Two decades ago, a UK advert imagined what it would be like if a beer company ran a bank:
A young man enters what looks like a dream office building with beautiful architecture and employees delivering trays of beers to customers as they wait to see their banker. In a 10-second conversation, the man is offered a Carlsberg, asks for £50,000 to start a business, and is given £75,000 with instructions to “pay it back when you can.” The closing tagline: “Carlsberg don’t run a bank…but if we did it would probably be the best bank in the world.”
What is Embedded Banking?
Embedded Banking is a potentially transformative concept that empowers consumer brands and marketplaces to offer banking services to consumers or businesses from within their own platforms. As a subset of Embedded Finance (which includes banking, payments, lending, insurance and other financial services), Embedded Banking refers to the integration of traditional banking services into non-financial companies’ business models.
Why the Enthusiasm?
The trend for Embedded Banking is gaining momentum, enabled by globally accessible technology and with major tech-forward brands like Apple, Uber, and Shopify leading the way. Industry experts predict that the Embedded Finance market could be worth $40-50 billion within the next five years and many times that number by 2030.
As with most integration strategies, the main benefit of Embedded Banking is ownership over the entire customer experience. Companies offering Embedded Banking via their platforms can deliver a seamless experience, gain deeper insights into customer behaviour, and retain their customers for longer within their eco-system.
When activated strategically, this can improve revenue and Customer Lifetime Value (a key metric for business owners). At the same time, end users benefit from innovative and tailored financial services offerings.
Seizing the Opportunity
Formulating and executing an Embedded Banking strategy marks a significant step towards embracing the future of banking. However, it also requires a mindset shift for organizations looking to enable their internal capabilities to clients “as a service.”
So, where should a financial services firm begin? Here are four key considerations for financial institutions considering offering Embedded Banking services to their clients:
1. Define and understand your target market.
Obviously it’s important, no matter what the venture is, to identify the markets and products you wish to offer. It’s no different with Embedded Banking.
One strategy is to focus on one industry vertical and its specific requirements. For example, a bank could focus on enabling their fintech clients to offer accounts that enjoy the protection of national deposit guarantee programs. (These are programs that protect customer deposits up to specified limits, when held with licensed deposit-taking institutions such as the Financial Services Compensation Scheme in the UK or Federal Deposit Insurance Corp (FDIC) in the US).
Another approach is to focus on offering a few core banking or payment services and then expand out from there. For example, a bank could start off by offering basic embedded payment services for funds transfer, followed by the ability for the client to set up deposit accounts for their customers (to send, receive, and hold funds). Using learnings from this implementation, you then can add lending or card issuance capabilities to leverage the data and funds gathered from their customers.
The right approach will depend on your organization’s strengths, investment capacity, credit appetite and resources. Once you find product-market fit you can seek to scale your offering to maximise sales.
2. Consider your distribution model.
One important decision is whether to market your solution directly or to partner with software companies or FinTechs.
Working with payment technology, accounting, enterprise resource planning (ERP), or treasury management software (TMS) platforms is one way for banks to embed their account opening and payments services into these company’s products making them conveniently and easily accessible to customers using those platforms.
Consider how convenient it would be if you were a small business or start up and were able to open a bank account, at the same time as purchasing and implementing your accounting software, and for those services to be fully integrated to receive supplier invoices and trigger the resulting payments from Day 1.
Organizations will face a choice to deliver on these requirements alone, or adopt a partnership approach or a combination of the two. The model should be the one that best fits your organization’s unique capabilities, objectives, access to customers and knowledge of the market.
3. Deeply review internal processes, systems, and infrastructure.
There is a tricky balancing act between meeting clients’ expectations of speed and low friction and maintaining robust internal controls to fulfil regulatory and risk obligations.
Current Anti-Money Laundering (AML) and Know Your Customer (KYC) policies and processes will need to be reviewed. They must be ready to be externalised and exposed via APIs “as a service” to clients.
Another factor is that non-financial clients may lack the requisite experience to offer, onboard, and deliver financial services products to their customers. Therefore, training and support requirements could be higher in the initial stages and must be staffed accordingly. Operational and onboarding teams will need to prepare to handle the expected increase in onboarding and servicing enquiries, especially in the first few months.
Consulting widely across your functional organizations, including groups such as Corporate Treasury, should help to capture less obvious impacts.
4. Remember to manage your risk.
It is critically important to keep an eye on the regulatory landscape for embedded payments as it evolves. Recently the press reported that the Fed had issued a warning to one major global bank about their insufficient due diligence and monitoring processes for onboarding high-risk non-bank clients. Whilst the firm declined to comment, it’s a stark reminder that the bank who holds the banking license will be held accountable for any failings in this area, and therefore well-designed controls and processes are critical. Clear roles and responsibilities, between each of the parties involved, will be necessary for every stage of the value chain to effectively manage these risks.
Change Has Already Begun
Fortunately, there are multiple examples of providers in the market who are successfully developing and launching embedded finance solutions to their clients and paving the way for other innovative banks to follow suit:
- Key Bank has been an early mover in the space with a relatively mature offering of integrated solutions in their commercial line of business.
- ClearBank offers their clients the ability to leverage their banking license to offer accounts protected by the UK’s deposit guarantee scheme.
- J.P. Morgan offers a suite of embedded banking tools which can be incorporated via bank-supplied APIs into their client’s digital platforms.
- BBVA teamed up with Uber in Mexico to offer digital bank accounts and services to their drivers and delivery partners, combined with non-financial benefits such as discounts and rebates.
- HSBC recently announced a partnership and investment in Tradeshift, which will allow them to incorporate their capabilities into trade, e-commerce and marketplace experiences.
Cheers to Success
Any bank looking to step into a new or unfamiliar space, especially one that is not yet fully developed such as Embedded Banking should take a considered approach to implementation.
By properly assessing the risks and impacts on your organization and clearly defining roles and responsibilities, financial institutions can excel in the Embedded Banking landscape and join the movement to empower their clients who might just be brewing the next round of innovative banking solutions.
Banks have never seen more disruption, from unprecedented market and regulatory challenges to intense competition from fintech challengers. Further Advisory works with major financial services firms to establish transformational strategies, build new digital capabilities, and accelerate launches, all while modernizing core business operations.