Embedded Finance

Our thesis around embedded finance is driven from prior experience running the integration of third party services into one of the world’s largest core banking systems and into client applications via APIs.

We believe that in between the distribution of financial services products through either points of sale (car insurance with car purchase) or enormous user bases with trivial customer acquisition costs (WeChat’s 800 million payments customers), there is a large opportunity for orchestrators of embedded financial services to emerge as startups.

Distribution

Viral non financial services applications and points of sale and interaction with financial services.

Orchestration

Aggregators of financial services capability into defined use cases and delivery of polished end products to developers via APIs or end users the B2B2C SaaS products.

Balance Sheet & Infrastructure

Regulated insurers, reinsurers, deposit takers or lenders with balance sheets and ledgers, risk pricers or processors (sometimes provided by orchestrators) and providers of transaction processing rails where necessary.

Economics of Embedded Finance

Financial services products are valuable but not very exciting. Because of this, their customer acquisition costs are high and they do not capture the viral customer acquisition opportunities to grow, that Internet era products can.

Financial services products sit within a regulated industry and regulation is often different by region. As a result, unlike many other sectors, it is inherently a fragmented market. Even if global brands emerge with local regional subsidiaries, the different regulatory markets mean that financial services products can’t leverage the winner takes all dynamics that apply to Internet platforms, stemming from network effects (every additional user increases the value for each existing one).

The principal opportunity in embedded finance is to lower customer acquisition costs by embedding seamlessly into other services while giving those services an incentive for the integration, based on the large customer lifetime value of most financial services products.

Intel Inside and Incumbents

Traditionally, banks and insurers used architecture as branding with unnecessarily expensive architecture designed to convey stability.

Being able to afford such a building gave people confidence that their money was not just physically safe in a vault (an illusion since banks lend out deposits), but that the bank was so good at making money that it could afford to ‘waste it’ on a decent building. Few would be encouraged by a more thrifty bank in a shack.

Today, this confidence is conveyed by well designed, reliable online products and services safe from hacking – and by large numbers of people using them, giving confidence that these products are reasonably priced and safe.

The signaling value of a large user base shows that brand network effects are in play in financial services, even if they don’t have the virality of the products they are embedded in, giving the opportunity for ‘Intel Inside’ style opportunities for incumbents in embedded finance.