If we haven’t already reached peak hype on embedded finance, it surely can’t be long before we’ll be hearing claims about how it will slice our bread, stem inflation, tackle world poverty, address food shortages and solve climate change.
In fact, in researching for this piece I really did hear one of those claims, but let’s get back to the real world. In the here and now embedded finance is all about selling. It’s about seamless shopping – frictionless spending with enhanced UX and uninterrupted checkout journeys. Let customers build a basket, burn that cash or borrow it – all without the bother of a new window.
It’s at best somewhat perverse that the excitement about making it easier to spend should coincide with the most testing and precarious economic period in recent history. Across much (if not all) of the world, household finances are stretched; prices are climbing, interest rates are rising, energy costs are soaring, credit is tightening and discretionary spending is constrained. Budgeting (for most) is key. And yet, here’s an industry beside itself with excitement about divorcing the sense of spending from the act of doing so. Separating the pain of payment from paying.
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Whether the timing for doing that is propitious or not, the embedded hypers tell us that payments are the least of the embedded promise. Those excited advocates relate that embedded finance has much, much more to offer us than humble payments. Extending and upending value chains, disrupting incumbents, empowering consumers and liberating merchants; enhancing choice (and yet locking in loyalty); lowering costs to end users (even while driving billions in new revenue opportunities for suppliers); transforming customer acquisition; blurring industry lines and monetizing consumption. In all, there’s little embedded finance isn’t slated to do for us – or to us.
“Embedded finance is happening and will continue to happen. But, and at the risk of sounding like a heretic, it seems to me that we’ve had embedded finance in analogue form for a good while now,”
Natasha de Terán, Author
Maybe all (or at least some of that) that is true. But without the support of embedded payments, it’s tricky to imagine how any other form of embedded finance could have true utility. Data-rich, integrated, seamless and tech-driven embedded finance might be – but surely without the transactional payment element, it would just be marketing?
The embedded future
Talking about marketing – there isn’t a bank, consultancy, industry pundit or fintech that isn’t currently marketing a view on embedding things. And yet, much like open banking, embedded finance is and will likely (continue to) be one of those things that happens to users without their noticing. Industry geeks may well wax lyrical (and even write books) about it. So, doubtless, will industry laggards – desperately trying to cast themselves as “relevant” in this sexy new world. Everyone will be meeting customers “where they are” giving them financial services “when they need them”.
This crew will excitedly deliberate over embedded finance’s growth and penetration rates, its revenue prospects and its game-changing possibilities. They will do so in loud LinkedIn discussions, on podcasts, at conferences, on webinars and in jargon-filled white papers. And yet end users will be deaf to the jargon. Without even knowing of the voguish term and all its possibilities, they will blindly adopt of a new way of doing things.
Embedded finance is happening and will continue to happen. But, and at the risk of sounding like a heretic, it seems to me that we’ve had embedded finance (even contextual finance!) in analogue form for a good while now. Is there that much difference between in-store lending offered by a bricks-and-mortar merchant at the point of sale and lending at an online checkout? Aren’t they both “meeting customers where they are” and “offering customers a service when they need it”? Similarly, car finance and insurance offered by manufacturers in franchised showrooms? Yes, embedded finance will be cleverer, scalable, data-driven, automated, customized and so much more, but at the end of the day surely it’s (just) a technologically enhanced version of the former analogue solution? Cheerleaders for the movement can send me answers on a postcard.
In the meantime, I will continue to wonder whether some of the issues that make our instore and wider traditional financial experience an interrupted and imperfect one will actually persist long in our idyllic embedded future. Embedded finance might be able to give us an utterly ‘delightful’ customer experience, but can it really magic away all the friction?
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After all, behind any sort of embedded finance activity there will be a common or garden financial transaction, however hidden it may be. And that transaction will have risk, terms and conditions and a host of disclosure obligations attached to it. There may be several degrees of separation between the provider of the financial service (maybe one of those dumb pipe banks?) and the platform or marketplace that embeds it, but ultimately someone has to assume responsibility for all the tiresome stuff. For fraud, identity, KYC and AML checks; for disclosures, for making sure that customers read (or at least see) the T&C and understand what their actually doing. In short, all those pesky interruptive obligations that make financial transactions so, er, unseamless.
Indivisible transactions
Can all the existing obligations fall on the financial providers if they are to be unseeable at the point of transaction and have no direct relationship with the end customer? Who will be responsible for ensuring consumers understand the (invisible) financial act they are undertaking – the platform, the merchant or the bank sitting behind it? How will that discovery process both fulfill its regulatory purpose and yet not disrupt the customer’s financial foray? If a financial transaction is effectively indivisible and undistinguishable from another act, is that even achievable?
Then there’s choice and competition. A lot is made of unbundling and how this fuels competition and enhances consumer choice. Unbundling has – and that’s been great. But we aren’t in a steady state – everyone is moving and repositioning themselves and, guess what? Scale matters. It’s entirely possible that these shifting boundaries will create new giants with new walled gardens – giving large providers far greater power than their predecessors ever had.
What for instance if large merchant or platforms were to bundle purchasing with particular lending or insurance options (as some already do)? In doing that, haven’t they constrained competition and consumer choice? We can use Affirm here, Klarna, Afterpay somewhere else, but rarely (if ever?) have the choice of all three at the same time. Sure, we can probably (still) borrow on our credit cards instead or buy our insurance separately, but by embedding (and promoting) this financial plan for us, the merchant or platform has already constrained our understanding of our choices, if not actually limited them. What if a merchant or platform prefers a particular payment method (perhaps its own) and bundles that with lending and insurance offers (again its own)? In such a case embedded finance will not have reconstructed the old walls but built higher ones with far deeper foundations.
None of this is to say that embedded finance is bad or won’t or shouldn’t happen. It’s overhyped at present, yes, but exciting even so. Nonetheless at some point even the true believers will have to grapple with those (albeit unwelcome) questions, exploring where and how those responsibilities will ultimately be fulfilled. Tomorrow’s problem, or food for thought today?
