Participant or orchestrator? A key choice for brands as embedded finance becomes ever more pervasive
Embedded finance is an exciting and fast-growing opportunity that’s projected to be worth US$3.6tn globally by 2030. By enabling individuals and businesses to have frictionless, seamless access to financial services within non-financial contexts, it has emerged as a major transformational force in business and society. So it was appropriate that embedded finance was the subject of a high-level panel debate at the Innovate Finance Global Summit 2022, centrepiece of FinTech Week London.
The discussion among the panellists centred on how both FinTechs and banks can realise the full opportunities that embedded finance presents. A number of key points emerged. One was that embedded finance depends critically on collaboration between multiple parties across the ecosystem – which includes not only financial service institutions and FinTechs, but also technology vendors and non-financial brands. Another was that to navigate the ecosystem well, companies must make a strategic choice between being orchestrators of embedded finance experiences for users, or participants within those experiences.
These insights were among the powerful takeaways from the panel debate. Entitled Embedded Finance: The Future is Now, the session brought together industry leaders with deep expertise across embedded finance technologies, strategies, use cases and regulation. Building on the points mentioned above, the wide-ranging discussion explored three key themes around embedded finance:
- The critical importance of regulation and trust in driving growth and take-up.
- The need for new business models to enable embedded finance solutions and experiences, underpinned by collaboration across the ecosystem.
- The emergence of new and more sophisticated use cases, including solutions for small and medium-sized businesses (SMBs).
Here’s a closer look at each theme, drawing on comments made during the panel.
The Embedded Finance Panel at IFGS 2022
Moderator: Eleni Digalaki, Principal Analyst, Insider Intelligence
Panellists:
- Leda Glyptis, Chief Client Officer, 10x Banking
- Lord Chris Holmes of Richmond MBE, Vice Chair of the All-Party Parliamentary Group on FinTech
- Michael Jenkins, Strategy Lead, Fidel API
- Alex Price, Director – Consulting, PwC
- Hayley Viner, Head of Product, ClearBank
Regulation and trust – the vital bedrock
Setting the scene, Lord Holmes described embedded finance as “the hot transformational force in 2022 and beyond…providing an opportunity for massive economic and social growth.” But he cautioned: “That's the plus side. Obviously, everything is necessarily dual – and on the other side, we also have to consider data privacy and consumer protection.” So governments have to fully understand the implications – and “put the right regulatory framework in place to balance consumer protection and competition”.
Other speakers agreed that regulation has been central to the success of embedded finance to date – and will remain so into the future. Leda Glyptis of 10x Banking said regulation has set the tone and direction of travel, and that market forces alone wouldn’t have got us to where we are today. The good news now? All the necessary elements – the regulation, the infrastructure, the understanding of business models, and the imagination to come up with new use cases – are coming together, making this a very exciting time.
Regulation is central to trust – and it’s this area where PwC has seen the biggest change in the past couple of years, with a huge shift in mindset not just among customers, but also among the brands serving those customers. From a customer’s perspective, the main change is that they’re now much more open to trialling embedded finance solutions. But they're also starting to actively expect those solutions, which is helping to generate massive momentum in the market.
Meanwhile, from a brand’s perspective, there is less scepticism around offering embedded finance solutions, and much more willingness to embed finance into their customer journeys and experiences. We at PwC now have a lot of clients reaching out proactively to ask us questions like, “What should our strategy be around embedded finance? Where should we take this going forward? And which technologies and FinTechs should we work with?”
Business model strategies: collaboration is key
The second theme is the emergence of new business models to enable embedded finance – and the vital importance of collaboration in making these work. “Partnerships are going to be crucial for companies to make sure they continue to evolve with the changes coming in,” explained Hayley Viner from ClearBank. “It’s also important to really focus in on what your value proposition is and what you want to bring to the market. That might mean leveraging partnerships in areas where you don't necessarily want to be the market leader. And it’s often tricky for big institutions to identify the right partners.”
As larger banks seek these new partnerships, they’re coming to terms with some new realities – a point made by 10x Banking’s Leda Glyptis. The first is that there’s now a “vertical play” for banks to go for, where another organisation provides the horizontal platform: “There's no reason why, as a bank, you can't cooperate on other people's platforms – it’s an interesting twist to competition,” she said. The second – related – change is an acceptance by banks that they don't have to own the entire value chain. The third shift is that banks are looking at how to make the mechanics of connectivity work at large volumes and scale across the entire lifecycle of money.
PwC’s clients are responding to these changes. As they do so, we’re seeing a number of common threads to the strategies that organisations – and particularly financial institutions – are starting to apply. The first is around the customer, as banks look to gain real clarity around who they’re going to target and the primacy of the relationship with those customers. The second is around business capabilities, as they seek to define the types of capabilities they’ll need to build out: this usually includes components like a new developer experience or partnership relationship strategy. The third is around technology – where banks want to participate in ecosystems of vendors and FinTechs that are able not only to solve the challenges they have today, but also to provide roadmaps to help solve new challenges going forwards as well.
Use cases: the only limit is imagination
The third theme around embedded finance is the rapid expansion in new use cases. The consensus among the panellists was that the possibilities are effectively infinite, with the only restriction being people’s ability to innovate. By way of example, take the home-buying experience: a drawn-out process that’s ripe for innovation and involves many different parties – and which is just one of the activities that PwC is currently working to revolutionise. In addressing such use cases, brands face the choice between being orchestrators of embedded finance experiences or participants in them. This is a key strategic decision that more and more organisations will have to consider as embedded finance continues to grow.
A further consideration is that as use cases become increasingly sophisticated, they also become more complex – meaning they take longer to develop and prove. “We’ll need to be patient with the fact that we're now getting our teeth into something more complex and not easy to get to a proof point,” commented 10x Banking’s Leda Glyptis. As to who’ll benefit most from embedded finance use cases, Michael Jenkins of Fidel API summed up the consensus when he said: “I think the biggest winners of embedded finance are going to be consumers – so long as financial institutions and FinTechs continue to put the consumer at the forefront. And the biggest losers? Incumbent institutions that don't innovate.”
Conclusion: doing right by the customer and society is paramount
So, innovation is pivotal. But what will be the ‘hot’ areas for embedded finance in the near term? In PwC’s view, the fastest adoption will be around pre-existing digital communities like social platforms, gaming platforms, or in the workplace. We'll see a lot more ‘slippage’ or blurring between digital and physical instances of embedded finance, especially as cities become smarter and more digitally infused. And we're going to see a lot more B2B as well as B2C use cases in the future.
But whatever use cases emerge, they’ll need to keep the interests of the customer and wider society front and centre – and be tempered by the right future regulation. At the end of the panel session, Lord Holmes concluded:
“There’s a possible space where individual consumers and SMEs win, and we get finance back to doing what it was always intended to do: empowering individual and business growth. That's the opportunity. To realise it for the UK, we need the Government and Whitehall to understand fully and put everything in place, so we have the right regulatory approach.”
The message? Everyone in the ecosystem has a role to play in doing right by the customer and making embedded finance a force for good. It’s time to collaborate to make that happen.
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