![]() Consider Walmart’s recent announcement that it is building a financial-services offering with financial-technology investor Ribbit or Ikea’s recent announcement that it is purchasing 49 percent of its banking partner. By definition, ecosystem orchestrators seek to offer as much integration as possible, so an embedded integrated financial offering fits the model perfectly. Customers, according to our research, are flocking to these multiproduct customer experiences, known as ecosystems. The most significant trend is that customers increasingly seek simple, holistic, embedded, and direct experiences. Customer demand for integrated experiences.Understanding and monitoring these trends can help banks, and those who hope to work with on embedded finance, identify opportunities and guard against threats. We see six trends in the embedded-finance and banking-as-a-service arena. If this winner-take-all dynamic prevails, a few BaaS providers that are ahead of the pack in technology, analytics, and cost structure will likely form insurmountable advantages in the space. Another possibility is that the market will be prone to returns to scale, much as cloud computing is dominated by big players. In that world, achieving long-term differentiation with BaaS will be difficult, so banks will continue to distinguish themselves based on products, rates, reach, and other dimensions. One possibility is that banking as a service and API banking become as ubiquitous as online or mobile banking, a channel that every bank must build and maintain. It’s early to tell how the market will evolve. My work with incumbent banks suggests that more than two-thirds have undergone the digital transformation and modernization necessary to be competitive in BaaS. To offer BaaS, banks must undergo digital transformations, but many already have. Banks often struggle with their cost structures, which are frequently based on legacy technology and enabled through manual processes and operations. The good news is that enabling partners to distribute banking products can be a low-margin, high-volume business for banks. ![]() Many banks are concerned that distributing their products through partners threatens their client relationships, but if end users begin adopting embedded finance in significant numbers, banks may have little choice but to launch BaaS business lines. (Fintechs offering to intermediate BaaS relationships also have emerged examples include Treasury Prime, Synctera, Unit, and Bond.) Banks will also need new business models, such as pay-for-use monetization, B2B2C and B2B2B distribution capabilities, and a careful consideration of branding. Making it work will require new technologies and capabilities, because BaaS is usually distributed to clients via APIs and requires strong risk and compliance management of the embedded finance partner. To meet the rising demand for embedded finance, financial institutions are increasingly offering banking as a service (BaaS)-bundled offerings, often white-labeled or cobranded services, that nonbanks can use to serve their customers. For customers, the appeal is ease of use: a small business can get a bank account from its accounting software, or a consumer can pay via the retailer. Venture capitalists, such as Angela Strange at Andreessen Horowitz and Matt Harris at Bain Capital Ventures, have for years encouraged their companies to consider embedded finance as a key monetization lever, “ making every company a fintech company.” Today, companies of all types and levels of maturity-including retailers, telcos, big techs and software companies, car manufacturers, insurance providers, and logistics firms-are considering and preparing to launch embedded financial services to serve business and consumer segments. The companies’ embrace of embedded finance-banking-like services offered by nonbanks-aims to retain customers and increase their so-called lifetime value. ![]() March 1, 2021More and more nonbank companies are offering financial services, such as bank accounts or wallets, payments, and lending.
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