It’s very likely that you’ll get your next loan from a company other than your bank. In fact, consumers are increasingly making all sorts of decisions about money and executing on them without the help of their traditional financial services provider.
The trend highlights the rise of what’s often referred to as “embedded finance”, or “contextual banking”. It points to the integration of financial services — the kinds people usually go to their bank for — into the products and services of non-banks, paving the way for a broadening array of bundles and hybrid approaches, and expanding the boundaries of finance and fintech innovation.
For consumers, the most notable development so far has been the integration of new payment options into online shopping. But the expansion of embedded finance is leading to bigger, deeper transformations.
There’s still a boundary today between what you do on your banking app and the rest of your online presence, but that’s going to change drastically
In the near future, it’s likely to become standard for customers who are buying a fridge online to be offered a loan to cover the cost, insurance for the product, and maybe even some form of blockchain integration to secure the entire process.
“Payments aside, there’s still a boundary today between what you do on your banking app and the rest of your online presence, but that’s going to change drastically over the next few years,” says Alan Vaksman, managing partner and cofounder of VC firm Digital Horizon.
“The focus on client experience means companies are increasingly delivering services to customers when and where they want them. In that context, there’s no sense in logging on to a separate bank app to get your financial services,” he says. “Embedded is the way to go.”
Any application where there’s already a big user base is going to start to add in financial services as an offering
Startups including Toq.io and FintechOS in the UK, Banxware and Afilio in Germany, and Younited Credit in France are emerging as the next wave of embedded finance flag bearers. All have closed fundraisings in 2021, by investors including Goldman Sachs, Commerzbank, the World Bank and some of Europe’s leading VCs.
Trends to watch out for
As embedded finance has grown into a global $43bn industry, it’s the fintechs and tech startups, not the banks, that have led the charge.
In recent years, lines have already become blurred between the worlds of tech-focused business and finance. Global tech giants from Apple to Amazon and Uber have converted millions of their existing clients to their wallets and payment apps.
Fintechs including Europe’s Klarna are becoming household names with embedded finance features like buy now, pay later that sit on top of practically any ecommerce website and shake up the way loans are traditionally awarded.
This will absolutely move wider than just fintechs and startups, to sports clubs and big brands that have never even thought of this stuff
“Embedded finance is going to become the norm [for companies],” says Keith Grose, head of UK at US-headquartered fintech Plaid. “Any application where there’s already a big user base is going to start to add in financial services as an offering. With these tools and open APIs available, it’s easier than ever before to build financial services into an application if you already have brand equity with consumers.”
So what are the future non-banks we should all be watching out for? “I don't think we've even seen the tip of the iceberg,” argues Louisa Murray, chief operating officer at Railsbank, a banking software provider. “This will absolutely move wider than just fintechs and startups, to sports clubs and big brands that have never even thought of this stuff. They’ve got good engagement with their fans, they can widen that even further.”
When might we start seeing this? Some are bullish on timelines; others argue it will take time. “I think embedded finance is going to be like cloud computing. It’s going to be absolute. But it's going to take much longer than people think,” says Andries Smit, founder and chief executive at fintech Upside.
The forward-thinking [banks] have created their own separate tech ventures
Mega-company shopping sprees are likely in the meantime. “We will continue to see consolidation through M&As like in the case of Visa and Tink,” says Filip Dames, cofounder of Berlin-based Cherry Ventures, a seed-stage VC firm. “Publicly listed finance and insurance incumbents are in a strong position to acquire technology companies and internalise specific know-how as well as access to new customer segments.”
Banks vs non-banks
But don’t discount the role of banks, which are also starting to make moves to compete with, acquire or partner with the fintechs that are disrupting this sector.
“They’re starting to wake up a bit because the danger is they get relegated to a commodity position and they won’t have the customer relationship anymore,” embedded finance expert Simon Torrance says. “The forward-thinking ones have created their own separate tech ventures. They have access to lots of customers, access to banking services, brand trust and brand recognition, and are selling into the digital companies or the brands who want to have embedded finance to support their propositions.”
London-based fintech 10x Future Technologies raised $187m in June to expand its offering, helping established banks build next-generation services and tools to help legacy systems work more efficiently. Its founder Antony Jenkins is the ex-chief executive of Barclays, and 10x is reportedly building services for Westpac and Nationwide.
I think every big bank now has a [non-bank] partner
In Spain, BBVA is one bank embracing the potential embedded finance offers. It has developed its own BaaS (banking-as-a-service) offering, and announced in 2020 that it was working with Google Pay in the US to offer digital bank accounts to interested customers.
Carmela Gómez Castelao, head of open banking at BBVA, says such partnerships are becoming more common for banks. “I think every big bank now has such a partner," she says. "We’re learning a lot, we’re exploring what this means in terms of security, in terms of due diligence, and in terms of providing services to a platform that is not yours so you cannot control the customer experience completely."
For more on embedded finance, check out the Sifted report.