Imagine a typical city street. You’ve got your convenience stores, pharmacies, bars and cafes, a hair salon, probably a dry cleaner, maybe a grocery store, and a shipping center — and of course a bank branch on almost every corner.
Now imagine each of those non-bank merchants offers banking services: credit cards, checking accounts, loans, along with loyalty programs, and premium rates for their employees and customers. Who still needs to visit the bank?
Those offerings constitute a new market called embedded finance. This transformation is well underway, from Starbucks offering embedded payments, to Tesla offering auto insurance. If a single banking and finance trend is to define 2021, embedded finance will likely be it. As the economy rebounds from the COVID-19 crisis, consumers will continue to demand digital solutions to match their new remote working lives.
While Big Tech has been first out of the gates in deploying embedded finance, it’s only a matter of time before businesses in every corner of the consumer sector — online and retail — start using the technology to bolster their brands and bottom lines.
Banking executives should be asking themselves: As fintech and e-commerce companies start offering virtual wallets and virtual credit cards, along with lending services and payment processing, how do we adjust? What is our role in the future of embedded finance beyond these initial adopters? How can we take advantage of the coming transformation?
There is no need to panic. The coming changes will likely mean banks facilitate more transactions, service more loans, and process more payments. In fact, embedded finance is predicted to generate $230 billion in new revenue as soon as 2025, and much of that will move through the banking sector.
Companies will still rely on regulated banking partners to secure loans and settle transactions, but banks’ public-facing role will diminish as more and more companies roll out white labelled financial products and services.
This past year turbo-charged changes that were already brewing in banking. In its annual report on the sector, Deloitte compiled some of the more remarkable examples: almost half of all retail banking customers reported using their primary bank’s mobile app more often, Bank of America’s business banking app experienced a doubling of mobile check deposits, and Standard Chartered’s revenue from digital retail banking grew 50%.
In the embedded finance space, 2020 brought a number of high-profile success stories. Shopify (through a Stripe partnership) processed $14 billion through its Shopify Payments service in Q3 2020 alone. Uber rolled out Instant Pay, which now accounts for 70% of driver payouts (which are free if the drivers deposit into an Uber Visa Debit Card from GoBank). Amazon has made some $1 billion in short-term loans to sellers on its marketplace.
These two trends — the rise of digital banking and the early successes of embedded finance — help explain why industry analysts expect embedded finance companies to have a combined market cap of $7 trillion by 2030. Bank executives have ample inspiration to start figuring out where they fit in the embedded finance value chain.
These changes won’t happen overnight, but the sands are already shifting. As embedded finance technology improves — and no longer requires expensive teams of coders to integrate and customize APIs — it will expand access to vendors and industries beyond Big Tech and venture backed startups in the fintech space.
Ride the Wave – Or Watch It Crash Over You
JPMorgan Chase CEO Jamie Dimon made headlines in January when he said his $3.4 trillion bank should be “scared s---less” about fintech and other digital-native companies expanding their market share. There is no doubt that disruption is coming. However, banks that start forming strategic partnerships with embedded finance service providers can ride the wave, rather than letting it crash over them.
The venture capital firm Andreessen Horowitz estimates that Software-as-a-Service firms that include fintech features such as payments, cards, lending, benefits and payroll, can increase their revenue per customer by 5x or more. However, these SaaS providers need banks to buy into their business models, to provide the security and compliance that can be passed onto their customers.
As embedded finance expands from Big Tech to SMBs, there is a tremendous opportunity for regional and mid-size banks to forge profitable partnerships. Many executives at these banks are already making the necessary technology investments to speed up processing, improve data management, and beef up API architecture.
Now is the time for these executives to overcome their fear of disruption and establish themselves as part of the embedded finance transformation.
Mike Ross Kane is CEO of Hydrogen. Hydrogen provides companies a single no-code platform for the rapid development and implementation of financial products.