Embedded finance is the digital provision of financial products within a non-financial context, such as the purchase of an Uber journey within the Uber application. This relatively recent innovation, accelerated by the wave of digitization following COVID-19, enables the entities that deploy it, in both the digital business-to-business (B2B) and business-to-customer (B2C) spheres, to improve their product offerings, increase customer lifetime value, and drive sales. For the end-user, embedded finance is the gift of convenience. By 2030, 10-15% of banks’ revenues and 20-25% of retail and small to medium-sized enterprises (SME) lending revenues may originate from embedded finance. With total European embedded finance revenues estimated to hit €100 billion, banks need a well-thought-out strategy to tap into this burgeoning market. Here are some steps that can guide banks in successfully developing an embedded finance strategy.
Planning and Preparation
The very first step should be for project leaders to immerse themselves in the target industry to understand the end-users and their needs. This step is crucial for informing a broader strategy that disseminates the concept of embedded finance across the institution. By having a deep understanding of the target audience, banks can tailor financial products to meet specific needs, thereby enhancing customer experience and satisfaction.
Each business opportunity should be meticulously mapped out against its predicted impacts on metrics like revenue, customer experience, and other relevant factors. Identifying the leading value proposition and defining how it will be executed is essential for aligning the business strategy with customer expectations. A clear and actionable value proposition helps in setting measurable objectives and tracking progress over time.
Once an action plan is identified, the next step involves creating a shortlist of potential partners for each vertical and conducting a thorough screening process. After completing the request for proposal and due diligence processes, banks must engage in negotiations covering pricing and precise partnership models. Establishing partnerships with reliable and strategically aligned companies can significantly enhance the chances of success in the embedded finance landscape.
Implementation
The next crucial phase involves designing and refining all relevant digital infrastructures required for the project. This could involve leveraging orchestration platforms to shorten the delivery timeline. Modern orchestration platforms incorporate various digital tools and services that allow quick and efficient deployment of embedded finance solutions. Drafting a launch plan and a list of well-defined business goals can set clear milestones and keep teams focused on achieving them.
In preparation for activation, it’s vital to integrate all infrastructures, partner systems, and front-end elements. This step ensures that the entire ecosystem works cohesively to deliver seamless financial services. Banks should also validate the solution with their core end-users through multiple phases of testing, tweaking, and re-testing. This iterative process helps to fine-tune the product or service, ensuring it meets the needs and expectations of the target audience.
Launch
Once the solution is ready to be taken to market, the work is far from over. Banks must consistently monitor users’ interactions to understand how the embedded finance solutions are being utilized. Based on these insights, appropriate adjustments should be made to optimize the user experience and drive greater adoption. Additionally, banks should employ a suite of marketing activities aimed at promoting the new embedded finance features.
A recent report on the subject summarizes the key tenets of delivering value-positive embedded finance services. Key elements include distinctive customer journeys, a joint vision and delivery from the finance provider to the customer owner, and data sharing and collaboration to improve decision-making and conversion rates. Furthermore, win-win partnership economics, characterized by open-book, profit-sharing philosophies, enable mutual value creation. Enhanced unit economics through originate-to-distribute models lower capital needs and leverage data from the customer owner to reduce the costs associated with data in credit decision-making.
Conquering the Challenges
The journey to establishing a successful embedded finance strategy comes with its share of challenges. These include heightened regulatory scrutiny, increased potential for cyberattacks, and oversight or permission issues. However, banks that can holistically manage these challenges stand to gain significantly. Embedded finance promises improvements in customer acquisition and retention, increased lifetime value of customer relationships, creation of new revenue streams, and the generation of data-driven insights. Moreover, it facilitates frictionless, integrated experiences that can redefine customer interactions with financial services.
Besides the financial benefits, embedded finance portrays banks as innovative and adaptive to global market shifts. This perception could lead customers to view the institution as forward-thinking and ready to ride the wave of modernization. Therefore, while the establishment of an embedded finance solution involves considerable effort, the rewards make it a price worth paying for banks aiming for long-term success in a digitalized financial landscape.