drivers, understandings of the technology’s benefits, and general trust in technology. But with the pandemic, more of these generations were forced into the online space, completing digital transactions and connecting with friends and family online.
A key for retaining these customers beyond the pandemic will be perfecting the user experience to make them more comfortable and offering further products to keep them engaged. Embedded finance offers an integrated and painless way for seniors to engage with fintechs and frictionless payments – if offered with tact and care.
As elsewhere amid the great digital shift, there’s a clear generation gap. Older users are both skeptical and vulnerable when it comes to interacting with the very apps that could make their online financial lives a bit easier.
We’ve laid out 2 of the main problems that fintechs must address in order to attract, serve, and retain these older cohorts:
Packaging & Access
To put it in real-world terms, a consumer opening a Venmo account or setting up the Starbucks app is more than likely unaware that they are establishing a regulated financial account, whereas they may be more aware when setting up a traditional checking account at a bank.
However, these same consumers know what sort of experience they want. They know they’re buying into a service that will let them buy what they want, and perhaps earn loyalty points, in a controlled environment. If the experience meets or exceeds those expectations, the brands will win more customers and cement their loyalty.
In the case of senior-orientation, many of these apps or systems can tailor the experience to be eaiser to read & navigate, particularly focusing on products tied to health care and bill-pay.
Education & Trust
Older generations can be vulnerable to scams; with conscious efforts directed at education and online hygiene, these generations can safely access fintech innovations to make their lives easier.
An informative, user-friendly onboarding experience can go a long way toward addressing this innate mistrust. Let customers know what data is being collected — and what it’s being collected for — on a low-level account, and they’ll be more comfortable when they step up to a bigger one, all within a trusted environment. Eventually, these same users will feel comfortable providing their credentials and account information when setting up accounts on an open banking platform.
Healthcare represents a natural fit for older customers to start interacting with apps, entering their data and, ultimately, transacting.
While these two hurdles may seem daunting, a little more time spent on UX/UI and the specific needs of seniors can go a long way to securing these potentially-lucrative customers.