The $300 Billion Embedded Finance Revolution: AI, Payments, and Strategic Growth

Rutger Van Faassen (00:01.784) Hello and welcome to another episode of Banking on Information. Today my guest is David Chung, who is a Partner at Simon Kucher in the Financial Services Practice. Welcome David to the podcast.

David Chung (00:15.224) Thank you, Rutger. Happy to be here and thanks for having me. Rutger Van Faassen (00:18.

594) Yeah, So we always start with that same question for everyone. So here it is for you. Why, David, do you do what you do? David Chung (00:26.

008) So I think I have two, two angles on this or two perspectives on this. think First from a market facing perspective, I enjoy creating material impact for my clients and their businesses. What's going to move the needle and how can I help convince them that this is the right direction to go? And I also like to problem solve.

So applying sound data-driven insights to how organizations go to market. The second perspective is more internal in terms of building a business. So I enjoy building our own business here at Simon Kucher, our own practice. And growing from a team of three when I first started, to one that has critical mass, it's been fun charting our own path and then being able to realize it.

Rutger Van Faassen (01:02.488) Yeah. So you do have that entrepreneurial spirit in you. And not only do you apply that to your own business, but you also help your clients create better businesses for themselves and you like to help them problem solve.

David Chung (01:16.302) That's exactly right. Thinking about what are some of the things that are top of mind for them and seeing whether or not there is a solution or capability that we can bring to the table that might help them accelerate or reach that goal. Rutger Van Faassen (01:27.

724) Yeah. Now, what are the typical problems you help your customer solve? David Chung (01:32.59) Yeah.

So in my role, I have a bird's eye view into all the work that we do going on from a financial services perspective or financial services ecosystem perspective in North America. So from work with financial institutions across business lines, to Fintech, as well as financial services providers and payments. I have a particular focus within that ecosystem on payments and Fintech, as well as business banking. So those are the areas that I typically consult in or work with my clients on.

And more recently, I've been working in the intersection between finance and technology, so specifically in embedded finance or embedded payments. And in that space, we've estimated that there's possibly a $300 billion revenue opportunity, and we're seeing CAGRs of over 20%. Now you ask, Why is this such a huge figure? Well, I think there are three primary trends that we're seeing around the growth of embedded finance and embedded payments.

I think One, there is a convergence of payments and software. So with commerce being more digital and the emergence of Fintech driven solutions, payments gets absorbed in the full retail journey. So as a result, payments gets more deeply integrated into commerce and business management software. So I think that's the first trend.

The second is more demand for merchants to seek all-in-one solutions. So merchants are increasingly aware of their options. So choice of payment providers is often subordinate to the choice of business management software that increasingly come with integrated payment solutions. as an example.

So as a result, what's happening is that merchants demand integrated services, integrated service ecosystems with payments being only one element. And the willingness to pay for discrete payment services decreases while the willingness to pay for integrated business ecosystem increases. So we would say that that's the second primary trend. And then the third is more demand directly from end customers.

So customers are demanding frictionless multi-channel journeys, choice between payment options and alternative payment methods such as buy now pay later, crypto, mobile wallets, peer-to-peer, account to account, and so forth. Customers are also aware of their buying power and increasingly expect rewards for their loyalty. Rutger Van Faassen (03:48.888) Yeah.

No, that's very, very interesting. And yes, absolutely. Payments becomes much more embedded and kind of like you want to be there at the point of payment. You want to give very clear options that are seamless and easy for the customer.

Now, how do you engage with your customers to give them more value? David Chung (04:05.484) Yes. David Chung (04:10.

35) Yeah. So, in describing those three different trends, I'm also looking at it from three different angles. So As an example, From a financial services or financial institution point of view, they are the providers of core financial banking products, such as checking, savings, investments. So helping them think through some business problems there.

The second is around infrastructure providers. These are the folks that typically enable the functionality or provide the connectivity between banking providers, as well as the software providers. And then you have the third angle, the third player in this ecosystem, which are the software and technology providers that integrate financial services into their platform. right?

So For each of these different players in the ecosystem, I tend to work with them on similar problem sets. So answering questions like, what is the opportunity size? Who are their target customers? How does their value proposition compare to others in market?

Where do they differentiate and have a right to win? Where are their gaps? How do they communicate or commercialize their value proposition in an optimal way? And then how do they execute their commercial strategy effectively?

So, in general, we typically help them go go to market in a more effective way across these different types of questions, which typically results in revenue acceleration for our clients. Rutger Van Faassen (05:23.96) Yeah. And if that goes well, right?

And you engage with your customers, how do they describe the benefit that they're getting? How do they talk about that? David Chung (05:33.198) So across the three different business types I just described, in many cases, we are helping them with their overall revenue acceleration.

So In some cases, some of these opportunities are actually realized in a very quick fashion. So as an example, if you're capitalizing on like for like price increases, this is something that could potentially be realized within a couple of months. In other cases where we are actually helping them create a roadmap, Rutger Van Faassen (05:39.406) Mm-hmm.

David Chung (06:01.282) that enables them to reach their potential in the next 6, 12, 18 plus months, depending on their capabilities and ability to invest time and effort seeing this through, that might take a little bit longer. And then in some cases, we are actually supporting them on that journey. So how do we actually help them implement these initiatives?

So In those cases, we're working side by side with our clients to help realize or capitalize on that potential. Rutger Van Faassen (06:22.648) Yeah. And Especially when you go that quick, I can imagine that customers are quite happy with that.

If you can deliver value in a couple of months, that's much faster than most projects they work on. David Chung (06:30.606) Thanks. David Chung (06:34.

176) Absolutely, absolutely. And I think in some cases with some of the engagements that we've worked on, our clients have actually seen return on their investment in our professional services, even within the window of us working with them because of how quickly they're able to realize some of the potential. Rutger Van Faassen (06:47.736) Yeah.

And that's quite powerful. right? Because usually in the financial services industry, it doesn't go that quick. It's usually you invest first and then hopefully a couple of years later, money comes back.

So that is quite a unique thing that you deliver there. David Chung (07:01.164) Yes, absolutely. And I think you've, you've definitely described a financial institutions evolution or a path to revenue acceleration.

As you mentioned, some cases they require technology improvements, enhancements in order for us to, in order for them to adapt how they go to market. And without having that already within their technology roadmap for the next year, sometimes it just needs to wait, and, and wait for that realization potential to come through. But you're right, think some of the tactics and opportunities that we find for our clients could potentially be realized much, much sooner without a huge technical infrastructure upgrade or overhaul.

Rutger Van Faassen (07:41.294) Yeah. And that also makes it easier for decision makers in financial institutions to actually engage with you. right?

Because it's not a long-term payoff. actually, right? When they work with you, very quickly they get the return on the investment that they're making. David Chung (07:56.

118) Yes, that's right. I think that's been, I think One of our value propositions and working with our clients is that there's definitely a mix of opportunities that we help them to identify. Some are near term where they're able to realize that impact very quickly, as I mentioned, and then others which are mid to long term, which helps them actually with their, not only their near term strategy, but also their mid to long term strategy in terms of, are they going to be able to win not only the next three to six months, but also the next one, two, three years down the road.

Rutger Van Faassen (08:22.52) Yeah. Yeah. Well, that's a good bridge to what I like to do.

I like to do a Futures Thinking, which is thinking 10 years out. Now we don't know what the future is going to hold. So we're going to think about a possible future, but can you paint me a picture of what you think financial services landscape might look like 10 years out David? David Chung (08:42.

498) So I'll try to describe it from a couple of different points of view. think I also look to focus it on the payments aspect of it, since that's the area that we've been talking about earlier. So I think one is that much of the existing value proposition of being able to process a payment will become commoditized for the most part. right?

So small and large players will try to disrupt the market, but in a much more mature market 10 years down the road with only modest growth, the key question will become: How will a player differentiate themselves in the market enough to win? Is it the, as an example, is it the customer experience? Is it new features and functions that they're looking to introduce? Is it the optionality or flexibility of what they include?

Is it the support? How well are, Are they providing white glove service as an example to support organizations or is it all of the above? I don't know what that's going to look like. but I, What I do know is that firms will need to stay in touch or in tune with their customers and be able to monetize and articulate that value effectively in order to them.

And then I would say from our perspective, you from a Simon Kucher perspective, what is this going to look like in 10 years down the road? I would say the questions around go-to-market strategy that we address to help our clients 10 years from now likely won't change that much. right? But how we support them with what tools and with what timeline will drastically be affected.

And so we at Simon Kucher are also in process of figuring that out. So given how rapidly the business environment is changing, especially through the AI. as an example. Rutger Van Faassen (09:50.

276) Mm-hmm. Yep. Rutger Van Faassen (10:01.358) Mm-hmm.

Yeah. David Chung (10:15.768) How do we adapt to ensure that we remain relevant for our clients is one of our top agenda items for our business. Rutger Van Faassen (11:05.

411) How do you see AI impact financial services in the 10-year kind of window? David Chung (11:12.206) Yes. So I think AI is actually have, will have impacts across a number of different aspects, whether it be front office, middle office, back office.

I think there are already impacts that we see, especially to you know, making processes more efficient, helping with customer support, which is more market facing aspect to it. What we know is that a lot of financial institutions are, or have already been exploring how AI is going to disrupt their own business. And I think one of the things I have learned recently is that It's really important to understand where these AI capabilities are going to insert within the business, because this will have an impact on how you think about your overall strategy in the next one, three, five years.

But also how your resourcing strategy will look like. as well. as an example, Depending on what AI is going to disrupt, it'll disrupt the operations of how you go to market and how you operate. So, as an example, it could, From a Simon Kucher perspective, as an example, It could disrupt our consultants in terms of how quickly they operate, but also how many we might need in terms of how we typically execute.

But from a middle office perspective, middle office, back office perspective, it brings up the question, do we for example, need the teams that we need today? Or do we use AI to help? and so on? And so from a midterm, longterm planning perspective, it'll be super important to understand what are some of the...

the key use cases that are really going to disrupt the business and then thinking about how is this going to affect the resources and then create a plan around that so that you're able to fill the gap or help to augment areas where you feel like the travel is going, the direction travel is going to head. as an example. Rutger Van Faassen (12:50.948) Yeah.

Now, so We touched upon a couple of points of what a possible future could look like. If they come true, what can we do today to get ready for it? David Chung (13:02.046) so I think essentially what I was kind of calling out earlier is You may not be 100 % accurate in terms of the various use cases that will come up as prioritized or as important, but I think it's important to have that discussion, have that conversation now and what you think the possibilities may be.

And essentially coming up with scenarios on if, for example, these use cases become Rutger Van Faassen (13:25.284) Mm-hmm. David Chung (13:30.794) extremely effective or prominent in the way that we operate, then thinking through in that scenario, what are the implications around how the business will need to be restructured or reoriented to align to that new world?

So I think the thing that What I see most businesses doing at the moment is that they are thinking of AI. I think they're thinking about it in very narrow terms in terms of is this going to help with a specific function or capability, but not necessarily looking at it across the entire organization and how that's going to impact the organizational strategy of the firm. And so I think that's probably the thing I would suggest or recommend is having a deep look that will be more holistic for the business and not just the hot use cases that you think might be supportive or helpful in how you go to market today.

Rutger Van Faassen (14:20.004) All right. Well, that is probably a good point to wrap up this episode. Thank you very much, David, for being on the podcast.

David Chung (14:28.002) Thanks so much, Rutger. I really appreciate it and have a great day. Rutger Van Faassen (14:31.

63) Perfect. And until next time, choose to be curious.