TRANSFORMATION: EMBEDDED FINANCE Switched on: Banks could have a big role to play in embedded finance
€60billion missed opportunity Embedded finance is the ultimate shopping experience, one where you can not only buy, but also optimise your borrowing, the delivery of your goods, even insure them, and all in that one, simple customer journey. More and more non-financial companies, such as merchants and marketplaces, are looking to integrate financial services into that journey. They see it as a way of building stronger relationships, trust and loyalty, with customers but also to increase the lifetime value of those customers. There have been two fundamental enablers for them to do this. On the one hand, is regulation. Open banking and Europe’s revised Payment Services Directive (PSD2) forced access to data and made a lot of banking players think hard about how they were going to expose their services to third parties. And then we have a new tech paradigm, giving providers the ability to build modular components, hosted on the Cloud, and delivered through APIs. Now COVID has brought embedded finance to a tipping point by rapidly accelerating three trends. One is consumer demand for digital financial services. We’ve seen growth rates in the number of digitally active ffnews.com
Albion Murati, a Partner at McKinsey & Company and a leader in its Financial Services and Payments Practices, told TFM why embedded finance still has a long way to go
customers doubling over the last few years, so that now roughly 55 per cent of all consumers globally are digitally active banking customers. The same trajectory can be seen for the sale of financial products; roughly a third of banking products nowadays are bought online. The second trend is that fintechs have been gaining a lot of momentum. While that’s been true for the past five or 10 years, the most recent statistics are quite remarkable. For example, customer adoption of fintech services has radically increased. In the US, in a recent survey conducted by McKinsey, we found that 44 per cent of customers now have an active account with a fintech of some kind. And it’s not just consumers who are showing an interest; the investment community is putting record amounts of money into the fintech sector. In 2021, around €100billion of VC money was invested in these types of company; that compares to a previous annual average of around €40billion. Investors clearly believe there will be a market share shift, away from more traditional models, to new services, enabled by fintechs.
The third fundamental change that came with COVID, the one everyone is familiar with, is the digitisation of commerce. It’s not that just e-commerce penetration has increased; the more interesting fact is that we’ve seen new categories moving to digital commerce. Even the art world is moving to marketplaces and platforms. As new verticals like this shift to digital sales, it will unlock new opportunities for embedded finance. And that will really challenge the status quo. So, are banks and payment businesses ready to take on these new opportunities and challenges? We’ve seen some progress. To a greater or lesser extent, everyone, over the last few years, has had to renew their IT landscape, and, in many parts of the world, they’ve had to comply with a regulatory requirement to open up access to data. But while we estimate that the revenue pool for embedded finance could be €60billion globally, with the potential to grow tenfold over the next decade, today, the sum of the revenues generated by all the players – banks and fintechs – active in this segment, amounts to only a fraction of that.
As new verticals shift to digital sales, it will unlock new opportunities for embedded finance. And that will really challenge the status quo
Issue 23 | TheFintechMagazine
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