Wait, there’s a payments revolution?
From the McKinsey report, “Small businesses starting up today may never interact with a conventional bank.”
How often do you visit a traditional bank? If you’re like most of us, the answer is “rarely.” According to a Forbes study, the majority of banked consumers (78%) prefer digital banking. While part of this shift to digital banking was in response to fears about COVID-19 and the desire for contactless banking, the larger motivating factor is technology. The advent of banking apps — powerful and simple to navigate — gives consumers more control and easier access to their money.
We Are at an Inflection Point in Banking
Banking apps are just the beginning of a major transition in how people bank and who they turn to for banking solutions. Led by notable players like Amazon and Starbucks — who offer app-based financial services such as payment products (Amazon Pay) and digital rewards programs (My Starbucks Rewards) — more non-financial companies are using embedded finance to enhance their customer loyalty programs and leverage brand differentiation efforts.
Customers expect banking services they can access with a swipe of their finger and demand financial products that fit their lifestyle, with discounts, points, and coupons. Simultaneously, brands are looking for new revenue streams and ways to become more central in their customers’ lives. Sitting at the intersection of these two needs is embedded finance.
When Brands Add Financial Products
Embedded finance gives non-financial companies the ability to add financial products that fit their customers’ spending profiles. It also gives these organizations access to data they’ve never had before, allowing them to offer their customers rewards that are tailored to their spending habits. The more brands can provide services consumers want, the more likely they are to become central in their customers’ lives. It’s a self-sustaining cycle powered by technology that capitalizes on the data being generated and platforms built to make banking convenient and transactions seamless.
In its article “Embedded Finance: Who Will Lead the Next Payments Revolution,” McKinsey & Company uses the term “distributors” to define any non-financial company that “distributes” financial services through a fintech platform. In order for a distributor (such as a brand or business) to offer embedded financial services to their customers, the distributor must work with two different providers: a technology provider and a balance sheet provider.
According to McKinsey:
“Technology providers (fintechs) provide the platform through which distributors can access, customize, and offer embedded-finance products. [And] balance sheet providers (licensed or chartered financial institutions) are responsible for manufacturing embedded-finance products, providing risk and compliance services, and offering access to funds for lending and deposit products."
This isn’t exactly right. Those functions are discrete, but embedded finance can — and should — span both the technology and the balance sheet provider. In fact, to do less is irresponsible.
Who’s Really Behind the Fintechs?
Alviere Co-founder and COO Pedro Silva sees it this way, “Peel back the cover on these new fintechs, and they’re a direct avenue to an existing bank. Fintechs act as an “agent of the bank,” sponsoring their activities, which means the end consumers (or businesses) are actually customers of the sponsor bank, whether they know it or not.” While this relationship allows brands to offer their customers financial services, it doesn’t give them first-party customer data or new revenue opportunities.
As a fully-licensed, regulated money transmitter, Alviere’s platform enables distributors to incorporate a variety of financial products and services into their existing offerings. Brands and businesses take complete ownership of the consumer relationship.
This Is the Start of the Revolution
Consumers will increasingly expect more as embedded finance becomes more mainstream. More services. More rewards. More accessibility. And as this happens, the definition of “bank” will transform from branches with tellers to the brands people know, love, and trust. With McKinsey expecting the embedded finance market to double in size over the next three to five years, the long-term winners will be the licensed embedded finance platforms helping brands cross the chasm and become more central in their customers’ lives.