To run a viable embedded finance business, financial institutions need to operate within an ecosystem and efficiently serve multiple distribution partners. This paper lays out the challenges and opportunities for banks. Unless banks can successfully scale their embedded finance proposition to serve multiple commercial partners, it will never get off the ground. This paper explains how to do it.
Embedded finance is on the march. Over the past few years, banking has spread further beyond banks and has been progressively integrated into a multitude of other, non-financial customer journeys.
Financial services, especially payments and credit products such as buy-now-pay-later (BNPL), have become standard elements of the retail e-commerce experience. In commercial environments, payments and other services such as revenue-based lending or trade finance are now integrated into digital marketplaces or ERP software so that users do not need to switch into their online banking portal. Retail customers and companies are consuming financial services alongside non-financial products and services with no visible join.
It is important to recognize that this concept is far from new. More traditional partnership distribution models such as co-branded credit cards and point-of-sale finance have been around for decades. However, the relentless march of commerce and services into digital channels has given this established idea fresh relevance and momentum. The degree to which finance can be integrated into digital journeys is unprecedented, allowing finance to play its central, enabling role more effectively than ever. But it also poses new challenges for banks as they seek to engage with consumers and build their business in the digital economy.
The great advantage of embedded finance is that it brings banking services to where the customer is, creating simple, linear journeys that can be completed without opening a banking app or website, or inputting card details. Seamless journeys like this offer consumers and professionals an important value-add in terms of user experience and efficiency. There are major advantages for the providers as well. In e-commerce environments, embedded finance functions as a sales enhancement tool that increases propensity to purchase, delivers higher basket values, and reduces dropout rates. For commercial service providers, it brings opportunities to access additional income streams through revenue sharing between the partners or to increase the attractiveness of a software proposition.
This represents over 41% growth in the sector. (Sources: Publicis Sapient Analysis, BCV, BIS, Lightyear Capital, McKinsey & Co., BCG.)
(Source: Publicis Sapient Analysis)
Although fintechs currently dominate the conversation about embedded finance, banks are starting to engage, particularly in retail BNPL.
Banks have several potential commercial strategies for embedded finance. Whichever they choose, however, a key challenge will be to scale the proposition quickly and efficiently.
To successfully design, build, and run an embedded finance business, banks need to set the direction across a set of priority areas:
In addressing these priorities, banks face multiple challenges that can directly impact the success of the proposition they are attempting to build. Among these, failure to build a “digital first” organization for their embedded finance offering is key: an inherently digital service requires nothing less. In practice, this means that banks need to adapt to a faster cadence of digital product design, build, and iteration.
Project teams should adopt the start-up approach to development, delivering a minimum viable product quickly and then iterating it after launch. This allows the team to incorporate partner and customer feedback early in the process and ensure the proposition remains relevant while it is being developed and tested.
However, as well as moving to a more agile approach to product development, banks need to recognize that the process of shaping their customer proposition in embedded finance is radically different from a traditional product development process. They are no longer designing a standardized, standalone financial product, but are instead crafting a proposition that must fit seamlessly into a customer journey through a non-financial digital environment. Banks do not have an inherent understanding of how customers consume financial products as part of a non-financial journey. To succeed, they need to find out.
Equally, they need to understand the priorities of their non-financial partners so that they can offer them a compelling proposition that will support the partner’s business goals. This means acquiring a detailed understanding of what each partner wants from the relationship and how the bank can best support them. Understanding this will have a direct bearing on the economic model that is chosen to underpin the relationship—how each partner extracts value from the transaction process. Banks that have experience in partner finance and third-party distribution have a head start in this area.
In our experience, banks usually fail to get their product/market fit right because they have not defined the target market clearly enough—or they are aiming at the wrong target market. This is why it is vital to appreciate the importance of moving to a new model of product development that recognizes and accommodates the needs of the different players: consumers, partners, and the bank itself. This should help banks to avoid tired, “me too” propositions.
Shaping the technology architecture that will support the bank’s embedded finance proposition is in part a process of deciding the balance between buy, build, and reuse. But it will also depend on the bank’s ability to create strong relationships with the fintech ecosystem. These are vital players in embedded finance and cannot be treated simply as suppliers: success requires commercial partnerships that deliver on everyone’s priorities.
Building a digital-first organization to deliver embedded finance goes beyond the bank’s approach to tech development. Banks also need a delivery model for their service that is partner and customer-centric, bringing together cross-functional teams to support the product in much the same way Silicon Valley tech companies would. This will enable effective coordination and help to dismantle the barriers inevitably thrown up by traditional, siloed organizational models.
The five key areas we identify all contain challenges for banks in building embedded finance propositions, but arguably the greatest is the slow speed at which many banks have traditionally designed, built, launched, and iterated new products. This represents a major barrier to success because new propositions take too long to get to market and are behind the curve by the time they are ready to launch. However, projects can be delivered much faster provided banks engage constructively with the fintech ecosystem and are prepared to flex their traditional operating model.
Publicis Sapient are partnering with clients in all of these activities.
The platform architecture for the SME bank includes:
Publicis Sapient, SCB TECH*, SCB X, SCB
A platform to deliver:
Combined capabilities and experience to:
Delivered through:
Embedded finance is on course to become a much more important way for people to consume financial services. It therefore represents a key strategic issue for banks that have built their businesses on direct relationships with individual customers. Embedded finance represents a new business model in which the bank must form strong, mutually beneficial partnerships with non-financial distributors of its services and understand how it will engage with the end-customer under this model.
The product development process looks different. Banks must rethink traditional approaches and learn to develop propositions in close cooperation with both a commercial partner and that partner’s customers. They must design propositions that help their partner achieve its commercial goals and must seek early feedback from beta versions of the proposition to ensure it provides a high-quality customer experience.
To achieve this, banks must rethink their delivery model and draw on the capabilities of the fintech ecosystem. This is critically important given that in building a presence in embedded finance, banks are working with partners that view the challenge chiefly from a technology perspective: how to integrate a financial product seamlessly into a non-financial customer journey. Operating in this environment places a new set of demands on banks that are quite different from those required for their traditional approach to product development.
However, even if the bank can successfully develop an embedded finance proposition with a single partner, the central challenge in building a viable business remains—how to scale and adapt the proposition to work smoothly with multiple partners that have different commercial goals and technology platforms. Without the capability to scale an embedded finance proposition, it will never become economically viable.
To achieve this, it is essential to retain the flexibility that the modular approach to service design and development brings: in effect, banks need to become expert in “efficient customization,” able to adapt their offering to fit the needs of multiple partners, each with a distinct set of objectives and economic models.
This plays to the strengths that Publicis Sapient has gained from working on multiple embedded finance projects: the ability to provide end-to-end support for banks from shaping the strategic “north star” to defining propositions, target customer and partner segments, designing, building, and launching the minimum viable product—including the underlying organization—and then scaling the proposition to multiple partners with the level of service they require. And—crucially—the ability to help banks increase the pace at which they design, build, and iterate products so that they can move at the speed their commercial partners expect.
Find out more about how we are building the next generation of financial services:
publicissapient.com/financialservices
Publicis Sapient is a digital transformation partner helping established organizations get to their future, digitally-enabled state, both in the way they work and the way they serve their customers. We help unlock value through a start-up mindset and modern methods, fusing strategy, consulting and customer experience with agile engineering and problem-solving creativity. As digital pioneers with 20,000 people and 53 offices around the globe, our experience spanning technology, data sciences, consulting and customer obsession—combined with our culture of curiosity and relentlessness—enables us to accelerate our clients’ businesses through designing the products and services their customers truly value. Publicis Sapient is the digital business transformation hub of Publicis Groupe. For more information, visit publicissapient.com.
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