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How banks are staking a claim in the embedded finance ecosystem

Finance in the experience age heralds a new era for customers and banks alike, with embedded finance as the key to success.

In brief

  • Customers want financial products and services that are built into their daily activities.
  • Embedded finance offers both banks and nonfinancial services brands the ability to provide a frictionless customer experience.
  • Banks need a clear embedded finance strategy to unlock new revenue streams successfully.

The seamless integration of financial services into customers’ daily lives is entering a new era. For many consumers and businesses, financial services propositions are optimal when embedded into an interconnected customer journey, rather than offered as a separate series of interactions accompanying a journey.

Consumers and businesses increasingly expect financial products and services to be tightly integrated into their daily activities, for example, being able to pay for parking as they drive into a parking garage or getting financing at the point of purchase in real-time. Fundamentally, these integrated experiences go beyond “digital financial services,” and instead, are moving us closer to the next revolution in finance. Financial services will become an embedded component of a broader value chain experience: financial services in the experience age.

New financial experiences

Nonfinancial businesses have been faster to recognize that the age of “digital citizens” and “borderless and seamless financial services” is upon us. Many of these businesses are leveraging customer data and insights to maximize the customer experience and generate new growth paths. Their goal is to amplify brand loyalty and customer stickiness; increase conversion; and generate repeat purchases. Financial services in the experience age are best delivered in a way that reduces friction in financial interactions while increasing ease and elevating convenience.

Evolving customer expectations are a primary driver of this new era of embedded finance. Retailers, software companies, online marketplaces, automotive original equipment manufacturers (OEM)s, and e-commerce platforms are steadily embedding financial products and services into their end-to-end customer journeys.

According to the more than 20 global financial technology leaders recently contacted by EY teams, 94% believe the key to success is the relevance of a financial product in addressing customers’ real-time needs (note that many current financial products are not real-time). 1 In turn, there is a rapidly growing interest in creating embedded propositions among both nonfinancial and financial institutions (FIs), which has generated possibilities to capture meaningful growth for both parties.

Usability first
of respondents to an EY survey believe the key to success is the relevance of a financial product in addressing customers’ real-time needs

It is estimated that the market size of global embedded finance across the entire value chain will grow from US$264b in 2021 to US$606b in 20252.

Woman paying waiter on contactless card machine
1

Chapter 1

Embedded propositions on the rise

FinTechs, and technology overall, are at the heart of the embedded finance revolution.

Banking-as-a-service (BaaS) providers use modern API platforms to offer nonfinancial services brands modular banking solutions, using a licensed bank’s regulated infrastructure. Open API platforms and bespoke front-end customer journey technologies are making it faster and easier for FinTechs to partner with brands. The advance of cloud computing, digital architecture, and the proliferation of mobile devices, all enable rapid scale, real-time data exchange and greater connectivity between brands and customers.

As a result, several embedded value propositions are on the rise. For example, retailers that store customers’ credit or debit card information on their apps enable instant, one-click payments. And e-commerce platforms that allow merchants to open a financial account within the platform eliminate the need for a separate, traditional (business) bank account. Our survey indicated that over 70% of respondents believe that more than half of financial services will be offered via nonfinancial services platforms in the near future.

Switching platforms
of respondents believe that more than half of financial services will be offered via nonfinancial services platforms in the near future

For a nonfinancial services company, the benefit of owning a significant amount of customer transactional data means it can further enrich its insight into each customer profile and tailor the offering to the customer’s desires.
“Financial services and nonfinancial services companies should pay attention to embedded finance because it's the biggest opportunity for growth,” says Remy Carole, Chief Operating Officer at Treasury Prime. “Embedded financial services in products are starting to become commonplace. There's a future where embedded finance is as ubiquitous as web technology is today.”

It’s clear that online marketplaces, retailers, automotive OEMs and software companies will play a growing role in influencing the future of financial services. However, embedded finance creates significant opportunity for financial services and nonfinancial services organizations, both separately and in concert.

There's a future where embedded finance is as ubiquitous as web technology is today.

Remy Carole

Chief Operating Officer, Treasury Prime

Capturing this market opportunity requires banks, and broader FIs, to rethink their positioning, business models, value propositions and capabilities to excel in a hyper-dynamic, real-time world.

How EY can Help

Payments as the gateway

Embedded finance covers many domains, but payments is the largest game in town in terms of revenue. According to our research, the volume of payments through embedded channels reached US$2.5t in 2021 and is expected to reach US$6.5t by 20253. Nonfinancial businesses use payments as the first, and continuous point of customer interaction, leveraging vast amounts of data from each customer journey. With a variety of propositions such as pre-ordering, gifting, and discounts on offer, payments help to build new experiences, increase brand loyalty, and drive customer retention. And as brands integrate the payment flow, it also becomes easier to add other products to that payment flow, like lending or insurance.

In parallel, the rapid adoption of digital wallets worldwide has transformed payments for consumers and merchants alike. According to the EY report The Rise of PayTech – seven forces shaping the future of payments, the share of mobile commerce outpaced desktop e-commerce in 2021, with transaction value from mobile devices reaching 52% of all e-commerce spending. In fact, mobile wallets held a 49% share in global e-commerce payments in 2021. With various value-added offerings such as loyalty programs, security and an open loop payments system on offer, the total number of digital wallet users is expected to exceed 5.2b globally by 2026, up from 3.4b in 20224.  

Buying on the go
of all e-commerce spending in 2021 came from mobile devices

How EY can Help

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The role of financial services providers

Overall, the disruption brought about by embedded finance represents an inflection point for traditional banks. Fundamentally, they are being faced with a choice on which position to take – to embrace the embedded finance transformation, to enable others by leaning on their core strengths (e.g., risk, regulatory), or to do nothing.

Many traditional financial institutions need to catch up to customer expectations. The ability of nonfinancial service brands to move into the role traditionally held by banks rests on the fact that they can tap into a behavioral response from customers. Brands that offer embedded finance at the customer’s point of need create a seamless, end-to-end experience that customers want and make buying decisions based on.

To effectively determine their place in this developing ecosystem, banks need to clearly assess where their strengths lie and therefore how best to unlock distribution opportunities.

The following questions provide a basis for banks to critically assess what route to take.

  • Is there a high level of conviction in the growth potential offered by an embedded proposition that warrants increased capital investment and embracing new ways of thinking?
  • Has the bank considered what its real value is to customers and businesses? If its value is solely its balance sheet, maybe it should not play a customer-facing role.
  • Does the bank have the brand affinity and customer loyalty that will allow it to retain the customer, in an embedded experience?
  • Can the bank benefit from harnessing the brand loyalty and affinity of a well-known nonfinancial brand to extend its customer reach?
  • Are there specific value chains or experiences that the bank has the greatest involvement in, the power to lead, or the greatest value to add through the products and services it is best at?
  • Is the bank open to not being the marquee brand at the point of distribution, but leveraging new modes of distribution to increase deal flow, customer awareness, data access, and gain increased services fees?
  • Does the bank have the baseline digital maturity needed to be involved in profitable ways, or is partnering with an enabling technology or software a must? And if not, is it brave enough to place significant strategic bets in domains it is less knowledgeable about?
  • Is the bank open to rethinking long-standing business models focused on narrow bands of revenue, e.g., transaction and interchange fees, to models that expand the revenue possibilities, e.g., subscription, data monetization, pay-per-use, but require dramatically different thinking?
Mobile payment in a garden florist shop
2

Chapter 2

Choose a strategy for success

Establish a path to unlock new revenue streams.

Once banks have a clear overview of their capabilities, the next step is to establish what type of embedded finance strategy could successfully unlock new revenue streams. There are several ways to do this, but four distinct archetypes stand out.

1. Customer- or product-centered approach:

This is a customer-oriented model, aligned to a traditional product-focused approach. Here, banks extend products to others but maintain a focus on innovating products and services already at the core. It requires banks to re-evaluate what they know about their customers to gain a better understanding of who their customers are. It also demands that banks focus on innovative products to maintain their customer base as embedded propositions grow.

2. Enabler approach:

This approach enables a bank to extend its products and services through a platform business model. It requires setting up a digitized set of core banking products and services and developing a compelling go-to-market proposition to embed services into third-party platforms. In choosing this route, the bank needs to understand what products and services are best suited to being embedded into a third-party platform, e.g., payments, consumer loans. It also requires insight into what partnership models are best suited to the bank, based on its existing capabilities.

3. Builder approach:

Here, the bank owns the platform and orchestrates a mix of in-house and third-party products (open ecosystem). This requires heavy technology investment, with strong partnership capabilities integrated directly into customer offerings. It relies on an agile organization and operating model that’s able to continuously improve, adapt and coordinate with third-party platforms to evolve functionalities. The bank must consider what technology capabilities and products need to be built in-house and who it should collaborate with to provide best-in-class products and experiences.

4. Owner orchestrator approach:

In this case, the bank owns the platform, orchestrates products, and owns the customer distribution channels (vertical integration). In addition to the capabilities required of the “builder,” an orchestrator needs to invest in specific, targeted nonfinancial services sectors and sector expertise and create the technological ability to be directly placed at the point of customer interaction. This requires an agile organization with a scalable operating model to improve, adapt and evolve functionalities continuously. The bank must be able to measure the success of the platform and how best to retain customers and drive brand recognition.

The problem facing most banks today is that many customers are choosing embedded channels to conduct relatively simple finance services such as payments, digital loans and buy now pay later (BNPL) financing. As a result, they are migrating from traditional bank channels such as branches or online banking websites. With this, banks must find a way to still engage with these customers through new, embedded channels, or else suffer from high turnover.

However, it’s worth noting that not all products are the same. The more complex the product, the more challenging it is to embed it and for nonfinancial services firms to replicate it – for example, pension planning. Overall, banks have an opportunity to create a differentiated offering to competitors, while capturing additional value from any new distribution model.

        The future is frictionless

        Ultimately, the evolution of financial services toward invisible, interconnected customer experiences is not one that financial institutions will dictate. Instead, it will be mainly driven by innovation outside the sector that looks to financial services as an enabler. However, most financial services institutions are reluctant to take a back seat.

        The juxtaposition of what brands and customers demand from embedded finance propositions against the traditional financial services modes of generating profitability creates a dilemma that is only solved through a clear articulation of how, and where, a financial institution will compete to capture growth in the space, or if it will at all.

        Banks have a choice to reimagine offerings in an embedded world and compete on differentiated customer propositions. Alternatively, banks that are happy to play a utility role, will require a distinct set of scalable technological capabilities that will allow them to compete in a hyper-connected world.

        Resting at the heart of it all is the need to explore new platform business models, harness partners as assets to open new distribution channels and embrace new, non-traditional revenue streams, while amplifying complimentary offerings that remain highly relevant, e.g., cash and treasury management.

        The path to a lucrative embedded finance proposition requires the proactive definition of an institution’s strategic ambition, a willingness to innovate, and appetite to invest significant capital ahead of the curve.

        The tectonic shifts underpinning this fundamental change in the provision of financial services continue to expand and accelerate, and in turn, taking a wait-and-see mode is not a viable option.


        Jochen Kaempfer, Principal, Strategy and Transactions, Payments and Banking, EY-Parthenon, Ernst & Young LLP, contributed to this report.

        Summary 

        Customers increasingly expect financial services and products to form a part of their daily lives. Nonfinancial services’ brands are meeting customers’ evolving expectations by offering embedded finance solutions such as payments, at customers’ points of need. To unlock new distribution opportunities within this developing ecosystem, banks must determine an embedded finance strategy that enhances their core strengths and delivers long-term growth.

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