Customers of the modern connected society are increasingly expecting financial services to be more contextual. That means ability to purchase and consume financial services right on time when and where needed. Embedded Finance (EmFi) integrates financial services such as payments, loans and insurance products into non-financial customer journeys to offer seamless customer experiences. Embedded Finance also offers monetization opportunities for the providers, as well as the digital platforms where those journeys take place.

As a business idea Embedded Finance is nothing new – financial institutions have integrated especially consumer loans, credit cards and insurances into traditional retail trade customer experiences already for a long time. However, the customers are expecting more: more seamless, more real-time, more on-demand. Embedded Finance enables the building of frictionless contextual customer experiences and reaching new customer segments by leveraging modern technology and by combining available financial and non-financial data. 

Embedded Finance is a strategic question for financial institutions. Inability to meet customers’ needs leaves room for new competition. In addition, Embedded Finance disintermediates the traditional value chain and introduces new ways of acquiring and consuming financial services. Business models shift from traditional pipeline models towards ecosystem models. New roles and new forms of competition emerge. As a result of this, financial institutions are forced to make choices as to how to position themselves in different business areas and in different customer segments.

Embedded Finance provides both upside benefits and downside risks for financial institutions: while opening opportunities to reach new markets and customer segments, EmFi may also lead to diminished role and negotiation power of traditional financial institutions, and complicated controlling of regulatory liabilities. It is therefore essential to carefully evaluate the impact of Embedded Finance on different business areas: which services will be affected the most and what will be the magnitude, direction and pace of the impact. The likely impact varies greatly across business areas and individual products, depending on factors such as product complexity, product-specific regulatory requirements and competitive dynamics.

The impact of EmFi must be evaluated from three perspectives

  • Penetration: How big a share of different types of financial services will be purchased and used in non-financial (“embedded”) contexts vs traditional financial contexts.
  • Transformation: How different is Embedded Finance from traditional finance in terms of required capabilities, assets, efficiency, commercial model etc.
  • Redistribution: Will Embedded Finance grow the overall and addressable market size of the respective business area, restructure market shares in the related competitive landscape, or both.

Monitor & Mitigate: Do not undertake any significant EmFi initiatives or invest directly in EmFi capabilities but monitor the progress of EmFi and conduct regular impact assessments, especially in core businesses most at risk from EmFi disruption.

Plan & Prepare: Incorporate EmFi into your strategy, execution plans and product and technology roadmaps and begin investing in the underlying capabilities required for success specifically in the EmFi landscape, starting from the businesses most likely to be impacted or where growth opportunities are most apparent.

Optimize Distribution: Leverage Embedded Finance fully as a complementary distribution channel alongside existing channels and in product categories and platform types where it may offer much lower costs of acquiring and serving customers or even the possibility to consider gradually replacing own channels.

Unlock New Markets: View EmFi primarily as a way of tapping into new geographic markets or customer segments that would otherwise be difficult to access. Choose platform partners strategically based on the specific segments they serve, the data and insights that they have on these segments, and the geographic markets in which they operate.

Optimize Product Offering: Redefine the product offering to be compatible with a future where Embedded Finance is the primary business model, scaling down on product lines with little embedding potential and investing heavily in developing those product lines with high embedding potential.

Reposition & Transform: Reassess the company’s entire strategy from purpose and value proposition to positioning across markets, customers, products and the value chain and the way services are produced and delivered. Leverage Embedded Finance, Open Finance and the fintech ecosystem fully to deliver a superior customer experience, whilst also achieving unrivalled efficiency.

Defining the financial institution’s strategy around Embedded Finance and working out a concrete implementation roadmap begins with a deep understanding of the customer perspective. It is essential to first understand the preferred digital locations of the customers: what are the platforms and forums that both existing and targeted future customers are using and where do they expect the financial services to be contextually available. Equipped with this understanding, one can then begin to work out a step-by-step plan of how best to meet those expectations in a way that is technologically, operationally and financially feasible.

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  • Embedded Finance – Strategies and Considerations for Financial Institutions
    Embedded Finance – Strategies and Considerations for Financial Institutions 1.18 MB Download

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