Embedded Finance, hype or evolution?

Last March, we were privileged to join an exclusive roundtable hosted by Ximedes at Meet Berlage in Amsterdam. This event ignited insightful conversations about Embedded Finance* and its significant impact on the financial sector.

Surrounded by respected leaders in the industry, we delved into the future of Embedded Finance alongside Joris Hoekstra, Head of Rabobank's Banking-as-a-Service team; Ward Hagenaar, Head of Consultancy at PaymentGenes together with Kirsten Hoornstra, Practice Lead at PaymentGenes and Ari Corman & Wouter Moolenaar from Jifiti; and to top it off Joris Portegies Zwart, CEO of Ximedes.

*Non-financial institutions integrate financial services into their customer journey. For example, car service providers sell loans.

The discussions revolved around what Embedded Finance means for banks, practical examples and particularly Embedded Lending, and technical facets that Embedded Finance entails, such as APIs, scalability, and custom integration.

Keep reading as we delve deeper into the insights from this engaging event. 

Is Embedded Finance another buzzword, hype, or logical evolution? 

It's about offering financial services such as payments, lending, insurance, or banking outside the traditional financial ecosystem context. Offered via partners and enabled by regulated financial institutions or fintechs.

While the traditional distribution context of financial services has moved from physical to digital, the next step is offering them contextually. Examples are within marketplaces, during retail sales processes, and settlement with merchants. It's about meeting the customer where they are, with a specific financial solution suitable to their need.

Is Embedded Finance a logical evolution? Considering how retail, payments, and finance have developed provides a clear indication. 

In retail, we have evolved our thinking from channels to customer journeys, provided by a mix of applications and microservices. From single to omnichannel and headless composable commerce. 

The payments function evolved from a stand-alone process to an integrated functionality and is now considered a strategic commerce capability. Not only by merchants who have created a differentiator out of their payment capabilities such as Uber, Amazon, and Starbucks but also by payment companies such as Adyen, Checkout, and Viva Wallet offering embedded services as part of their payment processing suite.

In finance, we evolved from monolithic financial institutions offering all services to all customer segments to the rise of fintech specializing per service (moneytransfer, currency conversion), to an open ecosystem based on open data, open banking, and banking as a service creating an infrastructure that enables numerous use cases.

That is why we flag it as a logical market evolution, not a hype, not changing the world but addressing real market needs in the merchant transaction context. 

The owners of the context where embedded finance solutions are offered gain from increased loyalty, revenue from reselling the financial service, and potentially lower costs of acceptance. 

The key market fit seems to be on SMEs and Consumers. Research from BCG shows they feel underserved by financial service providers. SMEs want convenience and integration with their workflows such as accounting apps offering access to working capital applications. 

The opportunity for financial institutions is now to partner to get access to the right context providers and achieve reach with these new distribution channels. While it's still an early stage in the evolution with approximately only 5% of the market potential currently being served the addressable market is huge. In the EU the SME market is currently estimated to be 110 bn Euro. 

A brief overview of 3 Embedded use cases

• Swiss grocery retailer COOP offers in partnership with several financial institutions the basic banking functions, IBAN, savings accounts, and Cards plus complex financial products such as pension plans and access to investments. ‍
• Mobile.de offers a solution for high-value marketplace transactions. Their leading second-hand car marketplace enables the KYC process and secure payments solution via an escrow solution provided by specialist provider Mangopay. 
• Payments specialist Viva Wallet offers a close to 0% acceptance cost under the condition that merchants use their Viva payment cards to spend the settled amounts from their Viva IBAN account. 

These embedded use cases are here to stay and will only grow in relevance as a logical evolution and an opportunity financial solution providers should focus on. 

In a time where Embedded Finance is taking on an increasingly prominent role in the financial sector, it's crucial to understand its evolution. After our discussion with Ximedes, it's clear that this phenomenon is more than just a passing trend. Embedded Finance is about offering financial services outside the traditional financial context, with non-financial institutions acting as bridges to these services. This development is not merely a hype but rather a logical step in the ongoing evolution of financial services.

Listen this Podcast's Episode (In Dutch), where we delve deeper into the question of whether Embedded Finance is a hype or indeed the next big thing in the world of financial services. Discover what the experts have to say and how this development could impact your business and your customers.

Click on this link to listen to the podcast: Nieuwe Knikkers - Embedded Finance: a hype or the next big thing?

Stay updated on the latest developments in Embedded Finance and discover how your business can benefit from this emerging trend. Be prepared for the future of financial services and take the first step towards innovation today.

If you want to discuss use cases such as embedded lending with Jifiti or embedded payments reach out to ward@paymentgenes.com.