Mark Munoz,Managing Partner, Vectr Fintech.
As big tech races into Fintech, it has lifted the curtain for a new kind of normal: any digital service can become a Fintech player. Regardless of sector or geography, by leveraging their distribution network, a company can offer financial services and gain a deeper insight into their customers, as well as capture a larger percentage of their wallet. The new normal for any brand then is a bottoms-up demand to enter into Fintech, and this is in large part thanks to embedded financial technology companies.
Embedded finance, which is essentially a merger between banking-like services with non-banks or through a digital enabler (think API), has become a growing trend. It potentially touches on every aspect of a user or a business’s financial life—from banking, lending, and payments to insurance, trading, and much more.
The benefits of adopting such technology are clear: businesses can build a richer and stickier value proposition, and hence increase the lifetime value of each and every customer. A poor implementation, however, can create a frustrating user experience and backfire. In fact, embedded finance as a market category is still in its infancy and will continue to evolve in the foreseeable future.
- Embedded finance has a market potential of $7 trillion by 2030 as non-banking companies are eager to take a slice of that pie. That is more than double the aggregate value of the world’s top 30 global banks.
- In payments alone, embedded finance’s revenue in 2020 stood at $16.1 billion, and is forecasted to reach $140.8 billion by 2025 at a staggering CAGR of 54.2%.
- Embedded insurance represents a $3 trillion in market opportunity as the “protection gap” doubled between 2000 and 2020.
The upside for this type of enablement technology is to significantly broaden the playing fields for both banks and non-banks as silos between different industries can be broken down. With embedded finance, traditional financial services providers can dramatically expand their distribution networks and gain greater access to their customers’ assets. Through embracing Fintech, the likes of J.P. Morgan and Citibank have found new avenues to profitability while reinventing their corporate images.
For non-banks, look no further than Grab. Nine years ago, few would have imagined the Singaporean ride hailing company to emerge as a formidable Fintech player, offering payments (GrabPay), enterprises, microlending (GrabFinance), insurance products (GrabInsure), and investment solutions (GrabInvest) services. In 2020 Grab’s financial unit saw a 40% increase in revenue from a year ago, thanks to accelerated digitalization across Southeast Asia on the back of the Covid-19 pandemic. The impressive growth enabled the unicorn to raise approximately $300 million in January, a month after it obtained a digital banking license at the end of 2020.
How did embedded finance get here? In the past two decades, there have been four important innovation waves in software business models that enabled Fintech to multiply its reach today:
1. Pre-2000s: On-premise + licensing softwares (Oracle, SAP) unlocks access for large enterprises
2. 2000s: Subscription-based SaaS platforms (Box, Workday, Salesforce) reduced/eliminated operational expenditure requirements, unlocking access for small to medium-sized businesses and enabling APIs and embedding applications from strategic partners
3. 2010s: The rise of bottom-up i.e., freemium / trials models (Zoom, Dropbox, Airtable,) that unlocked access for individual consumers and the ability to pay at the point of engagement
4. 2020s: Embedded Fintech for new verticals (PAKT, Episode SIX, WalletEngine) unlocks new potential financial services revenue streams for digital businesses. Revenue is a combination of SaaS and consumption-based models
Game-changing Innovations Drive Growth MultiplesMarket penetration will continue to deepen given that embedded finance can help Saas businesses to increase revenue per customer by as much as five times. The opportunities it promises are spawning three interesting investment themes:
1) Finding the next payment service disrupter;
2) Banking-as-a-service or technologies that allow non-bank brands to offer financial services;
3) Vertical Market Additions, such as fitness, construction, property, or other sectors that can offer insurance or other financial products.
Embedded finance, which is essentially a merger between banking-like services with non-banks or through a digital enabler (think api), has become a growing trend
At Vectr Fintech, we continue to see game-changing companies that can both solve challenges and grow a brand’s revenue and market share through embedded finance. Two examples include:
- Gigacover: provides insurance and financial services to gig workers that man the many on-demand services platforms across Southeast Asia (Gojek, Lalamove, FoodPanda, AXA Insurance). Through the Gigacover app, these platforms can offer contract workers a variety of insurance products, access to healthcare, and even loans. The platforms benefit by becoming more attractive to their workers, as well as ensuring that their workforce remains healthy, secure, and has access to the right financial products.
- PAKT: still in stealth mode, has APIs that allow any qualified brand to offer auto or homeowners insurance. The user experience is seamless and can be embedded as part of an existing subscription service or as an add-on using a brand’s loyalty points.
Everything is FintechThe myriads of companies in various verticals going into Fintech is the necessary infrastructure needed for the massive transfer of wealth going to Gen-Y and Gen-Z, where the future is primarily driven by convenience first. This makes delivering these services via brands where consumers already have built relationships and trust even more important to drive adoption. Every brand must look at how they can embed financial and insurance services into their customer relationship as customer retention and loyalty strategy.
Making transactions both easy and high value is paramount. Big tech realized this in 2007 when Amazon launched Amazon Pay, and soon others followed. The new normal now is to ensure every business can offer a suite of financial services that are aligned with its brand as well as customer relationships. With such a big market opportunity, there can be (and we believe will be) several winners. But winning will require all stakeholders to be open to new models and processes and for regulation to keep up with the demand for access. There is undoubtedly a long way to go, and the innovation wave powered by embedded finance is just getting started.
