Magical banking

‘Embedded finance should be everywhere the customer needs it to be‘. That user-centric vision of financial services is redefining both individual and corporate relationships with the institutions that have facilitated finance for so long. But what does it mean for traditional business models?

“It’s a powerful shift,” says Florian Redeker, VP of Product at German Solarisbank, which, with its European banking-as-a-service (BaaS) platform, is doing its best to disrupt those models.

“Before, the incumbent banks were able to get away with subpar user experience because they had a monopoly on their processes and market entry barriers were so high. There was no incentive to and management consultancy Capco and founder of Creative Construction, the design consultancy it acquired in 2020, ‘the battle is not yet lost or won’ for legacy institutions… but the future is unclear. It depends on what, as-yet-unimagined, applications emerge of embedded finance – or what Walorska prefers we call ‘contextual’ finance, because it’s basically in the context of whatever the customer happens to be doing at the time.

“Being right there where they need it –this is the future,” she says. “We will see more and more finance in every service.”

Customer experience – be that an individual or a business – is the key here. Retailers ‘got’ that decades ago, which is why brands like IKEA and Apple are now so keen to enter financial services, not necessarily because they’re empire

improve because they had built this walled garden and they had it very comfortable in there. Maybe those times are over, because, with technology and a new view of finance, it is possible to create seamless user experiences and deeply integrate those financial services into a multitude of use cases. This is what people care about.

“With embedded finance and BaaS, we make banking a commodity. We do our best to move financial burdens to the background."

You only need to have taken an Uber ride once to know what that means for a truly painless customer journey – quite literally. Those in the driving seat are benefitting from embedded finance, too. Uber Instant Pay uses Visa rails to allow the ride-hailing firm’s employees to cash out their earnings up to five times a day using the Uber Driver app.

But Redeker’s concept of ‘commodity banking’ is, of course, anathema to legacy banks, who fight for brand recognition every day. Should they – and can they – keep doing what they’re doing, or is their destiny to become anonymous and leave the customer dog fight to others? According to Agnieszka Walorska, executive director at global technology

Magıcal bankıng

Technology is sprinkling the fairy dust of frictionless journeys on everything from trade finance to Uber rides. So where does that leave the traditional bank? Michael Pierce from Mambu, Florian Redeker of Solarisbank and Capco’s Agnieszka Walorska conjure up ideas

building (although that too), but because they see it as a way of further enhancing the shopper’s experience of their brand and, they hope, their loyalty to it. The same is true for Uber, where invisible payments have long been central to the offer, and also for the ’paymentless’ store format where there is no obvious sign that shoppers are being relieved of their cash.

The growing realisation among non-financial companies that they can leverage fintech solutions to embed these added-value financial services into their own customer experience, is what’s driving growth at providers like Solarisbank.

“We do this with technology and our full banking licence. We make it possible for companies – startups and fintechs, but also established companies and especially established brands – to integrate financial services seamlessly into their user experiences,” says Redeker.

Startups can obviously benefit from such services, which are quicker to market and easily scalable, but their appeal also extends to major players.

IKEA, for example, announced earlier this year that it was taking a 49-per-cent stake in its financial services partner Ikano Bank, which will allow it to offer financial products in-store and online, saying it would make the furniture retailer ‘more affordable, accessible and sustainable’. Although there has been much speculation over exactly what that will mean for customers long-term, the partnership has already enabled the store to offer its own-branded buy now, pay later (BNPL), interest-free service in the UK. It fits comfortably into IKEA’s positioning as a brand that supports its customers’ aspirations and turns dreams into affordable reality. As it put it at the launch: “We hope this new service helps customers create the home they dream of and leads to a better everyday life.”

The sentiment of helping customers lead a better life is one shared elsewhere.

Indeed, Amazon Go, the big tech retailer’s grocery store format, is a particularly good example of hyper-personalisation and customer-centric experiences, according to Michael Pierce, director of partnership commercialisation at software-as-a-service Cloud banking platform Mambu.

“What Amazon Go has done, essentially, is looked at the customer journey and identified that the biggest pain point in that is the checkout process,” says Pierce. “And if they can eradicate that checkout process entirely, they can likely increase conversion rates and encourage more spending, which results in more revenues.”

Pierce cites one report that says companies investing in personalisation are outselling their counterparts by 30 per cent or more. Another found that 80 per cent of consumers are more likely to purchase at firms with tailored experiences, he adds.

“What we’ve seen from our 200-plus customers across the world, is that the financial product has taken a bit of a backseat and experience has taken the front seat,” he says. “I, as a consumer, don’t want to care about the product behind my BNPL proposition. I just want to know that I can buy now and pay later, and everything else sort itself out.”

Experience is everything and everyone can profit, including the banks if they maximise their existing customer relationships, their scale and status, believes Walorska, particularly in B2B.

With embedded finance and banking-as-a-service, we make banking a commodity.We move financial burdens to the background

Florian Redeker, Solarisbank

“A lot of banks are talking about embedded finance, [in relation to payments],” she says, but she’d urge them to explore services beyond exchange of value, such as identity verification services embedded into brand process flows. She points to paytech Stripe’s launch of Stripe Identity, a know-your-customer tool for businesses, as an example of how banks could leverage their resources to create a new revenue stream through APIs.

US banking giant Goldman Sachs’ collaboration with Apple on embedded products – such as, reportedly, an Apple Pay Later service, following its Apple credit card tie-up – and, in corporate banking, Commerzbank experimenting with new sources of revenue by facilitating the exchange of trade between two client companies over its blockchain, are others.

One advantage that it’s hard to take away from banks is that they continue to play an important infrastructure role in the wider ecosystem. A banking licence is hard won and expensive to justify without the full panoply of tech, time and expertise usually only available to a big institution.

As Redeker says: “There is a reason that banks are out there: they are regulated by the state, and there is supervision to make sure the financial ecosystem is controlled. Sometimes banks stand in the way of what people want to achieve. But, on the other hand, it’s great that society has an eye on those systems, and makes sure that they work for the people, and not against them.”

It is also important to note that many consumers, despite the financial crisis, still trust banks more than they trust Big Tech or fintechs as a store for their money – although, among younger generations especially, that view is being eroded fast. The banking crisis of 2008 drove many consumers into the arms of challengers who made much of their untarnished reputation, but they were like flies on a buffalo to the big banks. Now, they look more like a flock of cranes, as perceptions change.

“Banks, historically, have made customers work on their behalf, and I think what you’re seeing now is customers are demanding that banks work on their behalf,” says Pierce.

He believes banks must adapt to five major trends in order to expand their offering and future-proof themselves.

Firstly, they need to really understand how consumer behaviours are changing.

“They need to understand specifically what that means they need to do as a business – so not just lowering interest rates, or eroding fees on bank accounts, but launching better services,” he adds.

Secondly, they need to embrace banking disruptors and move on from the ‘little fintech versus big bank’ friction, which, to be fair, has already been eroded over the past 18 months.

“I think the convergence of being able to provide services and find harmony within this is something that is going to be very critical,” says Pierce.

When a bank is not a bank:

Embedded finance will change the business model

The key is clearly going to be BaaS, he adds, along with the rise of openness and being able to better use data-driven insights – data, of course, being one thing banks have in abundance.

His final, and most interesting, piece of advice, is that banks mustn’t overlook certain customer segments because they are deemed just too expensive or unprofitable to service.

“Find ways to optimise your architecture, your technology, your experience, to be able to – otherwise there’ll be others that enter the market who will. Banking is not finite, it is infinite, which means it is constantly evolving and we’ll need to keep adapting,” he says.

The consensus that emerges is that banks shouldn’t replicate what has gone before – and, indeed, will fail to stay relevant if they do. Banking is becoming an ecosystem with a multitude of players – both from financial and non-financial services, including retail, automotive and telecommunications. They must master the Kardashian-like art of reinvention.

“I think players have placed their stakes in the ground and now it’s about [how] they play with each other, and where in the market they are all working with each other,” says Pierce.

After all, people may still trust the big banks to hold their money, but, in the right context, they tend to trust certain brands way more, observes Redeker. In other words, banks’ status is not unassailable. This is where non-financial players, such as home retailers, e-commerce platforms and telcos, could have an advantage in the everevolving embedded finance ecosystem.

What we’ve seen from our 200-plus customers across the world, is that the financial product has taken a bit of a backseat and experience has taken the front seat

Michael Pierce, Mambu

Commenting on the Spanish telecommunications giant Orange launching its own bank in 2019, underpinned by Mambu’s tech (with now 1.2 million customers across Europe), Pierce says: “I remember seeing this coming in and thinking ‘why is a telco in banking? This doesn’t make any sense’. But then you realise that Orange, as a company, has such a strong brand.

“It is trusted, it is proven, and it has pivoted into the financial space because they’ve been able to maximise on the big data they use, to have better insights, to understand the types of financial products their customers are going to need.”

One final benefit of embedded finance and increased integration of third-party services that is worthy of mention, is the impact on customers’ financial health, as it enables better data-driven insights on factors such as creditworthiness.

London-based B2B Bud Financial, for example, enables regular rent payments to be recognised by credit reference agencies and lenders, meaning tenants can build a credit history in a way denied to them before. Meanwhile, some neobanks are working on chat features where someone can simply ask ‘can I afford this?’ before deciding to spend.

With so many movements in so many different directions, it’s difficult to predict where things are going next, says Walorska. “But I’m really pretty sure it’s going to be more intuitive, more automated, more personalised and a better overall experience – both in B2C and B2B.

“Paradoxically, technology is making the financial experience more human. You have the finance and the technology but the only thing that the user sees at the end is the magic.”