A recent Accenture survey found that embedded finance offerings to small and medium-sized enterprises could increase global bank revenues by as much as US$92 billion by 2025. Embedded finance offers banks a huge opportunity to grow their businesses. I’ve asked my colleague Chris Jaggard to share his insights into this opportunity. Chris is the Commercial Banking Lead for Australia and New Zealand.
Commercial banks need to move quickly to counter rising competition from powerful digital platform providers and an array of specialised fintech firms. These new rivals are winning over business customers by delivering outstanding digital experiences, exceptional convenience and an enticing range of value-added services.
Embedded finance provides commercial banks with an ideal vehicle to protect their customer bases and capitalise on new growth opportunities. It is especially suited to serving small and medium-sized enterprises (SMEs). And commercial banks serving SMEs should waste no time in incorporating embedded finance in their distribution channels. Accenture studied more than 2,500 SMEs around the world and found that embedded finance offerings to such businesses could boost global bank revenues by as much as US$92 billion in the next three years.
What is embedded finance?
Embedded finance is a collection of technology-enabled financial services seamlessly integrated into many different digital environments. The services most suited to embedded finance in commercial banking include payments, unsecured lending and asset finance. But the scope of embedded finance is growing fast.
Already, digital platform providers such as Amazon, Google and Apple are using embedded finance to broaden and enhance their consumer offerings. Banking and payments features on these platforms, embedded seamlessly in compelling digital experiences, are attracting droves of consumers and a growing number of business users drawn to the convenience and low cost of these offerings. WeChat, for example, facilitated transactions worth around US$3.8 billion last year through the seamless payments experience it integrated with its hugely popular instant messaging app. More than a billion people use the WeChat app. Similarly, Apple has captured 5 percent of all global card transactions, according to research firm Bernstein, by offering a seamless one-touch experience for consumers using its Apple Pay facility.
Now, as digital platforms such as Xero, QuickBooks and Amazon become increasingly popular with SMEs, these platform providers are harnessing their modern, API-enabled infrastructures and rich pools of data to deliver an assortment of embedded finance offerings. Intuit’s QuickBooks accounting platform, for example, recently partnered with Green Dot Bank to launch Money by QuickBooks in the US—an embedded finance facility that offers SMEs cash flow management, debit cards and bill payments. Within a year of its launch in 2020 it boasted cash balances of more than $100 million.
US$32 billion swing to embedded finance
Our recent global survey found that US$32 billion of banking revenue from SMEs could shift from traditional banking offerings to embedded finance experiences by 2025. More than 40 percent of SMEs we surveyed expressed interest in receiving banking services across the digital platforms they currently use. Nearly half of these SMEs are willing to pay the providers of such services at least as much as they currently pay for their traditional banking services. Many Asia-Pacific SMEs, for instance, are keen to use banking offerings from accounting services providers such as Myob and Xero.
To combat growing competition from digital service providers and fintech firms, far-sighted commercial banks should learn from their new rivals. Cautious institutions may choose to ignore how powerful digital technologies and abundant data sources are transforming the ways business customers perform their banking. However, bolder banks need to get on the front foot and start shaping a new set of user experiences that will attract additional customers and open fresh revenue opportunities.
How should banks apply embedded finance?
It’s vital that commercial banks understand and define the roles they will play within the embedded finance value chain. Key roles include:
- Ecosystem curator: To strengthen and expand their relationships with customers, banks can deliver a range of complementary embedded financial services within a single digital ecosystem. This approach gives them greater control over their customer relationships but provides limited opportunity to reach new customers. For example, Starling Bank in the UK, which this year become one of the first fintech challenger banks to turn a profit, offers a tightly curated marketplace for business customers, connecting them with capabilities across accounting, pensions, communications, human resources, loyalty, utilities and legal services.
- Back-end capability provider: In partnership with leading digital platform providers, banks can supply the underlying capabilities for the digital platforms to deliver their own branded embedded finance offerings. This role allows banks to extend their customer reach but cedes control of the customer experience to the platform provider. Shopify, for instance, has launched credit and transaction products in the US that leverage the capabilities of Stripe and Evolve.
- Pass-through partner: Banks can partner with digital platforms to offer bank-branded products incorporated into the partner’s offerings. This approach allows banks to capitalise on their existing products and technology while keeping some brand relationship with the customer. In Australia, prominent accounting platform Xero acts as a distribution channel for Westpac, NAB and ANZ Bank business loans.
Three steps to roll out embedded finance
Commercial banks eager to harness the potential of embedded finance should consider employing a three-stage process to identify and capitalise on their main strengths and opportunities.
- Define the strategy: Identify current and future competencies, analyse customer needs, estimate value-creation opportunities and set milestones and goals.
- Develop a go-to-market approach: Choose value chain roles such as ecosystem creator, back-end capability provider, pass-through partner or a combination of these functions. Select product and service offerings as well as target markets, customers and partners.
- Prepare to execute: Appoint product teams, devise business models, decide technology requirements and finalise roll-out roadmaps and implementation plans.