By Philipp Buschmann, CEO and Co-Founder AAZZUR
In the late 90s, I worked at Razorfish. We spent our days helping American retail giants like Walmart and Walgreens take their services online. It was an odd time. Some companies would welcome us with open arms, acutely aware of the potential of these new things called websites. Others would raise their eyebrows and ask us “a webwhat?”.
Back then we all knew how huge the internet would be for retail and history has proven us right. Those who embraced it surged ahead. Those who did not were left behind. “Innovate or Perish” is what held true.
Embedded finance is going to be seismic. Retailers/Platforms who choose to ignore it will be left behind once again.
First, a brief explainer on embedded finance. It simply means offering financial and banking products into traditionally non-banking spaces. I.e. retail and e-commerce businesses. Usually at the point of need. Short term point of sale loans from brands like Klarna are an example. At its peak, embedded finance is about offering an ecosystem of personalised services based on spending data. Insurance. Loans. Investment. Wealth management. All offered exactly when a customer needs them.
But what does embedded finance mean for banking itself? For those focussing on embedded finance, there’s huge potential but challenges too. For those yet to get involved, there’s a lot of ground to make up. In fact, now any business can offer financial services. What does it even mean to be a bank?
Traditional banks are having to transform again
After years of little to no change, traditional banks find themselves facing back to back decades of reinvention. The 2010s saw them desperately scrambling to catch up with the rise of challenger banks like Starling, Monzo and Revolut. Innovative, tech-first, customer friendly banking is now the norm and the world’s biggest banks have had to spend a lot of money to catch up with the more agile challengers.
Most have now broadly caught up. The infrastructure is up to date. Mobile and online banking is front and centre and the feature lists put the customer first.
But just like that, the game changed again. In the 2020s, the fintechs started evolving and integrating with each other to create vast new ecosystems of products. Banks like Starling are offering the services of fellow fintechs like Pensionbee to their users. All while offering out their own services and payment rails.
Furthermore, they’re offering those services to non-banking businesses. One report found that 52% of financial relationships for all consumers were with non-bank providers. For Gen- Z, this rises to 69%.
This is bad news for traditional banks in more ways than one. Obviously, they want those relationships for themselves but moreover, embedded finance is enabling the challenger banks to finally make some money. If you don’t love the customer, you are going to have a bad time. And the customer cares about convenience and service – usually not your ratings.
Challenger banks are turning a profit
As previously said, challenger banks have completely transformed banking, making it far better for the consumer and causing everyone in the sector to up their game. There’s only one little problem. They’re famously unprofitable. In fact, despite there being around 250 challenger banks in the world, only 5% have broken even.
Embedded finance is changing this. Now challenger banks can turn a profit by making commission from the embedding of other financial services into their own products. They have the infrastructure to integrate them and the data to create triggers to cross sell useful products right at the point of need. For example, if a customer purchases a flight or a hotel, they can then be offered travel insurance or foreign exchange. This is one of the main things my team and I at AAZZUR help challenger banks with.
Further to this, they can embed their own services into other systems and make money on their uptake.
Starling is the perfect example of this. Having utilised both sides of embedded finance, it’s the only challenger out of itself, Monzo and Revolut that’s consistently profitable.
Banks have always tried to cross sell products through schemes like bancassurance but often with limited success. Why then, are these ecosystems so hugely profitable? One word: PERSONALISATION.
Banking is now all about personalisation
The first fintech revolution was about making banking better for customers in general. This new one is about making it personal. Not just when customers are using their bank, but whenever they’re using their cards.
Think how Google monetises search and social media platforms monetise relationships. Financial service providers can now do the same thing but with spending data. All thanks to the Open Banking, Insurance and Investment initiatives and the ecosystems of services embedded finance can offer.
While previous cross selling schemes have fallen short due to a slow sales process, these sort of hyper personalised services, offered exactly at the point of need, are far more likely to be picked up. Take our partner, bsurance, for example. They embed specialist insurance into banking and retail journeys. By utilising spending and even geolocation data, they see a massively impressive 10% closing rate on the policies they cross sell.
Earlier, I spoke about offering other travel products after the booking of a holiday but that’s just one option. Think of a card that pays its own parking tickets. A digital ski-pass merchant that offers its own short term extreme sport insurance. Wealth management services triggered by high value purchases.
51% of consumers surveyed by Salesforce expect banks will now anticipate their needs and make relevant suggestions before they even make contact. Due to this, banks are now competing – but also collaborating – to create these huge ecosystems of services.
This race to add these services is upending the entire banking supply chain.
The banking supply chain is shifting… again
Before last decade’s fintech revolution, a bank traditionally controlled almost every step of its supply chain. They had their own payment rails, monitored their own customer spending, provided their own accounts and services. Banking-as-a-Service and embedded finance have completely changed that. Now most financial services rely on huge infrastructure providers like Railsbank to provide payment rails, data service providers (DSP) for data and then companies like Tinq and Solarisbank to provide their additional services.
But even this is changing. As banks look to tap into the opportunities embedded finance presents, they’re building networks that can compete with infrastructure providers like Railsbank. While the sheer amount of data these ecosystems gather sets them up to genuinely challenge existing DPSs.
The wheel has been reinvented and the race is on
Despite the huge impact embedded finance is evidently having on banking, many in retail and even banking itself still ignore it. Just like websites in the 90s, this is a huge mistake.
Its projected market size by 2025 is estimated to be €230bn. Time to join the race. The starting gun has already been fired.
Philipp Buschmann is co-Founder and CEO at AAZZUR, a one-stop-shop for smart embedded finance experience. Recognised as a rising star in the FinTech space, AAZZUR’s mission is to build profitable banking whilst at the same time empowering consumers to have access to better informed financial choices.
Philipp is a serial entrepreneur with extensive experience of working in Challenger Banking, Financial Services, IT and Energy across the world. He took one of his businesses public – Ignis Petroleum was publicly listed in the US and Germany.
Having started as a developer in Financial Services, Philipp has first-hand experience of the banking revolution from both a technology and financial perspective. His interest in behavioural economics helped inspire AAZZUR’s revolutionary work on customer centricity in banking.
Philipp holds an MBA from the London Business School. He is passionate about entrepreneurship and loves exchanging ideas, insights and discussing FinTech’s future. He has spoken at major Fintech events including Money 20/20, MoneyLive, Finovate, Fintech Matters, and the Future of Retail Banking.