Wes Schmidt, Chief Revenue Officer at Alviere.
The future-forward development of embedded financial technology has the potential to completely change the financial services business model. As a disclosure, my company Alviere is one provider of such solutions. In this article, I will break down how embedded finance works and provide readers with three recommendations on qualities they should seek in an embedded finance partner.
Access has long been the missing key to creating economic inclusion, which is why embedded finance’s ability to reach all consumers is so attractive to brands. Meaningful access to financial products via untraditional routes is now possible.
Embedded finance has the potential to revolutionize a brand’s business model. Some large enterprises have already made the move and now offer robust financial products to their customers. For these brands, embedded finance strengthens and deepens the relationships with the millions of loyal customers they already have and provides enterprises with a major competitive advantage of reduced customer acquisition costs.
And for consumers who need better access to financial products, using these services is fueling a new emerging economy through brands empowering mass financial inclusion. By removing barriers typically imposed by traditional banks, brands democratize financial services—expanding financial inclusion and equality across the globe.
How does embedded finance work?
Embedded finance uses a combination of banking-as-a-service (BaaS) functionality and application programming interfaces (API) to integrate bank accounts, payments, lending, investments and other financial products directly into non-financial businesses or platforms. This allows any business or brand to offer financial products directly to both new and existing customers. Embedded finance is changing the face of the fintech industry in mitigating an age-old problem within traditional banking by leveling the playing field for the financially underserved and economically disadvantaged.
Those often overlooked by our current financial system are considered either underbanked, with few options, or unbanked, with no access to financial products. While the barriers surrounding traditional banking continue to plague consumers with low or no credit scores, poor financial history or no access to a physical bank, embedded finance allows the unbanked and underbanked equitable access to digital financial services. These underserved consumers face real challenges as the economy grows towards a digital cashless society, leaving them fewer options to fully engage in the economy.
According to the 2021 FDIC National Survey of Unbanked and Underbanked Households, the main reason consumers do not have a bank account is simply not having enough money to meet the minimum balance requirements. A secondary reason is a lack of trust in banks. The exclusion of access to financial services for this market limits their financial growth and security, keeping people at the lowest rungs of the economic ladder. This removes a section of the population from earning interest, borrowing or investing.
When consumers can’t afford the financial services offered by banks or sense the subtle exploitation in the costs of using traditional financial institutions, where does this leave them? If consumers cannot qualify to open an account or distrust traditional banks in general, who will they bank with in the future? A very likely candidate: the brands they already know, love and trust.
Enabling financial services can diversify a brand’s abilities to do more for its core customers by providing access to financing and investment services with lower fees, higher convenience and more access. It also attracts and serves a larger segment of the market. Offering branded banking products and services to customers provides them with more affordable and dynamic banking options and additional channels for engagement, loyalty and increased revenue for brands.
What should brands seek in an embedded finance partner?
Here are three things brands should seek in an embedded finance solution.
1. A strong offering should be able to provide more inclusive financial services with lower costs, lower risk and higher returns.
With specifically tailored financial services, brands can bridge the gap in customer engagement by building lasting connections to customers, increasing customer lifetime value (LTV) and customer loyalty.
2. An embedded finance solution should allow you to better meet your customers at their point of need and interest.
Brands should seek solutions that can best enhance their visibility into each customer’s financial lifestyle, trends, product demand and general spending cycles. This will allow them to offer the most relevant and timely products and services. A strong solution will help you serve customers more effectively at their point of need.
3. A strong solution should expand both your value proposition and your reach.
Consumers are demanding more from financial services—more convenience, easier access, lower costs and a fully-connected customer experience. With the right embedded finance partnership, brands should be able to increase the value proposition of existing core products and services while significantly expanding their appeal in a constantly evolving market.
Inclusive financial services encourage customer interaction to grow beyond regular purchase cycles into everyday usage and engagement. With the right embedded finance partner, brands can leverage the ability to design robust financial services at scale. Financial products like branded bank accounts, branded debit or credit cards and global remittances create new revenue streams and increase customer retention. Smarter rewards programs, early wage access, savings accounts and peer-to-peer (P2P) payments are just the tip of the iceberg.
What’s next for embedded finance?
The allure of embedded finance for brands is evident. Financial inclusion for the underbanked and unbanked is not an unsolvable problem. Servicing a market of consumers in need of new financial products and services generates new revenue while expanding customer acquisition at lower costs. New revenue streams that grow over time, enhance customer loyalty and build a well-rounded business proposition should be the primary focus for companies seeking to leverage a partnership with an embedded finance provider. By allowing for wider access to financial services, embedded finance has the potential to bring millions of people into a more secure and rewarding financial landscape.