Embedded Finance is often defined as finance on the consumers’ terms, and refers to the joining of traditional financial services with a non-financial programme, creating seamless experiences for customers.
Kate Drew is the director of research at CCG Catalyst Consulting, where she spearheads client-facing research projects on fintech topics including open banking, digital channels, payments, lending, blockchain, AI, and others.
Her decade of experience in the field includes leading data-driven research projects, creating fintech industry thought leadership, and managing editorial content for publications including Business Insider Intelligence and The Value Line Investment Survey. Kate is a regular speaker at industry events and has written for numerous publications including CNBC, Business Insider, and FinTech Futures.
Here, she shares her thoughts on value-added services and embedded finance.
We talk a lot about embedding financial services into nonfinancial channels. “Embedded finance” is top of mind for every fintech pundit today, and rightfully so. “Buy Now, Pay Later” buttons from Klarna and Affirm have become a stalwart on the online checkout page, and nonbank titans like Shopify are generating buzz with plans to launch bank accounts for their customers. This is all enabled by flexible, application programming interface (API)-based architectures that allow financial services firms to deploy their products via a variety channels. The flip side of this, though, is that these companies can do it all in reverse, plugging in nontraditional offerings into their own platforms.
This is happening in earnest on the fintech side of the house. Just recently, digital wealth manager Acorns revealed its job portal powered by online job market ZipRecruiter. This allows users to look for and apply to jobs from within the Acorns app — hardly a traditional financial services offering but a value-added tool that makes a whole lot of sense for a company that built its brand on helping customers manage their financial lives in a smart and holistic way. Acorns also offers an insurance product, called Protect, and educational content under its Grow offering
The hiring portal had been on the company’s roadmap, but it accelerated those plans as a result of the pandemic, CEO Noah Kerner told CNBC. And it ties very nicely into the company’s core value proposition. “The more you earn, the more you can save and invest for the future — we wanted to connect those dots for people,” Kerner told the outlet. Ultimately, this should enable Acorns to drive more people back to its core product and keep them within the app for more of their financial needs.
Another major player in this realm is Square. The payments company known for its point-of-sale dongles turned itself into a sprawling financial apparatus by adding traditional services like small business loans through Square Capital, but it’s also been able to hook merchants with its array of add-ons like email marketing and payroll support. These are tools that small business merchants need, and the ability to access them from within a platform they are already on is invaluable. That makes Square stickier. It’s also an additional revenue stream — the company’s subscription and services-based revenue hit $346 million in Q2 2020, up 38% from a year earlier.
There is probably nowhere value-added services are more needed than in small business banking. We often hear about the looming threat to financial incumbents from Amazon, but companies like Square are building the one-stop-shop powerhouses that hurried merchants need to run their businesses. As Jo-Ann Barett, owner of Aromas Boutique Bakery in Harlem, recently told Fintech Insiders, “I’ve been dreaming of this for a decade, a product that speaks to everything together would save me time because I’m already wearing a dozen hats. And Square does that, you know, we can do marketing, we can do processing, payroll—[it] all can happen under Square.”
This suggests there is a missed opportunity on the bank side that fintechs are moving in to fill. And that gap likely exists because traditionally banks tend to rely on one entity to provide services — themselves. “Banks have spent decades building their own products and services in-house and offering one-stop-shopping for small business banking services,” according to Forrester cited by the Financial Brand. “But the ability to create new value by integrating further capabilities to create new value, such as integrating accounting with banking or POS systems with inventory management, means that a siloed approach to small business services is no longer viable.” As banks in the US work hard to compete, they are going to have to think outside of the box and look for areas where complementary services might make sense — or risk losing customers; half of the small businesses surveyed by Aite Group for Alkami in 2019 said they would either probably switch or at least consider switching financial providers in the next two years as institutions failed to meet their needs even before the pandemic.
Competing effectively on value-added services will require partners. This will be true both on the commercial and retail side. And for smaller institutions, that may seem like a gargantuan task, especially from a technical standpoint. But it doesn’t have to be. There is an entire crop of fintech service providers that are dedicated to helping banks create more flexible architectures. Fintech enablement platform Hydrogen, for example, built its business on enabling companies to quickly add financial products using its prebuilt API catalogues, and it is now gearing up to launch a suite of nonfinancial tools including customer relationship management and marketing. “This will allow companies to combine the embedded fintech services with non-fintech with just a few clicks,” company co-founder Mike Kane told CCG Catalyst.
It is important to note that value-added offerings in financial services aren’t a new idea. Banks have long offered services like identity theft protection and a number do provide access to payroll support, for example. But what fintechs excel at is thinking deeply about the customer and creating offerings specific to their core business. As a result, they can move away from one-size-fits-all add-ons and look for things that are complimentary, like Square’s email marketing for merchants or Acorns’ educational content alongside investment products. The pioneers here aren’t just creating a better customer experience, (though they are doing that), they are completely reimagining what it means to be a financial services company today. It’s time to follow their lead.