KPMG defines Embedded Finance and its use cases

Here are key highlights from the report,

"Harnessing the power of embedded finance: There’s a revolution coming," KPMG defines embedded finance:

The integration of financial services (FS) into non-financial businesses – is fast becoming a norm internationally, with established players in industries from retail to telecoms. However, despite clearly burgeoning customer demand for ever-greater convenience, adoption of embedded finance remains far from universal.

Removing the friction from consumer experiences

Offering a smoother path to customer engagement, KPMG outlines significant differences in the production, distribution, and consumption of financial products compared to the well-known traditional banking value chain.

These differences play out in the time and effort on both the part of the offering brand as well as the end-consumer. These differences are most apparent in both revenue opportunity and customer experience. Here are the distinct differences between traditional banking and bank functions via embedded finance.

Traditional banking

• Limited control over the revenue opportunity.
• Little to no control and influence over the customer experience (CX) as it follows the same process as those of products offered by the financial services institutions' own channels. Therefore, they offer limited — to non-existing — possibilities for tailoring.

Embedded finance

• Total control of the immediate revenue and cross-selling opportunity. For example, the business could offer branded debit cards to customers that do not qualify for a credit card.
• Full control over the revenue opportunity. Enterprises can start by offering a single product (e.g. demand deposit accounts (DDA)), earn corresponding fee revenue, and then cross-sell other products (e.g. credit cards) by augmenting the existing portfolio .
• Greater control and influence over CX as a result of partnering with an embedded finance platform that can tailor the CX to their business requirements. For example, desired customer service levels agreements (SLAs) could be tailored to specific needs.

Use cases for embedded finance

Travel & hospitality: Cross-border payments & FX

There's an opportunity to offer faster payment methods and increase customer satisfaction through embedded finance. Clear use cases present themselves in aviation, where airlines routinely have to deal with complex supply chains in a wide geographical footprint, making their corporate payables and receivables processes difficult to manage due to the variance in applicable regulations, currencies, and payment methods.

Embedded finance offers airlines an opportunity to cut through this complexity using embedded cross-border payment and foreign exchange (FX) solutions, which have the potential to reduce cost and payment delays, plus automate what are currently back-office functions concerned with collections, account reconciliation and the optimization of foreign exchange payments. For airlines, enhanced transparency, predictable fees and control of payments translates to better understanding of the costs of doing business and, crucially, a tighter grip on cash flow. Key partners and suppliers benefit from richer and more transparent transaction data, giving both sides of the transaction a clearer understanding of settlement times and transactions costs, raising satisfaction levels on all sides.

Retail: Next generation reward programs

Rewards programs have long been a feature of retail, but tend to fit a familiar template, with customers being rewarded for loyalty to a particular brand through points that are redeemable with that brand, in a closed-loop. Embedded finance offers retailers an additional opportunity to open the loop via their own branded debit cards, providing new value for themselves and for consumers. For example, one company could launch a branded debit card that provides cash back on all fuel and other in-store purchases, creating rewards tiers to drive additional spending in the brand’s stores. Such a card would allow the customer to continue to reap unique benefits through spending with the card supplier, while also being able to use the card at other merchants. Offering the card gives full visibility into customer spending patterns, revealing opportunities for new goods, services, and partnerships and result in lower marketing expenses, all of which have a positive effect on the bottom line.

Closed-loop cards provide additional funds to the issuing enterprise. Preloaded funds via debit card serve as a source of interest-free funding. In a closed-loop model, the value on the stored card cannot be redeemed for cash by the consumer. For the business or retailer's accounting purposes, these deposits are recorded as a liability, allowing them to use the money however they see fit for operations.

Government and NGOs: Easing funds distribution

With large and complex payments, often recurring, government and NGOs can streamline social welfare payments to those who may not have access to traditional banks, yet have a mobile phone.

Existing social welfare payment mechanisms are complicated by duplicates, corruption, ghost beneficiaries, and other inefficiencies. On the recipient side, access to banking services can be a serious impediment. Embedded finance solutions can obviate both of these challenges, offering agencies the opportunity to facilitate preloaded accounts, provide open-loop debit cards, and other alternatives to legacy bank-based financial transfers. Not only can this dramatically improve outcomes for welfare recipients and reduce systemic inefficiency and insecurity, it can also promote financial inclusion.

Pharma: Building a smart, efficient supply chain

With complex, regulated supply systems, embedded accounts and payments are particularly well suited for the pharmaceutical sector. There's an opportunity for pharmacies and drug distributors to create their own B2B payments ecosystem. 

Tracking cash flows and goods as these move across the supply chains is a difficult task, to put it mildly. Embedded finance presents an opportunity for both pharmacies and drug distributors to offer value-added services beyond the existing transactional relationship. Embedded accounts and payments can enhance transparency and control over payments for both sides, providing a better understanding of the cash-to-cash cycle. Using a single ledger to manage both pharmacies’ and drug distributors’ accounts would effectively create a B2B payments ecosystem, with the potential to eliminate traditional bank fees and allow both parties to benefit from richer and more transparent transaction data. This can afford both sides of the transaction a clearer understanding of settlement times and costs, raising satisfaction levels all around.

Benefits for B2B, B2C and consumers

B2B • Improved Treasury management

Embedded finance promises to lower costs and complexity in B2B payments, enabling seamless fund movement and instant settlements while bypassing intermediaries.

B2C • Ancillary revenue and growth

Embedded finance provides an opportunity to diversify and augment existing revenue streams by adding financial services to core product and service suites.

B2C • Improved customer insights

Embedded finance products can give non-financial businesses a new window into their customers’ spending behavior.

B2C • Increase CLV

Businesses offering embedded financial services expand the value they offer to their customers, leading to higher levels of engagement and revenues per user, lifting overall customer lifetime value (CLV).

Consumers • Improved customer experience 

Embedded finance simplifies the consumer’s access to financial services, replacing a dispersed experience using separate platforms, apps, and webpages with easy-to-access offerings embedded in familiar brand sites.

For many businesses, these new revenue opportunities will be the primary driver of adoption, but they are far from the only benefit. Alongside the ancillary revenue opportunity without additional customer acquisition cost, businesses can expect to glean a deeper understanding of customer spending habits, which can be mined to better meet customer needs, target product or service offerings, and hone the design of customer experiences. All of the above naturally tends to increase the business value to the consumer, growing loyalty, customer retention, and conversion rates.

Who to partner with? Key trusted embedded finance platforms

Many fintechs are simply a direct front for, or ‘agent of’, a third-party bank, meaning that the bank is ultimately responsible for sponsoring the fintech’s activities as well as ensuring regulatory compliance, while the provider remains unlicensed. This can lead to confusion on the part of the consumer about who they are ultimately doing business with, as well as about whose shoulders the regulatory compliance risk rests on.

Non-financial businesses are likely to be better served by partnering with a full stack and regulated embedded finance provider, for a number of reasons:

Flexibility

Businesses whose ultimate partner is a bank are ultimately bound by the bank’s rules and standard operating practices, which is likely to make tailoring and personalizing their embedded finance programs more difficult.

Reputational risk

Businesses in a multi-party alliance are exposed to higher levels of scrutiny due to the higher levels of complexity involved in negotiating compliance obligations between multiple partners.

Ownership of benefits

In most cases where the ultimate partner is a bank, the bank will ultimately control the embedded finance offering and is therefore likely to realize a greater share of its revenue opportunities.

KPMG guidance on embedded finance

Established businesses in a wide range of sectors will find themselves sidelined by the next generation of customers if they ignore embedded finance, and will miss out on a golden opportunity to solidify their relationships with their existing customer base. Done well, embedded finance has proven its capacity to drive growth and engagement, generate new revenue streams, and improve customer lifetime value.

In our view, the future of many sectors is tied to embedded finance technology and will become the expectation for many consumers. With consumers facing an increasingly limited banking landscape, and a burgeoning digital economy, they are likely to adopt innovative embedded finance solutions that can service existing financial needs within trusted companies. From a business perspective, single-party alliances are likely the simplest way to serve this opportunity.