Embedded finance — when non-banks offer banking-like services — is predicted to be worth $3.6tn by 2030.
Startups can get in on the action now by using their customer data and relationships to offer personalised services, but what services should they offer and when? And which sectors have the most to gain?
In our most recent Sifted Talks, we embedded ourselves in embedded finance, and asked the big questions to our panel of experts:
- Andy Barker, executive VP payments at online marketplace software company Mirakl
- Joost Brugmans, cofounder and CEO of wholesale marketplace Orderchamp
- Iana Dimitrova, CEO of global payment and banking as a service platform OpenPayd
- Alex Graf, cofounder and co-CEO of digital commerce cloud platform Spryker
1. Over 70% of brands plan to get in on embedded finance
While embedded finance is not new, the sector is still in its infancy and is only just gaining momentum. For Dimitrova, there are two reasons: a regulatory push from the European commission seeking to boost banking innovation and an influx of new technologies.
Dimitrova mentions a recent OpenPayd survey which found over 70% of brands plan to launch embedded financial services within the next two years, which shows “a dramatic shift in how businesses think about their customers.”
We should not underestimate the combination of that regulatory change and the opening up of technology... This is something executives are thinking very actively about. And not just thinking about, but essentially projecting to generate revenues, to generate returns, from some form of financial service or product embedded in the rest of their business.” — Iana Dimitrova, OpenPayd
2. Embedded finance isn’t for everyone
According to Barker, embedded finance is a bit like “shiny red object syndrome,” where everyone is seeing big numbers and wondering what they’re missing out on. But just because you can add embedded finance to your product offering doesn’t mean you should.
“You should lead by the customers and data that you have before you start looking at the numbers that are potentially on the sheet,” he says. “Because if you do it bad, most times you only have one shot.”
Brugmans agrees, saying you shouldn’t look at embedded finance to just gain extra profit or alleviate your financial FOMO, but as a way to build a better customer experience.
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He says startups looking to get into embedded finance have two options: go into partnership with a payments provider and add it on top to make extra revenue, or you can create and sell the full service yourself and challenge incumbent banks that aren’t modernising as quickly.
Banks are traditional beasts. They struggle with their cost structures and with their manual processes and they can’t really service the customer in the way that they want to be serviced, digitally, online, etc.” — Joost Brugmans, OrderChamp
3. Let your customer be your guide
Embedded finance is a big umbrella — it could mean adding anything from a debit card or credit service to BNPL and embedded insurance. So how do you choose which to add?
Echoing Brugmans and Barker, Dimitrova says choosing an embedded finance service should always start with the needs of the customer. This, she says, will help keep them hooked.
“If it’s just a one-off transaction that they do, they’re not really spending enough time on our platform,” she says. “So let’s look at the other needs of the customer that we cannot service today to offer a more holistic experience.”
Barker says the service you choose also depends on what your business is and what your customers want from you specifically.
If you’re a traditional retailer, you might embed instant credit or BNPL capabilities... If your business is a platform, where you're building something to serve other businesses, there might be opportunities for you to add capabilities like currency conversion, real time banking, card funding or issuing.” — Andy Barker, Mirakl
4. Be like Tesla, Uber and Peloton
According to Graf, we need to forget the first decade of embedded finance where every company just seemed to issue its own credit card. Instead, he says, startups should lean into the platform economy and add features that will keep customers on your platform.
Graf uses electric car company Tesla and fitness platform Peloton as examples. To use their services, “you don’t have to put in your credit card,” he says. “Only because of embedded finance is this type of experience possible.”
Barker says startups should think about embedded finance like Uber because the startup didn’t change payments — you still have to pay for your Uber ride — but they did remove the unnecessary exchange of cash or using a credit card machine, from both the driver and customer.
We’re seeing it in the Tesla supercharger, there the whole process is frictionless because it’s embedded, you just take out the charger, put in your card, charge and that’s it.” — Alex Graf, Spryker
5. You don’t need to be a bank to use embedded finance
Brugmans is using embedded finance in his own startup, online marketplace Orderchamp, but says he doesn’t want to become a bank or a fintech in the process. But, he says, embedded finance has allowed him to remain competitive.
“I don’t want to become an official financial institution like a credit company or even a traditional bank,” he says. “My goal is to get unique merchandise in every store because these retailers need to compete with online giants like Amazon.”
Dimitrova says most of her customers (and the rest of the market) similarly have no interest in becoming a financial institution, but that embedded finance allows them the best of both worlds.
Having the ability to embed those financial services is so that we don’t have to think, focus, spend time or money on them and that is when the value of an infrastructure provider comes in.” — Iana Dimitrova, OpenPayd