Is the Future of Global Business Embedded? Riding the Wave of Financial Innovation

Speaker A: This is payments innovation. We take you deep into the DNA of digital finance with some of the most respected voices in the industry. Let's dive in. Hello and welcome to another episode of the Payments Innovation Podcast. In this episode we're turning our attention to the wave of embedded finance. It's been labeled an evolution as well as a revolution. And back in 2019 Bain and Company, the global management consulting firm, described the concept of embedded finance being the crucial fourth layer in the technology stack after connectivity via the Internet, intelligence via the cloud and ubiquity via mobile. But that was back in 2019 and a lot has changed in the past five years. So given that the embedded finance market is projected to continue to grow fivefold by 2032, where are we on that embedded finance wave? And is the future of global business really embedded? I'm your host Piers Murray and I'm delighted to have joining me today Sarah Ellenson, principal at EY Parthenon. Sarah, for those of our listeners who don't know you, can you give us a few details about you, your background and importantly what you're up to?

Speaker B: Well first of all thank you so much for having me, Piers. I am a partner at A.H. ernst Young within our uh, E.Y. parthenon strategy practice. I lead our payments and fintech strategy and M and a business working with either incumbents, the banks, financial institutions and payment networks, or working with commercial entities as they are looking to scale and grow.

Speaker A: Why don't we kick off with the 101? What is embedded finance in your mind?

Speaker B: The way I think about it is embedded finance integrates financial services into a non financial service company's. It allows a consumer or business to start consuming financial products outside of the branch or outside of the financial institution within the business's environment.

Speaker A: And in your opinion, how is that then changing the way that businesses approach the idea, the concept of financial services? But also um, what are some of the benefits changes that you see with those waves of embedded finance?

Speaker B: Embedded finance, again, it can be like a very large term in people's minds, but let's just sort of break it down. That could be embedded payments, it could be embedded lending or credit solutions, it could be embedded insurance. Think about an age old example of um, store credit where the merchant was the bank, you went to your general store, you had store credit there and you had financing at the point of sale. Now that's a very organic way of doing it. To move forward you then would have a co brand card. Again that is lending at the point of sale. And if you take that from the general store to the CO brand to where we are today, it's really all about enabling finance and enabling financial services in a much more seamless and integrated way. Still a lot of handoffs, but you don't feel the handoffs. You're consuming the financial product within the workflow or within the purchase transaction itself. Think about the car buying experience. There is often a financing element and you sit down and you're behind a desk and you get these terms, you know, how many years and what do you want to put down? And it's a very manual discussion in the office. Think about that in a more automated way. Think about embedding insurance into that purchase decision. Some of the OEMs are integrating an insurance product into a subscription release price. Think about a payment mechanism embedded into your vehicle for gas, for EV charging and it's easy to see a lot of the benefits and convenience of embedding financial services into traditional purchase experience.

Speaker A: I love that example because it really transforms the primary intention of the customer here, which is to go and buy the car. And the financial service element becomes secondary to the primary customer journey that that individual or in some cases businesses are uh, looking to achieve or go out to do in the first place. You've touched on a variety of different aspects here across financial services. What would you say has been some of the impact, if any, on other parts of maybe the more traditional incumbent financial service ecosystem or incumbent financial service providers?

Speaker B: I always think about when people throw around the large numbers around embedded finance, is it really a net new market or is it a redistribution of the profit pools around financial services? And I think banks and traditional financial institutions and traditional players need to think about, we used to make money here. Some of that's getting moved over here. And how do we continue to either participate in those flows and maybe play a different role, or how do we add value added services on top of so that they can continue to be relevant and not completely disintermediated. So I think as a traditional fi, uh or a traditional player is really thinking about what new roles does this introduce for you? Which customers are going to want you to continue to play the same roles you've been playing and what new customers might you be able to access by playing in the market in a different way?

Speaker A: You articulate that well, this isn't just a binary, we will win or lose some customers. This is about a, uh, change in mindset, potentially business model as well to think about in some cases a partnership, a collaborative approach or brand new Business models that can be integrated into existing financial institutions around the world.

Speaker B: Yeah, you know, I gave an example in the consumer setting of, uh, an auto purchase, but apply that to a commercial setting and maybe not as exciting as buying a new car, but paying invoices. Right. You've got invoices coming in from suppliers. Embedded finance can mean integrating different payment methods. It could mean providing different lending products against invoices or against purchase orders. It could also mean insurance goods and services in transit. So it's easy to get excited about embedded finance even in a mundane area such as paying your bills.

Speaker A: As you said earlier, embedded finance is a very broad topic and I think it can be quite easy to assume that this is a fairly trivial process in some cases. But actually when you talk about not just from a consumer, but from an end business perspective, embedded finance has to be a lot of things to a lot of different people and businesses solving for very, very different use cases with individual challenges in their own right. But it is probably worth calling out that this is a complex, multifaceted new model, let's call it that in some cases has to play a lot of different roles and provide a lot of different functions to huge parts of the financial services ecosystem and wider customers around the planet.

Speaker B: I think you hit on something. When I think about the promise of embedded finance, one of the, uh, challenges is there's humans involved, right? And there's a network of partners that you now need to manage. It's much simpler if you've got a customer and a merchant and it's bilateral, but when you start introducing other players into that ecosystem, um, it becomes more complicated. Now you do that because of the rewards and the benefits that you get from introducing other players. But it adds complexity and it really requires some pretty clear delineation of roles and responsibilities. I, uh, would say that that would be the first thing. The second aspect is really thinking about a capability around partner management. Not every business is very well equipped to manage the group of third parties that they're working with in different ways than they traditionally worked with them. You've got startups, you've got scaled fintechs, you've got financial institutions. And each of them operate in a different way, different cultures. And so having the capability to manage that partner ecosystem is something that probably shouldn't be overlooked from a business.

Speaker A: And you touched on different cultures that can also, I think, span geographies as well, different maturity levels in terms of that service provision. Um, and certainly in my experience this then also starts to span financial services. When thinking about businesses outside of the traditional financial service ecosystem. M We then start to talk about the understanding some of the knowledge that exists or doesn't exist perhaps in certain businesses that all combine to provide this fairly complex melting pot of this idea of quite simple idea of embedded finance that makes it very, very difficult from a service offering perspective and when thinking about new business models, makes it very difficult for many types of businesses and financial services, uh, service providers around the world.

Speaker B: Yeah. So you can think about the challenges that these businesses have and you can think about the flip sides. What's the opportunity that embedded finance unlocks? Let me focus a minute on the challenges. I mentioned that sort of being able to manage a network of partners. I think that is a challenge for some organizations. The second challenge probably that rises up to that level is just regulatory compliance. You enter a new market, you need to understand what roles you can undertake, what are you licensed to undertake and where do you need a licensed participant or a licensed partner. Another thing that needs to be dealt with is how do you manage data that gets into managing data in a way that complies with privacy and security, but also managing data in a way that enables the right decisions, underwriting right or um, actuarial decisions and making sure you're getting the data that was running through this network and you're managing it in the right way. Maybe two more aspects around the challenges I mentioned at the foundation of this is humans, right. And what roles they're playing. But the tech platforms that facilitate all of these handshakes all need to speak together, all need to integrate in the right way. And if the promise of embedded finance is going to come to fruition, that needs to work well. Right. That can't be clunky. And then the last challenge is really around brand permission. I speak to a lot of companies who see what some leading retailers are doing around financial products and they want to participate in that market as well. You know, does a hot dog stand need a credit card? I don't know. So thinking about the brand permission that a corporate has to actually promote. So those are some of the challenges that uh, I would say, uh, companies might need to grapple with in order to really embrace embedded finance.

Speaker A: And um.

Speaker B: Right.

Speaker A: So those are some clear challenges. But again I'm a half glass full kind of person. Let's come back to the opportunities. I think that's where you'd also wanted to head. Where do you see some of these opportunities? And particularly from a cross border, uh, perspective, does that incorporate itself into some of those potential opportunities?

Speaker B: For every challenge that there is for a, uh, corporate that wants to think about embedded finance, or for every corporate that wants to think about expanding globally, embedded finance can actually help solve that problem. If I am a business that's selling in the US market today and I want to enter Poland, for example, I need to be familiar with the local regulations, I need to understand local volume patterns, how do my customers consume what I'm trying to sell. And embedded finance can be a solution to working with the right tech platform and then the tech platform's partners within the region to really bring you almost commerce in a box as you enter a new market. I think that's a really interesting opportunity for embedded finance as you're scaling globally.

Speaker A: I stumbled across a stat uh, that estimated that the US in terms of embedded finance revenue, this was looking at 2022 data, was more than 26 billion USD. The next country down that list was the UK with about $4 billion. Brazil was the leading Latam UM country with $1.8 billion. In your mind, what do you think are some of the factors as well that play into this difference in terms of embedded finance adoption geographically? And perhaps an extension to that question is then across different use cases.

Speaker B: Those are interesting numbers. I think in the US market in particular, two things are probably driving embedded finance and this is more from a consumer perspective. One is the uh, proliferation of an embedded payments model. So just about every software company has a glimmer in their mind to say, hey, there are a bunch of transactions flowing through my software. How do I get a piece of that? And there's some really good business models on how to monetize that. Think about a hair salon that needs some scheduling software. Payments can run through for payments acceptance for the services, but also for payroll and paying out tips and whatnot. Another use case is the buy now, pay later phenomenon. That is another old business model that has been modernized through new technology potentially.

Speaker A: That's a nice segue actually from BMPL into generational differences. You've written a really interesting article about Generation Z and some of the differences in expectations that they might have from a financial service and from a payment perspective. Do you see or are you talking about with your clients, generational differences that may then impact embedded finance now and going forward?

Speaker B: Yeah, so we did put out some research where we surveyed across generations to see what payment preferences were. And as we filtered on Gen Z, there were some pretty clear distinctions. They certainly are biased more towards a debit product than a credit product. What we haven't done in that study in which we get asked a lot about is a little bit more longitudinal, right? Are the Gen Z preferences solely because they're of a certain age today, or do they represent how a generation moving forward is going to look at financial services? I tend to think it's a mix. I don't think it's all one way or the other. But I do think there is a shift certainly for Gen Z in being paid for the data that they are providing. They are very willing to provide information about their preferences, but they'll do it only in exchange for discounts, offers and they feel very much in control of the data that they can monetize for themselves.

Speaker A: And there were some really interesting concepts here. Uh, the idea about data management that probably extends into digital identity as well in some shape or form. But you've also talked about open banking, open finance, maybe even that open data journey that I like to think about as we move from open banking to open finance through to open data. How do all of these different concepts combine with embedded finance to really provide that next wave of how we think about and probably consume financial services?

Speaker B: It's a great question. The identity problem hasn't been solved for for sure and that remains a friction point for commerce and for interactions. And so I think as that gets solved that will certainly add to the seamlessness and sort of pull out more of the friction in financial services.

Speaker A: Uh, and what are the other if any parallels that you see with embedded finance and open banking or open finance?

Speaker B: When you think about open banking? I think about it as I've got banking data in one location that I'm porting over to another provider or platform and putting it to use for myself. And I think that's very similar to embedded finance where I as the consumer I'm m not moving things over but some group of partners or a platform or an ecosystem of partners have taken a financial product and moved it over into the area where I actually want to consume that product. And I think that's a nice analogy with open banking that it's, I'm consuming it where I'm interacting and where I want to be sort of digitally.

Speaker A: I do like to think about these three ever growing concentric circles of open banking to open finance to open data and um, certainly the concept of then financial services and the data underpinning some of those services then being able to reach out into the open data ecosystem, into things like utilities or into travel. For me there are some parallels with the way in which we've thought about and maybe described Embedded finance as an ecosystem, as a market previously. And I think it will be really interesting over the years to see how those two somewhat distinct concepts underpinned, um, by different mechanisms, regulatory or otherwise, start to come together or perhaps to diverge further. I'm sure that there is far more that needs to be done from an ecosystem readiness perspective, let's call it, um, regulatory, perhaps, you know, governmental input into this. But I do think it will be an interesting journey over the coming years to see how these historically different worlds start to collide or not.

Speaker B: That's a great point. I think at some point we'll probably stop using the term fintech and then finance, open banking and it'll just become finance. Right? That will be how it's delivered and how we operate in the world. So I think that that's another parallel between embedded finance and open banking, that if they are successful, the terms will become obsolete and it just becomes banking or finance.

Speaker A: That's a great point and perhaps we are further on that journey. I've talked about this a few times before that I certainly fall into that bucket of echo chambers within a payments industry or within a payments ecosystem that actually when you step back and think about this from an end consumer or end business, end customer perspective, the worry is not around whether this is embedded finance or open finance or anything else. It's can I pay for this invoice, can I get paid for this service as quickly as I possibly can with perhaps a new market that now spans the entire planet, not just the jurisdiction that I had resided in previously?

Speaker B: Yeah, there's a lot of really exciting things ahead.

Speaker A: So on that note, what are the most exciting trends, the potential disruptions as well that you see ahead of us?

Speaker B: So we touched on earlier this notion of identity, right? There's going to be horizontal technologies like AI that will support the innovation around customer identity and authentication. Mundane, but hard not to get excited about the promise of solving that.

Speaker A: And again, as a product person, I love the idea of KYC or KYB going beyond what's been traditionally thought of as a compliance or a regulatory requirement to actually thinking about really understanding your customer segments, really trying to personalize the level of services that you may want to then offer to different parts of that customer base based on the segmentation that you or a gen AI tool has, has helped you create. And ultimately I believe that all of that comes back to fundamental improvements in the end customer experience, whether you're a consumer or a business. But that's an important step change. I believe that that is around the corner enabled probably as you say, by horizontal tools like Gen AI. That is hopefully around the corner and soon to benefit all of us.

Speaker B: So that brings up maybe another innovation or evolution that we're on. When you think about FinTech 1.0, that really started in the retail sector, right. First case was, look, I'm now carrying around a phone in my pocket which is actually a computer and I can access all of these things in real time and I can bank uh, as I'm walking down the street. And that was very much a consumer led evolution or revolution if you want. We are seeing FinTech 2.0 or even 3.0 really make its way into the commercial world. People who are working back office at corporates, in front office at corporates, they are people who are interacting with consumer products and so they have begun to expect the same level of experience and seamlessness. Why can't I have that amazing experience that I have in ordering uh, a car that I have in pain in voice? Right. So it's completely different settings but the expectation becomes very, very real. I think that's another area where we will see a good amount of innovation that frankly that finance helps to solve

Speaker A: and any last trends or disruptions, things that you think are really important for all of our listeners to be aware of as we continue to think about what the future of embedded finance holds.

Speaker B: It's not a great one to end on, so I'm trying to think of a better one. I'll speak for myself and I think I'll speak for you as well, Piers. A little bit like payments nerds. Right? And so as you see new Rails coming online, real time payments, account to account, potentially an identity network, the proliferation of these Rails and what that can mean for embedded finance and for commercial activity is pretty exciting.

Speaker A: I totally agree with the sort of the instant everything mentality that we have as consumers. And the same people who are working in businesses are also those consumers who have those experiences. And I think this is the move to that sort of instant everything which includes then the ability to pay and be paid not just on a domestic jurisdictional level, but also on a cross border global basis is absolutely at the forefront of all of this going forward.

Speaker B: Yeah, instant everything and the transparency into that as well. Right. So if it's not instantaneous, at least seeing where things are along the journey and maybe being able to trace a payment as it moves its way to a supplier.

Speaker A: Brilliant. Well, that was, I think an uplifting note to end on actually. I think that's always really important. To talk about an optimistic future despite maybe some challenges that we see today or around the corner. Sarah, a massive, massive thank you. Full of amazing insight here with the idea of embedded finance. We've touched on open banking as well and talked about the edges of digital identity. And as you said, no podcast would be complete without at least a nod to generative AI. So thank you for including that as well. It's been an absolute pleasure talking to you today. Thank you for joining me. For anyone who is looking to find out a bit more about you, where can they find you online?

Speaker B: It's been an absolute pleasure Piers joining you today. For any more information, I'd love to debate. You can find me, uh, on LinkedIn or.

Speaker A: Thanks, Sarah. And to all of our listeners, thank you for choosing to tune in to another episode of the Payments Innovation podcast. Thanks for joining us here on Payments Innovation. We'd love to hear your thoughts and ideas about the show. Connect with Currency Cloud on Twitter or LinkedIn to find out more. And, um, remember to subscribe via your favorite podcast player until next time.