How Embedded Finance Products Are Taking a Bite out of Banking

Fintech is enabling businesses to do more with less. As companies embed financial services into their products, the future of banking is under threat.

What is a bank? Like, what is it really?

Once you peel away the layers of systems and regulations, the fancy branch offices, and the armies of smiling suits, what’s left?

Put simply, a bank persuades customers to deposit money and earn a low interest rate. Then, it makes money on the deposited money by lending it out at a higher interest rate.

These deposits and loan repayments are what make a bank tick—and grow. However, they depend on customers, which may soon be in scarce supply.

Companies with no previous financial products are taking customer-centricity to a new level, introducing services like financing and integrated payments that deepen their relationships with customers at the expense of banks. This new approach, called embedded finance, is an existential threat to the banking industry.

Customer Experience: The Driving Force Behind a Financial Revolution

Embedded finance isn’t an intentional attempt to overthrow banking; most companies are just trying to meet customers where they’re at (in-app, for example) when it comes to payments. With insight into customer earning and spending, providing more financial services is convenient and beneficial to both parties. It just makes sense.

Big tech has already been catching on to embedded finance in a big way. Recently, Facebook announced their new Facebook Financial initiative. A dedicated group will focus on embedding financial services like Facebook Pay inside messaging and apps like Facebook Shop. While traditional payment options are still available, the infrastructure now exists for customers to stash their money more conveniently within the platforms they already use every day, no bank account or credit card required. 

Giants in the eCommerce space like Shopify, Paypal, and Stripe are taking it one step further. These platforms handle payments and have detailed data about users’ businesses and finances. Recently, they’ve been using that data to offer competitive business loans based on actual sales, revenue, and forecasted income. Since these platforms stand between customers and merchants, they can lower their lender risk by automatically collecting payment when merchants get paid.

It’s not just commerce, either. Last year, Uber rolled out Uber Money to provide debit accounts and cards, credit cards, and a digital wallet for contracted drivers and couriers. Now, eligible drivers will also find a Loan section in-app and can apply for loans at 0% APR with no fees or credit check and the option to use a percentage of earnings for repayment. No branch visits, no more mountains of paperwork—no brainer, right?

When companies that already have customers’ attention provide banking in the same place, they improve their customer experience, and give banks a run for their money.

FinTech Startups are Laying the Groundwork for Embedded Finance to Scale

Imagine you wanted to start a software company twenty years ago. You would have to buy a server and physically hook everything up yourself. Today, that’s unnecessary. You can get an AWS account in five minutes and be off to the races.

The same is now true of financial services. You can easily use Marqueta to offer credit cards, Plaid to connect customers to their banks, or any other number of platforms to easily collect payments or offer credit. Fintech startups are bypassing banks and shaping the future of banking.

Embedded finance isn’t new. Retailers like Costco and Walmart have provided their own closed-loop credit cards for decades, and even old-school store credit looked a lot like the embedded finance we see today because it kept money out of banks. The difference now is that the internet enables a fully-integrated banking experience on a massive scale. Once this experience is built, it can be infinitely replicated thanks to existing fintech infrastructures.

It’s not a matter of whether embedded finance will disrupt banks, but when.

What Does This Mean for the Future of Banking?

For a glimpse into the future, China’s Alipay may offer some insight. Alipay is Amazon competitor Alibaba’s ubiquitous mobile and online payment platform. Today, people across China use it to pay for everything from train fare to retail products, online or offline. The platform saw $15 trillion in transactions last year, and its parent company, Ant, is set to make an IPO of over $200 billion. 

You could make the argument that compliance requirements and regulations in the US will keep non-banks out of the banking game for decades to come. That would make sense if only fintech startups were involved, but Facebook is the fourth-largest internet company in the world, and big tech has a history of using resources to lobby for legislation that favors them.

Massive companies like Google, Apple, Uber, and others on similar trajectories have the advantage of intimate customer data and relationships, as well as influence. It’s hard to imagine they’ll let embedded finance be regulated like banks without a fight.

And if you’re a traditional bank, it’s time to start gearing up for a battle of your own—one that isn’t necessarily going to be on home turf.

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Sandeep: Tell me a bit about the early part of your career.

Tom: I spent a decade helping to build start-ups focused on application and database software. This was where I learned how to sell and do business development. I was fortunate to be part of one company going public and another being sold to IBM.

Sandeep: What is something you learned during this time that helped you with consulting?

Tom: I began to appreciate how different customers achieved varying levels of success with the same foundational technology. This made me understand just how critical getting your team and process right can be.

Sandeep: This is something I only came to appreciate years into consulting, especially after the sale of my first consultancy to Capital One.I saw teams in different parts of the company trying to solve challenges like real-time messaging. Same corporate culture, same technology, same internal support mechanisms. Night and day outcomes.

Tom: We saw a lot of the same thing after selling our practice to EMC (sold to Dell in 2015). This is probably the thing I'm most proud of when it comes to the teams I've helped to build: the ability to perform well in a variety of contexts, sometimes in ways that inspires the client team to up their game as well.

Sandeep: Yes. It's particularly cool to see your team succeed in individual ways after an skills definitely translate into the corporate environment.

Tom: Totally. We have people who've stayed on at Dell and risen up the ranks, while others took the opportunity to become successful executives at other Fortune 100 companies....or to start their own agencies and startups.

Sandeep: We've both been around a while. My first consulting project was a Y2K thing for Cisco back in 1998. You've been around a little longer than that :). How do you think consulting has changed most during the past five years?

Tom: I think because there is so much infrastructure available now, consulting has become more delivery and outcome-oriented. A better blend of strategic and tactical. Public Cloud has also enabled velocity to increase at a pace unfathomable 5 years ago.

Sandeep: What has stayed the same?

Tom: It's still mostly about people. People who thrive on change and are focused on their personal and professional development. I love that this has not and will not's what I love about consulting.

Sandeep: I know you're adjusting your work style to COVID. You're still a dude who clearly prefers to drive an hour for a socially-distanced hike or outdoor meeting over Zoom any day of the week :) But personal styles aside, what is specifically compelling about a remote agency during the era of COVID?

Tom: Kunai has been remote for years, which gives them an inherent advantage. There is something about the communication and management styles that just works in a way that other organizations are still figuring out.

Sandeep: Yeah, I think what a lot of people fail to realize is that remote work isn't just office work over Zoom. it's an entirely new paradigm. There needs to be an understanding for asynchronous efficiency...and this just takes time and effort to develop. How do you approach remote work and family? What are you learning about separating work and personal time?

Tom: No matter what the form of interaction, Focus. Be present. Quality over quantity. The best weeks are the weeks where I proactively schedule work and personal time. Neil (Kunai's Head of Delivery) shared a great quote with me "With discipline comes freedom." When I am proactively addressing the majority of my professional and personal commitments, I find I earn a little flexibility. A little freedom.

Sandeep: Tell us about a business hero of yours that I may not have heard of before.

Tom: Paul O'Neill is someone you may not know. His work in both the public and the private sector created a profound impact

Sandeep: We are both over forty years old :). How have you learned how to work smarter during the past decade or so? What do you wish you knew about consulting when you were 25 that you know now?

Tom: Consultants want to make lasting change. Lasting change is often not the act of a single person. Today I work much harder bringing others along on the journey.

Sandeep: Last question. What are you doing here? :) Why join a small consulting company this late in your career when you could have a cushy job somewhere else?

Tom: I love a good challenge personally and professionally. When I turned 40, I decided I would run a 10K every Thanksgiving weekend and try to have my finishing time be less than my age. With the exception of one year where I did not run due to a health issue, I have met the goal. I also recently completed the Leadville 100 Mountain Bike race. So, I guess I'm here because I'm a glutton for punishment :) Jokes aside, our customers have a job to do and I intend to put Kunai in a position to execute flawlessly on their behalf. I love committing jointly to audacious goals for our customers and our business.

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