How will embedded finance shake up the value chain?

The agenda for Europe’s biggest fintech event Money 20/20 is looking super interesting - from crypto to omnichannel banking, we’re set for some highly polarising debates.

One session that caught our attention focuses on the embedded finance value chain.

There are so many different players in this market with different views on where they will land in that value chain for finance providers. So we’re really interested to learn more about what the session will cover.

👉For now, here are our top predictions:

Prediction #1: What shift in profit pools have we already seen in the embedded finance ecosystem?

While profit pools for e-commerce marketplaces and PSPs are often more short term - higher transaction values and lower churn rates - we expect this to impact profit pools for banks and financial institutions as more of a long term win.

Historically, profit for traditional lenders may have been through interests and other incomes. However, we’re now seeing how products such as embedded finance enable embedders to diversify away from interest-based profit.

For example, by moving to revenue-based finance where they benefit from a business’s sales growth. By embracing embedded finance options like this - where the applicant gets instant access to funding when they need it and repays as their revenue streams increase - finance providers can retain customers and increase their lifetime value. It’s a win-win for both parties.

In addition, while historically merchants may have paid for services, now with new embedded finance solutions, the partner/ embedder pays for the cost. This allows the end-user to get access to a larger product suite in return for higher loyalty.

Prediction #2: The creation of fully integrated business models

Today, key capabilities are often locked together in the bank’s monolithic technology stack and customer value is held back. That’s why we predict that many will turn to either acquiring or partnering to create new business models.

Seamless experiences will be key here. And the good news is Open Banking has seen institutions far more comfortable with data sharing. This combining of forces for sharing transactions data creates a better fully integrated experience.
In a short time, we expect full integration to become the norm as businesses increasingly expect to be offered a full suite of products within their known ecosystem.

For example, customers who have a marketplace expect to be able to get logistic services, financing, insurance and other business essentials all within one ecosystem to make up for the price paid.

Prediction #3: The future of financing is embedded

We believe the future will be leaning towards embedded partnerships, and that platforms that embed multiple services in a seamless journey will win over those who don’t. What’s interesting here is that financial institutions are already getting used to the idea of partnering with - instead of competing against fintechs.

For example, Visa has made a number of acquisitions in the last 12 months, including Open Banking platform, Tink and Earthport to expand its real-time payments network. As well as CurrencyCloud - to provide foreign exchange solutions for cross-border payments.

In addition, BNPL giant, Klarna, bought German payments Stocard, enabling it to add the app for bundling multiple bank cards as well as delivering discount deals from a network of merchants.

And of course, our own partners eBay and Foodhub are great examples of technology platforms expanding their value proposition by bringing financial products right where their users operate every day.

Essentially, this creates ecosystems that support multiple purposes and higher financial inclusion. And as the world learns more about new alternative data sources to base risk on, having multiple sources of information will prove incredibly powerful in understanding and predicting financial needs.

In summary

Embedded finance providers sit right in the middle of the relationship between embedders, merchants, and financial institutions. This helps fulfil consumer and merchant financial needs by providing quick and seamless access to finance and repayments - while also adhering to regulatory requirements.

The value chains that will make up tomorrow’s customer experiences will be increasingly synergistic, with multiple brands, financial institutions, and fintechs combining their efforts to deliver a truly integrated experience.

And that’s why it's crucial that they have a strong ecosystem of partners to help them build a scalable and robust infrastructure to serve both merchants and partners.

👋Meet us at stand A40

👉If you want to learn more about embedded finance and how we help partners like eBay, Shopify, Google and Dojo embed financing into their merchant offerings, we’d love to talk to you. Book a meeting here or through the Connected App.

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