July 16, 2024

When you embed financial items, what you're actually embedding

April 12, 2024
9Min Reads
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For the past few years, embedded finance has been a popular topic of discussion.

Or so I believed.

Because I have been discussing it "by popular demand" for the last, let's say, three or four years at industry gatherings and in board rooms.

Speaking of how BaaS ambitions are met by open financial regulations... How a whole new world is unfolding before us as a result of legislative direction changes and the rapid development and acceptance of technology...

It's been thrilling, intoxicating stuff. discussing this.

And really carrying out this. Not very long ago, one of the day jobs was building a BaaS platform.

For me, this is pretty thrilling stuff.

But in actuality, only a very small minority has found it to be quite popular. Up until recently, the only people who were enthused about this were fintech and banking nerds.

My sister's response when I tried to explain everything to her was, "What? similar to Uber? How is it fresh when we've had that for a while?

"What's the main concern? Who gives a damn?

I mean, how about popping my bubble?

But she's not incorrect. As customers, we just don't feel the same level of enthusiasm that we do on our end.

However, from the standpoint of the industry, things are different. Businesses care too, especially if you believe the studies that seem to be coming out of every consulting company these days. Particularly considering that the embedded finance market is predicted to grow from its estimated $58 billion in 2022 to over $730 billion by 2032.

According to other sources, throughout the same period, that amount exceeded $1 trillion.

By the way, if those figures seem fictitious, that's because they are.

They assess current events by sizing them up. extend them And voilà, you get consistent development by adding a dash of hope. We are dealing with a reward worth a trillion dollars.

Of course, the truth behind the numbers is more nuanced.

Don't get me wrong, there is a ton of potential in embedded finance, but not all of it is net new money. Therefore, it is not insignificant to find out who you are stealing market share from if you are pursuing this market since the reward appears worth the effort.

For it may be you, after all.

If you are a newcomer to the market, that figure looks very different from that of an established supplier attempting to hold onto their place in the face of yet another significant shift.

So how genuine is this window of opportunity? How much?

And for what purpose?

For although we geeks who love banking and payments have been giddy with excitement, mostly to ourselves, we have been clumsily dancing around not one, not two, but elephants in the room.

First of all, despite the fact that this is a vast and present opportunity, it isn't being dispersed equally, to use William Gibson's words.

So, for whom is this a really special opportunity? For whom is it causing a headache?

Because in my opinion, for a heritage organization that has been contentedly providing all of the services that are presently being integrated, For that company, integrating services is an overhead, whether it is for payments, credit card revolving, unsecured loans, foreign exchange, or insurance.

It's a little company opportunity that will cost a lot of money in capital and running expenses.

The age of your current IT estate and the extent of the upgrade required to participate will determine how much that will cost.

Whether it involves massive mainframe migration methods or little adjustments to your open banking compliance, if you were in operation before this became feasible, you need to put in some preparation work to be ready. and more crucially, your current clientele represents a portion of that delicious multi-billion dollar "opportunity" that the experts are pointing out. They are calling it open season on your present business.

In this instance, your opportunity is defensive.

Priceless.

Still.

Not as thrilling as before.

And the chance is to stop talking to ourselves and instead do what businesses are doing more and more, which is to say "Hey, wanna play?" to the outside world.

Because non-financial services companies may experiment with some potentially very intriguing stuff here. items that add value for its clients and shareholders.

The benefit is that you can provide your consumers with a branded, blended loyalty credit card that offers perks beyond a reasonable annual percentage rate without having to learn the ins and outs of card issuance.

It's important to understand your target audience and locate a partner with technical expertise.

It is my opinion that the market's present embedded financial capabilities is far more developed than the use cases that are now accessible indicate.

The use cases are uninteresting.

When you first heard about Uber or Klarna, do you recall thinking, "Wait... What?"

The reverse is true of the use cases that have emerged since embedded finance became feasible.


Their ingenuity has been lacking.

It is therefore "about time" to get the actual economy to start considering the art of the feasible.

But be aware that while opportunities are available to everyone, there are disparities on the playing field since people' execution skills vary. It's a very unfair competition due to a confluence of factors including limitations in vision, leadership, and legacy.

Thus, if you are coming into this environment full of ideas, you should focus even more on the unfair advantage of choosing a prepared and seaworthy companion. For better or worse, incumbent banks are stuck with themselves, so they aren't even given that option. Instead, they have to make some difficult choices about opportunity size, opportunity cost, and execution speed limits. That is conceivable. However, it is more difficult.

It is a different scenario for consumer companies who are venturing into this market. They can choose partners who will not impede their progress.

Furthermore, it's a huge benefit to ignore.

Why wouldn't you avoid the metaphorical elephant in the room that we just addressed, if you can avoid the folks who are talking to themselves?

Moreover, there was another elephant present in that room. We should all keep it in mind.

I did mention there were two, right?

If the first elephant is that, in terms of service providers, this dazzling item isn't equally available to everyone, then the second elephant is that, in terms of consumers, it could be dangerously accessible to everyone.

Everyone is aware that there is a fee to ride in an Uber.

Many people have discovered the hard way that your Amazon express checkout is just that—and even though you thought you had a little more time to decide, you are now the happy owner of twelve martini glasses looking like flamingos. The next time, you'll be aware.

However, about half (46%) of young people in the UK (those between the ages of 18 and 34) are ignorant that BNPL products might cause them to incur debt. Moreover, they are ignorant of the fact that, although not subject to the same regulations, BNPL instruments are quite comparable to unsecured loans.

In case you were hoping to brush this research off as "early teething problems," it was mentioned in This is Money in March 2024.

Now, just to be clear, I don't believe this is a BNPL issue.

The issue is one of financial literacy.

It is a problem that affects everyone since, when financial goods are embedded, financial choice is also embedded.

Are the reasons behind the decision well understood?

Do you fully understand the alternatives and their implications?

What presumptions about people's financial knowledge are we making if we decide to choose the unavoidably entrenched path? Regarding consumer knowledge of the goods and options we are now offering frictionless?

Furthermore, given that prior to embedded finance's quick and simple process of clicking "agree" without further consideration, no one ever read the terms and conditions of their loan, what obligation do we have to teach others? How do we go about doing that?

Is there more friction? Clarifying the time of decision-making?

Is it more general financial education, perhaps?

And by the way, in the digital age, people learn quickly.

The US point-of-sale financing business Affirm discovered that their rapid loan approval process worried individuals when it originally began. Customers were so accustomed to their bank deliberating over choices for months that receiving an immediate approval for a loan to purchase the surfboard of their dreams seemed too wonderful to be true.

The Affirm team thus included a pop-up window that stated something like "processing your application" and an egg timer. It had no effect at all. It was a complete charade.

However, it was successful.

It was consoling.

However, and this is crucial to note, it was no longer required after a few months. Customers' onboarding and trust-building phases for the new service were finished. They were able to fully accept that it was rapid and real. They discarded the egg timer.

This teaches us that individuals pick things up quickly.

Thus, instructing them is a feasible choice.

Furthermore, I contend that it is our responsibility to educate children about the options—that is, the decisions they are making and the alternatives open to them—if we are going to impose on them choices that are rather difficult.

A universe with high levels of trust and cooperation is called an embedded world. In between suppliers and their associates... relationship between service suppliers and clients.

A world that is embedded is one that is interdependent and networked. In this world, trust is vital and must be continuously restored. We have a responsibility to keep the conversation broad as we work through the fascinating new use cases and the art of the possible, trying to move people like my sister from the mindset of "this isn't new to me" to one of "hey, that's cool." We should spare those who don't care about the minute details, but we should never assume that the fundamental trust of our partners or customers can ever be glossed over in the fine print.

Because trust is crucial in embedded finance, it is more than just a parameter.

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