20 Dec 2021

The innovation race is on...

All the way back in 1998, I was working at a company called Razorfish. We built websites for big American stores like Walmart and Walgreens as well as helping historic financial institutions like Charles Schwab take their services online. A year after I joined, we were invited to meet with one of the big German fashion houses in New York to discuss how we could help them. Our answer was a simple one: we want to build you a website so you can sell your items over the internet.

In 2022, that seems like the most basic starting point for any commerce company, no matter the size. In 1999, we were asked, with all seriousness, “What’s a website?”

I see that same level of puzzlement today when I’m talking to retailers about embedded finance. But I also see that same level of potential. I see how seismic it’s going to be. But, just like in 1999, this isn’t about the future. The future is already here. As are the companies taking the time to understand, adopt and benefit from embedded finance.

Before I go any further, I should probably tell you what embedded finance actually is.

Embedded finance building on Banking-as-a-service (BaaS) or Insurance-as-a-Service is, as the name suggests, the embedding of smart banking and finance products into the commercial sector and non-banking products. Klarna is a great example. E-commerce businesses partner with Klarna to offer their customers a series of short-term loans exactly when they need them most, right at the point-of-sale (POS) which is the point of need. Genius.

But the possibilities go far beyond just short term, POS loans. At its peak, embedded finance is about offering an ecosystem of personalised services that rapidly improves a brand or merchant’s offering. It’s about offering consumers additional, personalised services based on their own spending behaviour and needs.

Think of a car that pays its own parking tickets. A digital ski-pass merchant that offers its own short term extreme sport insurance. Airlines and hotels that offer travel money or budgeting tools. Wealth management services triggered by high value purchases.

And that’s just the start.

As we go about our lives using our debit and credit cards, we’re leaving a footprint. Think how Google uses data to monetise search, how Facebook uses it to monetise relationships. The adoption of embedded finance allows any business with a large customer base, whether it’s retail, wholesale or B2B, to further monetise spending itself.

Evidence shows that modern customers expect – and want – more from their retailers. Especially when it comes to financial services. According to one report from Cornerstone Advisors, most consumers under the age of 55 would be willing to open an Amazon checking account if it came with benefits such as identity theft protection, roadside assistance, travel insurance or product discounts.

Nowhere is this shift more evident than in finance itself, where challenger banks like Starling, Monzo and Revolut, among hundreds of others, have made significant moves over the last few years. It used to cost $30m dollars and take six years to build a bank, now you can offer almost all the services a traditional bank does with a few tens of thousands of dollars in a couple of months. Unencumbered by the legacy issues of the brick and mortars, challenger banks have been able to easily integrate the services of others in the sector to increase their offerings.

Their rise shows three big things. One, the acceptance and desire of consumers to use non-traditional institutions for their financial services. Two, the desire for a personalised ecosystem of services and three, that profitability lies in that ecosystem.

Of the three challengers I’ve mentioned, two things really separate Starling from Monzo and Revolut. One is that it’s consistently profitable. The first of the challenger banks to become so. ​​The other is that it has the most diversified revenue stream. That’s no coincidence.  When it finally broke even in 2020, just 45% of its revenues came from card transaction fees – the main earner for challenger banks.

But these services don’t just need to be for banks. The incredible thing about embedded finance is it allows companies to offer their own customers services that were previously the domain solely of banks.

The difficulty with challenger banks is they are famously un-profitable because they prioritize growth. Retail businesses, on the other hand, tend to turn a profit. That means you can add profit making financial services to an already profitable (or successful) business. It’s no real surprise, then, that some estimate embedded finance could be worth 6.3 tn€ over the next ten years.

How though, if you’re a retailer, do you begin to build this ecosystem and offer these services? That’s where companies like mine, AAZZUR, come in. We’ve partnered with some of the biggest names in finance and insurance like Wise, Railsbank, Contis, Additiv and others so retailers can easily integrate state-of-the-art financial services into their offerings. These services are grouped into life events like getting married, buying a car, purchasing a first property and are offered to customers based on their spending activity.

Our process is always the same. The outcome, however, is not. That’s how we view our services. We talk to retailers about their customers. What do they do? What patterns are there? What sort of services might they like?

We then create data triggers that would identify potential product sales, offering them services they actually need when they need them. This can all be done with one integration as we’ve already integrated with the necessary providers. It’s a turn-key solution designed to attract and retain customers, earning retailers additional revenue on purchases their customers make.

Like web technology in the late 90s, many people don’t fully understand embedded finance so they ignore it. Just as I knew then, I know this is a mistake. “Innovate or perish” is what I like to say.

There’s an infamous CBS interview from around that time with the founders of my old employer, Razorfish. In it, the interviewer pushes them to explain exactly what it is that Razorfish does. It did not go well. Unable to put it into language the interviewer could understand and opting instead for marketing and tech jargon, they floundered, giving multiple answers to ever increasing levels of interviewer disdain.

Despite this, there was an answer that, as someone who understood what Razorfish did, really stuck out to me. And if someone asked me today, in 2022, what those of us involved in embedded finance do, albeit with a little more context, I’d probably still give the same answer:

“We provide services to companies to help them win.”

The original article can be found here.

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