How it works: The Embedded Finance value chain
We are entering the next inflection point in financial services, which has the potential to be just as significant over the next decade as the previous rise of fintech. This is the advent of Embedded Finance, in which the digital experiences we have in both our financial lives and our 'non-financial' lives are converging. The successful delivery of financial services products to the end customer is a coordinated effort by different players or partners in the Embedded Finance value chain.
The graphic below shares the most common and mature interplay of participants:
Expanding on the value chain:
Starting with the end customer - and their context:
The end customer is any existing customer of a non-financial company's product or service. The user has a particular end goal that may require financial assistance or a customized financial solution. Situations like making a payment; getting a loan; insuring something - all in the context of buying a non-financial product or service from a brand that they already deal with.
Looking at distributors or embedders - brands with their own customer bases:
A distributor or embedder is the company from which an end customer chooses to buy an existing product or service. The company has an existing customer base within which engagement, loyalty, and retention are key priorities. They notice that some customers drop off at the point of sale or realize that they can offer their customers goal-adjacent services which enhance the user experience - and by extension, help the company reach its goals faster.
Examples of distributors include:
Uber - when a customer needs to pay for a ride (embedded payment - the oldest example of EF)
Apple - when a customer takes a loan to pay for a new laptop or phone (embedded lending); or
Betterment - when a customer opens up a high-interest savings account (embedded banking).
The opportunity for technology firms as enablers:
Distributors seek out technology firms/enablers to act as enablers of financial services to their end clients. Technology firms create the infrastructure to connect financial products from banks to distributors via various plug-ins and API’s. Distributors do not need to work with banks directly (which can be a lengthy process) and can design the service for a seamless customer experience with their branding/ user flow. Technology firms looking to fill this need usually do not manage the financial products provided to distributors - they source this from financial service providers or banks.
Examples of technology firms include:
Q2 & Helix
Treasury Prime
Bond
Unit
and more recently Marqeta & Galileo
Banks as a bedrock in the embedded finance value chain:
While banks/ older financial services firms may not be the fastest-moving participant in this value chain, they have a distinct advantage regarding the regulatory, risk, and compliance infrastructure needed to manage financial services products. Technology firms provide a passage through which these services can be delivered to distributors - and, thus, the end client.
While the process may seem linear, as Embedded Finance matures, many versions of this chain may develop: More banks may create their own APIs and provide services directly to the distributors. Other technology firms may become motivated to provide specific financial services products directly to distributors to increase their profit margins. New neo-banks may pivot to solely providing financial services products to distributors. We now have a front-row seat to watching this trend evolve.
Would you like to work with Ulysses Partners on developing your Embedded Finance strategy? Reach out to our team today: info@ulysses-partners.com