Today your accounting software can offer you a loan, and your electric scooter app can sign you up for an insurance product. How is that possible? What are the implications of that for incumbents, non-financial institutions, and fintech players? Quo vadis, banking?
Since its inception, banking has been a relationships business. From understanding what the customer needs, to figuring out who will be likely to repay a loan, to just making sure a certain customer is who he claims to be. Banking has always been about people and was offered and serviced by specialized financial professionals.
Things have changed during the last decade. First, we lost the relationship aspect, to an extent, especially physically, and second, traditional financial institutions started facing new competitors like neobanks and Bigtech.
We believe that we are entering a new phase, where that relationship between financial providers and their customers becomes further removed. Non-financial institutions (or just brands) are taking center stage.
Interoperability and the everything-as-a-service model are transforming financial services, as a result new business models have arisen. At Cardumen Capital we call them financial utilities and financially-enhanced products.
Many market forces have created this change. In our eyes, the two most important ones are interoperability and the everything-as-a-service business model (XaaS).
Together, these two forces are playing a decisive role in fintech today and are heavily impacting the traditional commercialization model of financial services. As a result of these forces, some companies are poised to become the new “financial infrastructure providers” or “financial utilities” and many non-financial companies are realising that they can delight their customers by cleverly integrating financial services without needing to become financial experts themselves.
The most impacted players here are:
Embedded finance has proven to be a lever that can improve real business metrics like CAC, retention and stickiness.
Embedded finance may sound like a fancy euphemistic name for cross selling of financial products, but it is very far from the image of your supermarket cashier offering you to sign up for your tenth credit card.
Done well, it can have a real impact on customer acquisition and retention, improve the frequency of use and enlarge customer journeys whilst increasing the revenue per customer.
Some examples of these benefits in the market include:
The problem with offering financial services is that in order to do so, it is necessary to work with the regulator and submit an application that can take a long time to be assessed and approved. From a business perspective, this equals a long time-to-market. Additionally, regulatory licenses usually come along with the implementation of overreaching governance models that can directly affect the company’s ability to operate nimbly.
With all these hurdles to face, many companies prefer to stick to their bread and butter and to implement financial services into their product offerings through a Banking as a Service model. In other words, to create financially-enhanced products with API integrations that provide white-label financial services. These integrations can be implemented into the product offering without losing control over the customer experience.
Financial service providers will benefit from new business models with an ever-wide reach.
Non-financial companies are likely to outsource financial services to specialist companies, whose defensive mote is precisely the ability to help the brand jump over those hurdles and still provide the financial service within their product offering.
For financial providers this new market has three main advantages: (I) it increases the number of customers they can reach, (II) it increases the depth of the information retrieved from those customers, and (III) it dramatically reduces the marketing cost to acquire them.
This is a very tantalizing set of benefits for new bread fintech companies without the brand recognition nor the capital to sign up large numbers of end-customers. Marqeta, SolarisBank, Railsbank, Stripe and many others seem to be following this strategy.
For incumbent banking players, commercializing products via APIs has a radical impact on the customer relationship model that they have traditionally had with their customers, given that they currently have the brand recognition and already enjoy a direct relationship with the customer.
Customers will benefit with products with a significantly improved UX
However, some traditional financial institutions have realized this paradigm change and have started to compete in this new field too. This is the case of BBVA with the API Market, which has been particularly fast at identifying the new trend and jumping on the opportunities.
Customers of financial services have historically struggled with having access seamlessly to financial services at the moment of need. Banking has been this kind of service that requires unending forms and signatures and long waiting times. The embedded finance model allows to incorporate the service into the brands’ customer journey.
Some of the processes financial services require to be acquired such as KYC, AML screening or credit evaluation can be greatly improved by API-based identification linked to the customer bank accounts.
The end game for customers is service convenience and seamlessness. Most successful companies in the internet era are such because they managed to offer their service just 1 click away.
Imagine an e-commerce retailer that sells unicorn-shaped stuffed toys. Who do you think will give it a faster and more convenient loan to purchase its inventory: the bank branch down the street or the payment provider that is already handling the store’s sales?
Additionally, the end-customer has new needs and wants such as the control over their data. In this regard embedded finance also greatly enhances customer experience, as it is now easy to pay safely thanks to a single-use card or a token integrated into the payment experience to ensure the non-leakage of payment-related information.
We believe that there will be three clear types of winners from this revolution:
Analysis by Aitor Almendros, Head of Value Creation at our Tel Aviv office and Alberto Criado, Associate at our Madrid office.