By Ankit Shah, Global Head of Fintech at GTN
As someone working within the fintech space, I have observed an increasing number of non-financial digital businesses broadening their services by embedding financial services into their offerings.
Embedded finance integrates financial services into a non-financial business’ digital ecosystem. Much to do with the recent growth of embedded finance and the development of fintechs has to do with the support from regulators and the availability of cheap money (until interest rates started to jump again recently). Without the support of regulators and VCs, the sudden rise of these businesses would have been far more difficult to achieve.
Change and catalysts
If you remember how Baby Boomers used to invest, it was usually a phone call to place a trade or borrow money, then they had to stand in a queue at a bank. If you go back to an earlier era, trading was an open outcry, trust in banks was beginning to grow, and the adoption of credit cards was increasing in developed economies.
Today, thanks to digitalisation, banks are in the palm of your hands, credit cards have expanded to developing economies, and payments are being made by tapping your phone or a smartwatch. Even more, most brokers have gone online with apps. Millennials were the first segment that truly influenced the adoption of convenience and stickiness into digital service ecosystems. But the Covid-19 pandemic then led other generations to rapidly adopt fintech services as well, across different regions, demographics and social segments.
Embedded finance appeal
Nowadays, we are all inclined to stick with our current digital ecosystems for everyday life and are less interested in adopting new ecosystems for specific use. Embedding financial products inside apps is helping businesses retain clients and make their solutions stickier. You may often not even trade through a broker’s app but through a social media platform where you chat with your friends about a stock. You can trade it within the app because the social media app has integrated a widget that sits inside the app and is driven through an API from a broker that executes, clears and holds custody of the asset for you in the financial market.
You can observe many instances of how shopping apps have embedded lending inside the app or how online travel apps have embedded insurance. We will keep seeing this evolving and growing, and becoming more accepted as the norm.
Embedded finance pioneers
In Southeast Asia, Grab Holdings Limited, originally a ride-hailing platform, acquired full digital banking licenses in Singapore and Malaysia through its digital bank venture, GXS Bank Pte. Ltd. Since then, the company has leveraged embedded finance to allow its customers to shop, order deliveries, hail rides, pay, save and invest – truly becoming a super app. The Grab ecosystem has seen improved customer engagement, retention and overall lifetime value as reliance on their app has grown. Anthony Tan, co-founder and CEO of Grab, stated in 2021 that their evolution into a super app was guided by the everyday problems they wanted to solve and accelerated by a growing appetite for digital services in a rapidly transforming landscape.
Apple also applied the frame of embedded finance when launching Apple Card; it is paying a little over 4% in yield, and Goldman Sachs backs this. There is nothing that stops other firms from doing this. As an example, a firm using embedded finance could use a feature that collects money into a user’s wallet and asks the user whether they would like to participate in an auto sweep to automatically place their money into, for example, a US treasury, which yields over 5% today. This makes the product stickier, and people potentially won’t mind leaving money in their wallets simply because the wallets earn them more interest than their banks! The other benefit is that when they have this money easily available and earn some yield and want to spend money, they can; in the back-end, the US treasury can get liquidated to settle the purchase transaction.
These examples show just the tip of the iceberg of the limitless possibilities of embedded finance; it becomes far more than an app for investment – it becomes a ubiquitous part of everyday life.
Making investments more accessible
According to PWC, the market for embedded finance applications is projected to experience significant growth, surging from US$54.3 billion in 2022 to a staggering US$248.4 billion by 2032.
As someone working within the fintech space, I have observed an increasing amount of non-financial digital ecosystem providers broadening their value proposition with financial offerings to drive stickiness and revenue diversification. This is a strategy also implemented by “traditional” fintechs by expanding their core offerings with investment and trading capabilities.
Chipper Cash, previously focused on money transfers, payment accounts and card services, successfully expanded its core offering for customers to invest in stocks. Rather than applying for licenses independently, Chipper Cash established partnerships with licensed financial institutions and leveraged APIs and brokerage infrastructure provided by these institutions. This way, Chipper Cash expanded its services to include investment services quickly.
From a user perspective, convenience is key because they can invest and execute trades from the same app they use for everyday services.
There is still a lot of untapped potential for fintechs to explore, and fintechs should evaluate the opportunities – and threats – a concept like embedded finance brings into the financial services industry, so they can develop countermeasures to capitalise on the opportunities. Financial institutions that can act rapidly will achieve significant upside in their market penetration, especially when driving usage and client acquisition, leading to business growth and security for the future. Firms that embrace such solutions will stay in the game long-term, and some may move miles ahead; those that don’t will likely be left behind.
It is becoming increasingly imperative for organisations to evaluate ways to make their businesses stickier; investing, lending, insurance, payment, cash management and many other such functionalities today can easily be embedded. Companies must wake up to this reality and determine their strategy to take advantage of this.