Regulation & Standards

Unlocking the potential of embedded finance

Published: Nov 2022

As embedded finance continues to evolve, there is an opportunity for treasurers to explore how these developments could help their businesses. So, what does embedded finance really mean, what’s driving progress in this space, and where should treasurers begin?

Among the numerous developments reshaping the financial services landscape, embedded finance is one of the most significant. Recent research by Bain & Company found that financial services accounted for US$2.6trn of US financial transactions in 2021 – almost 5% of the total. By 2026, the transaction value of embedded finance is predicted to rise to over US$7trn.

A significant driver of embedded finance is the ability of companies to add to their existing revenue streams, launch additional products and improve the user experience for their customers. But what do the terms ‘embedded finance’ and ‘banking-as-a-service (BaaS)’ mean? And, what do they mean for corporate treasury teams in particular?

Understanding embedded finance and BaaS

Definitions vary, but in general terms embedded finance can be described as the provision of financial services by non-financial companies. A retailer, for example, might offer customers insurance for certain goods at point of sale.
“Embedded finance is where financial products are made available seamlessly within the customer journey of a non-financial platform, as and when they are needed,” explains Jonathan McPhail, Lead Client Partner, Banking-as-a-Service at Finastra. “By embedding the products, they can very easily be tailored to the customer and circumstance in which they are presented.” He adds that financial institutions expose their services for consumption in this way via BaaS platforms, which enable the connectivity and embedding of their products.

Aman Narain, Global Head of Platforms, Commercial Banking at HSBC, adds that financial services have “evolved from being someplace you went to (a branch) to being somewhere you needed it (in your pocket). Embedded finance, we believe, is the next phase of this evolution where banking is integrated or embedded into something you are doing, typically in a non-bank environment.” He notes that BaaS is “the tool or the infrastructure, including APIs, that enables others to consume banking products seamlessly in a non-bank environment.”

A variety of financial services can be embedded in this way. While embedded payments might be the most ubiquitous, says Narain, “you can equally embed lending, trade finance, or foreign exchange, as we recently announced with our partner Finastra – or even a suite of services, which we offer to Oracle NetSuite customers.”

Drivers and enablers

Several factors are driving progress in this area. François Masquelier, CEO of Simply Treasury, says that while embedded finance does not derive from legislation, it is one of many innovations to be enabled by the adoption of open banking with PSD2. “Indeed, this regulation has allowed the generalisation of APIs in the banking world, a practice that has also extended to insurance and investment,” he says.

Masquelier points out that embedded finance is based on API systems – “Indeed, on the use case allowing to extend the distribution of financial products to any website or mobile application, embedded finance connects via APIs to the information systems of banks and insurances to offer a seamless pricing and subscription to the end user. It is via similar systems that the underwriting information is then transmitted to all the CRMs involved.”

Silvia Mensdorff-Pouilly, Head of Banking and Payments, Europe at FIS, cites two key drivers of development. “On the one hand, digitalisation and interactable technology is enabling the embedding of financial services in customer journeys,” she says. “On the other hand, consumers are increasingly expecting transactions to become easier, faster, and more transparent.”

As corporate treasurers begin to experience the ease of embedded financial services being offered to them as consumers, says Mensdorff-Pouilly, they will also expect to have similar experiences in the corporate environment.

Aggregators and orchestrators

Another notable feature of embedded finance is what it means for the competitive landscape. François De Witte, Senior Project Manager – Member of the Board of Directors at Transfer1, notes that the rise of embedded finance comes against a backdrop of fading barriers to entry that have traditionally protected the financial services sector, with incumbents facing a multitude of disruptive shifts. “On the other side, customers expect real-time, seamless, and intelligent financial services,” he says. “Regulation drives further competition.”

With new providers working to compete with incumbent banks, they have been prompted to produce new solutions that leverage a greenfield environment to benefit from innovations such as cloud, microservices and APIs, adds De Witte. “The new challengers are born native to the cloud and provide ‘build-your-own-platform’ solutions via modular, microservices-based and API-first architectures.”

He adds that these are both aggregators and orchestrators. “A successful orchestrator aims to leverage financial data and capabilities, brand equity and product supply on a group level,” he notes. “Individual ventures remain autonomous and focused enough to innovate and stay close to external or internal client needs, such as wealth management, P2P payments, business banking, etc.”

Implications for treasurers

So how could treasurers benefit from developments in embedded finance and BaaS? Mensdorff-Pouilly explains that treasurers could gain access to flexible or needs-based embedded lending options, such as invoice financing, trade financing, or factor invoicing, for example. “These could be embedded in their receivables or payables management system via an embedded lending API, and would enable working capital optimisation,” she adds.

As major purchasers of financial services within their organisations, treasurers stand to benefit immensely from embedded finance, says McPhail. “With improved access to tailored financial products, such as payments, foreign exchange and financing, presented when they are needed, treasurers will be able to optimise the cost and reduce the time taken to select and acquire the services they need.”

Enrico Camerinelli, Strategic Advisor at Aite-Novarica Group, explains that BaaS enables treasurers to select and use banking products directly as part of a brand experience. “With embedded banking they can move from picking and paying for discrete products to enjoying a unique community experience in which the same products are ‘pulled’ based on the context that constitutes the user’s experience at that moment in time,” he says. “Users will also want to move money around, deposit that money, borrow or lend it, and generate interest.”

Embedded finance is where financial products are made available seamlessly within the customer journey of a non-financial platform.

Jonathan McPhail, Lead Client Partner, Banking-as-a-Service, Finastra

Understanding the use cases

Narain argues that any business that would like to improve its customer journey by reducing friction could benefit from integrating a finance offering, adding that BaaS can help businesses broaden their customer offering by introducing complementary products or services at the point of need.

HSBC, for example, has integrated banking services into NetSuite Accounts Payable Automation. “The service will accelerate cashflow and accounts payable (AP) processes, such as paying vendors and processing invoices, for customers,” says Narain. “Using NetSuite, users will be able to access payment discounts and cashflow regulation.”

The bank is also working with Finastra to offer its FX services to mid-tier banks, which “allows participating banks to deliver a wide range of currencies to their customers through branch networks and other retail channels, without requiring any additional technology integration.”

Other use cases and opportunities include:

  • Working capital optimisation. “Many businesses are overly reliant on expensive catch-all standard financing products, such as overdrafts and in many cases credit cards, to finance their short-term borrowing needs,” says McPhail. “We see this as a great example of how harnessing the data available in the business applications, which become the embedded finance venues, can enable identification of and access to right-sized financing options, which can be significantly cheaper than the catch-all standard financing products.” He adds that companies most likely to benefit from this are those that are included in extended supply chains and have high borrowing costs. “Building on the financing use case, we expect to see complementary products around risk mitigation (eg foreign exchange, interest rate) provided as packages in the same venues,” he says.
  • Point of sale finance (POSF) solutions. With B2B e-commerce becoming a critical sales channel for corporates, POSF solutions play a key role in helping them grow and retain their customer base, increase sales and gain an edge over competitors. “Sellers can introduce a POSF proposition which gives their customers flexibility to pay on terms or over a period,” says Narain. “Sellers still get paid in full, up front without needing to wait for their customers to pay – meaning there is more cash flowing into their bank account, making resource allocation, purchasing, and business planning smarter and easier.”
  • Embedded payments. De Witte notes that embedded payments enable consumers to make payments at the touch of a button and without switching between apps, thereby speeding up the checkout and payment settlement process and improving the customer experience. “By providing embedded payments to customers, companies can increase their revenue, customer sign-up rate, customer loyalty and gain powerful analytics insights,” he adds.
  • Embedded lending. “Embedded lending lets someone apply for and get a loan right at the point of purchase,” says De Witte. “The Buy Now Pay Later (BNPL) scheme is an example. This removes the need for excessive paperwork and cumbersome processes and enables the customer to get loans at the tap of a button. Another example is B2B lending.”
  • Embedded investments. Embedded investments, meanwhile, “simplifies the investment process by offering a single platform for investing and managing money,” De Witte explains. “It allows users to put money in different financial instruments without leaving the platform, which is a safety measure.”

Impact on corporate banking relationships

With embedded finance and BaaS blurring the lines between banks and non-bank providers, how could these developments affect corporate banking relationships in the future? And is there a risk that banks will become disintermediated?

As Camerinelli points out, embedded banking involves the integration of financial services into non-bank products and business processes. “Companies do not have to hand over the customer relationship to a bank,” he says. “They can maintain direct customer contact throughout the entire value chain.”

Mensdorff-Pouilly observes that financial service providers that can offer embedded finance and BaaS to their corporate customers will be able to strengthen their relationships and find new markets. “However, financial service providers that miss the boat on this may find themselves disintermediated in their corporate relationships by those offering more advanced digital services,” she adds.

On another note, embedded finance can also help financial institutions reduce the cost of serving their customers, says Finastra’s McPhail. “With a lower cost to serve, financial institutions will be able to more readily position their value-added products, in risk-mitigation and advice, on a broader scale,” he explains. “Embedded finance will not replace relationship banking – it will move it to a different venue which benefits both sides.”

Getting started

With the evolution taking place in transaction banking, HSBC’s Narain argues that “now is the time” for treasurers to consider reviewing their current treasury set-up with an eye to the future. “Against the backdrop of rapid digitisation and the arrival of exciting solutions encompassing embedded finance, treasurers have a unique window of opportunity,” he adds.

Camerinelli suggests that for companies seeking to deliver financial solutions and experiences to their customers, the best path “is to partner with financial services providers that have everything in place today.”

“The provision of financial services requires a license, and businesses partner with qualified banks or financial services providers with corresponding licenses,” he points out. “The fintech players best suited to offer embedded banking services are those with proven experience delivering agency banking – not simply holding an electronic money institution (EMI) license – and that have a bank license to develop BaaS products.”

For treasurers looking to take advantage of opportunities in embedded finance, Mensdorff-Pouilly of FIS suggests starting off by looking at working capital management tools and linked financing. She notes that this is currently “greenfield space”, given that most current embedded finance propositions are designed to serve retail or small and mid-sized business (SMB) customers. Nevertheless, she says, “it presents an interesting opportunity for industry members to come together and co-create a new solution.”

Asking the right questions

When reviewing embedded finance proposals, De Witte says treasurers should raise the following questions:

Trust: does a corporate have enough trust in the brand to interact in a financial context? Will they feel comfortable sharing their financial data with the embedded finance provider and trust that their privacy is protected?

Relevance: does the financial solution make sense for the corporate?

Business impact: can the solution provide sufficient value to the corporate, such that it incentivises adoption and usage? What is the value that this generates for the business? Will it be meaningful to the business?

Future developments

While the focus has so far been on services for consumers, it is likely that future developments in embedded finance will result in more opportunities for treasury teams.

“The key tenet of embedded finance is that it allows non-financial companies to embed financial services within specific contexts in order to streamline processes, broaden value creation and unlock unique business models,” says Mensdorff-Pouilly. “From a treasury perspective, embedded lending solutions seem like an obvious place to start, but in future, there may be additional use cases, such as B2B embedded loyalty reward programmes that can strengthen the buyer-supplier relationship.”

Could these developments give rise to a new breed of embedded treasury or treasury-as-a-service offerings? “As a new process, embedded finance brings a lot of ambition to move the financial industry forward,” comments Masquelier. “As a consumer, we will have access to many existing and new products. Now, could we talk about ‘embedded finance’ for treasurers? Interesting question.”

He suggests that banks could include in their banking service offerings elements such as treasury solutions, KYC platforms, cash flow forecasting tools and treasury-as-a-service offerings. “Banks could embed services into their offering, even if not pure banking products or services,” he adds. “I am convinced the banks will have to differentiate by offering other IT solutions to corporate customers.”

As Masquelier points out, this could be a way for banks to differentiate their offers, increase profitability, compete effectively, gain customer loyalty, enhance the customer experience – and enable customers to access better quality information, for example in the area of cash flow forecasting.

“We are only at the end of the beginning phase of embedded finance,” concludes HSBC’s Narain. “As the pioneers learn from their lessons and more players start to offer solutions, I believe the foundation of success will be based on the ability to develop the muscle to cocreate capability.” As such, he predicts that cocreation between clients, banks and fintechs will form the basis of solid relationships in this new era of collaborative working – “especially where BaaS is concerned.”

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