Embedded finance as win-win for every player

Not every new innovation has to lead to the death of others before it. To some, the old guards need to be put down before new champions emerge from the ashes, but what ancient text actually made this a thing? This is where embedded finance stands out in the new world of possibilities for financial services, and reaching even more consumers than ever before.

The beauty of embedded finance is that it enables every existing player in the financial space to keep doing whatever it is they do, but in a better, more efficient and more impactful way. If anything, it brings out the best in whatever the other players had to offer.

On one hand (let’s call it the left-hand-side), we have multiple financial service providers and on the right-hand-side, there are distributed financial services. Whoever you are on the left, you can participate on the right-hand-side because as long as you are embedding your service, you are fine.

If you are taking payments from customers, for instance, you may think one channel is just fine; either a payment gateway or an embedded service. But really, it would be ‘and’ OnePipe, not ‘instead of’ say, flutterwave or paystack or even your bank.

In a McKinsey & Co article on ‘What the embedded-finance and banking-as-a-service trends mean for financial services, it is emphasised that more nonbank companies are offering financial services, such as bank accounts or wallets, payments, and lending. The companies’ embrace of embedded finance—banking-like services offered by nonbanks—aims to retain customers and increase their so-called lifetime value. For customers, the appeal is the ease of use: a small business can get a bank account from its accounting software, or a consumer can pay via the retailer.
Meeting the rising demand for embedded finance by consumers, also means financial institutions are increasingly offering banking as a service (BaaS), bundled offerings, often white, labelled or co-branded services, that nonbanks can use to serve their customers.

What this means is that, the white-labelled services can be offered to you, to carry out the functions you would expect from your bank, but including other functions they typically may not offer. The fiat money still resides with your bank, for instance, but it is made more flexible and available for your customers who may be using dozens of other different financial service providers. What embedded finance then does is to provide a unified platform of sorts, where every customer can transact with you (and any other service provider), right from one interface; regardless of underlying banking providers who would continue to see their revenues grow. The average customer would be incentivised to spend more, the business owners will earn more, and the banks will have more money to account for.

Imagine Spar or Ebeano with a Kuda bank app of theirs. That is one of the possibilities embedded finance offers, yet, the bank with the underlying infrastructure does not get undermined. Every Spar customer using the app is able to pay after shopping at the hypermarket, and can also pay for their Uber ride home after shopping, pay bills, utilities or other services, all from that Spar or Ebeano app.

With every payment, every financial service player powering the underlying financial institutions (of the customer or business that provided the embedded solution) keeps making money without even having to do that extra work of getting more users. Sounds a lot like easy, free money, but really, that is what it represents for every player that embraces embedded finance. Every financial service provider can earn money without lifting a finger in implementation, offering an opportunity to take payment and make extra revenue.
 
A Treasury Prime article describes the Starbucks app as a prominent example of embedded banking, with its deposit and credit products provided by JPMorgan Chase. Launched in 2011, the app allows customers to store cash and earn rewards for purchases at Starbucks. 25 per cent of all US store transactions are said to occur via the app, and the retailer holds as much cash in its app and on its cards as some banks hold in deposits.
 
According to the European Merchant Bank, Embedded finance can radically change the financial sector forever, and by 2026, the industry could be worth upwards of $138 billion. Other estimates have the market being worth in the trillions of dollars over the next decade. That is an incredible rate of growth for an industry that can be considered to be still in its infancy.

Every financial service provider, be it a bank or a fintech, that makes it possible for individuals and businesses to adopt financial services through embedded finance, will ultimately be a part of that winning team (and success story). Will yours be included?
Irechukwu is head, Engineering, OnePipe Services Ltd.