Holistic Banking: The Rise of Embedded Finance

by S. Elif Kocaoglu Ulbrich

European banks got it all wrong. In the early days of the FinTech revolution, local banks and financial institutions channelized their energy towards fighting GAFA and Fintechs, mainly PayPal. We even have regulations as a result of this market protection instinct. Focused on the well-known enemies, they haven’t seen the real danger closer to them: consumer brands becoming competitors. Rising above the ecosystem trends slowly but surely, embedded finance is shifting the market balances as we speak.

Embedded Finance: A Look into The Future

Imagine that in the future, you don’t have to run between different bank branches, brokers, or comparison portals for mortgage eligibility; but instead, you can apply for a loan simultaneously as you visit the apartment of your dreams. Picture as your loan is being approved; the bank starts sending you trusted service offers for the broken sink or the Mediterranean tiles you fell in love with when you visited Spain one summer. After you shook hands, the real estate office offered you the possibility to select from different house protection insurances or apply for a credit card through them, giving you cashback points at various service providers and shops and installments to pay the brokerage fee. You were not aware that your local real estate broker had Fintech ambitions, but why not?

As you leave the real estate office, you feel like celebrating this significant milestone and end at the closest supermarket. You select a bottle of champagne and a nice cake from the bakery and leave the store without queuing or dealing with any additional check-out process – all thanks to the payment infrastructure using “Just Walk Out Technology.”

As it started to rain in the afternoon, you decided to drop by the furniture store, selecting a brand-new sofa for your new home. You eyed the latest baby blue model, which would look great in your new apartment. As you were contemplating buying the couch already, the shopkeepers asked whether you would like to apply for an instant loan for your new sofa. Of course, you immediately said yes – no need to use the cash reserves before the extensive renovation project. On your way back home, you stopped by the gas station to top up the tank and paid for the gas via your car’s interface, without the need to leave the vehicle (“in-car fuel payments”).

When you arrive home and realize that you are out of (probably vegan) butter, you will likely order and pay using your smart fridge (“pay-by-fridge”).

Sounds science-fiction-like, doesn’t it? On the contrary, this is the likely future. Embedded finance is already making most of these scenarios possible. We can expect many more of it in the future, saving us time, unnecessary conversations, paperwork, and waiting times. It is also likely to increase service and product sales since end-to-end, seamless processes are more likely to turn into positive shopping decisions, minimizing last-minute hesitations and buyer’s remorse.

Do We Need to Embed Financial Services to Everything?

Embedded finance (or, in other words, “integrated finance”) is the financial services incorporated into non-financial offerings.

Do we need to embed financial services into everything? The answer is not a straight yes since financial services are already embedded into every service and product stream. Maybe not as smoothly as consumers like or need them to be, but every service or product (even donating money) turns into a payment process after a certain point. Check-out processes are the “happy endings” of online and offline shopping stories. Embedded finance doesn’t change the fact that payments are the last step for purchasing; it merely makes the process frictionless, less complex, and more contextual. Embedded finance takes the check-out process a step further by connecting it to new potential offers and services. On the one hand, it triggers the urge to spend more, but on the other, it saves time, energy, improving customer experience.

According to CB Insights Q2 2020 Report, the trend towards embedded finance is gaining traction globally, even more since the pandemic. Embedded finance is an improved way of customer journey due to the end-to-end nature of the shopping experience. It increases shopping speed and retention, decreases costs for both the merchant/service provider and the consumer, enables cross-selling opportunities. Most important of all, embedded finance ensures customer loyalty. Hence the increasing interest in entering financial services across the globe. To achieve all this, some brands prefer to collaborate with Banking-as-a-Service (“BaaS”) and E-money (“EMI”) providers like Railsbank, solarisBank, PPS, Fidor, embank, ensuring quick and stress-free market entry. In contrast, some brands create or acquire their own financial brands so that the customer is entirely theirs and the brand trust is re-established.

Noteworthy examples of conventional and non-conventional “embedded finance” services include:

  • Amazon’s pay and go supermarket concept called “Amazon Go,” allowing customers to shop check-out free (US, UK),
  • Jaguar and Shell’s cooperation for world’s first in-car fuel payments, followed by Mercedes (“Fuel & Pay”), or locally in Benelux region: CarPay-Diem
  • Uber allowing splitting payment costs using Venmo (US),
  • Paying for Starbucks using the Starbucks app (US),
  • Retailers such as Zara and H&M offering POS finance via Klarna (H&M even investing 20M in Klarna),
  • Amazon offering marketplace merchant financing via Goldman Sachs (US) and ING Germany (Germany),
  • Amazon providing commercial car insurance and investment products (India),
  • Facebook developing a blockchain-based payment system, which could be implemented as a cryptocurrency, alarming regulators all around the world,
  • IKEA taking 49% stake in banking partner IKANO Bank with the intention of offering further consumer financial services,
  • Delivery services such as Uber Eats (US) cooperating with Venmo, Delivery Hero (Germany) growing its Fintech team, and Gorillas (Germany) planning to issue credit cards,
  • Walmart announcing the creation of a new fintech startup designed to develop and offer modern, innovative, and affordable financial solutions together with Ribbit Capital,
  • Google enabling digital-first bank accounts directly in the Google Pay app in cooperation with eight local banks (US),
  • booking.com announcing the creation of a new internal FinTech business unit to facilitate seamless access to the company’s global travel marketplace for both customers and partners.

Embedded finance is likely to transform the service cycle across industries. Lightyear Capital’s research reveals that the embedded finance market will demonstrate staggering growth over the next couple of years and will generate $230 billion in revenue by 2025, which only means that we can expect even more exciting developments soon.

Gazing Into the Crystal Ball: How Will Financial Services Look in the Future?

The concept of embedded finance isn’t new, but recent examples indicate the direction we are heading; earlier or later, all established brands will start offering financial services to get a piece of the cake. So where would this movement leave banks, then?

In the past years, modest interest rates, consumer-friendly banking trends, and strict regulations narrowed the margins and, therefore, playroom for traditional financial players, especially in Europe. COVID-19 was the last nail in the coffin, calling for immediate business model restructuring and strategy changes. The embedded finance trend growing in parallel proves that there will be an ecosystem consolidation, and precisely like Bill Gates predicted, “we need banking, but we don’t need banks anymore.” According to the World Retail Banking Report 2021 (WRBR) published in Q1 by Capgemini and Efma, banks fall short of meeting customers’ expectations, making the competition even more fierce. Moreover, as brands become Fintechs and take over the consumer trust entirely, banks are likely to evolve into backend providers, leaving customer relations to non-bank service providers. backend providers, leaving customer relations to non-bank service providers.

End-to-end service provider examples dominant in the financial industry, such as Alipay, Gojek, Rappi, demonstrate that the customers are willing to use fewer channels to receive more extensive, trustworthy services. All-in-one service providers or the so-called super apps are the likely winners of the market; however, banks can quickly catch up if they adapt to the “holistic service provider” approach, changing their course. Using the financial data, banks can identify new opportunities and increase the life qualities of their customers, offering them a range of services that goes beyond the electric bill and rent payments, term deposits, and mortgage installments. Forward-looking banks and financial service providers already leaped to enter the non-financial sphere, offering lifestyle banking options. South Korean banks are planning to add food delivery services to their banking apps. Standard Chartered’s innovation and ventures unit has partnered up in Singapore to launch a “wealth, health and lifestyle” consumer platform called “Autumn.” Banking is more than just incoming and ongoing funds, and these lifestyle platforms are here to prove that holistic banking.

“By combining digital wealth technology with health, lifestyle and financial wellness, we’ll help users adopt healthier habits and create a retirement that is personalised for them.”Mike Kruger, CEO, Autumn


At this point, blending Fintech in the value proposition is not a <nice to have>, is a <must>.

Experts predict that every company will become a Fintech company in the future. As omnichannel, customer-centric super apps increase their power, it will become harder for niche platforms to succeed. To keep up, banks should switch from “passive” to “active,” looking for novel ways to improve customers’ life qualities. They should utilize the existing data, open banking, and BaaS cooperations to create 360-degree experiences. Banking is not limited to the activities listed in the banking license regulations anymore. The market players that can foster the most relevant financial and non-financial services and become “an integral part of” consumers’ lives can expect to stay in the game.



The LHoFT Foundation

The LHoFT Foundation is a not-for-profit initiative supported by the public & private sector to drive innovation for, and digitialisation of Luxembourg’s financial services industry. The LHoFT is the national platform and central hub for Fintech, working to connect the domestic and international community to solve challenges and address opportunities that will ensure the Financial Industry’s continued competitiveness.

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