Embedded Fintech: The business within

The use of financial services has been a constant since the beginning of human history. Today financial services have undergone a digital transformation. The birth of semiconductors in the 60s, servers in the 70s, terminals, PCs, and local networks in the 80s, the internet in the 90s, and smart devices in the 2000s have revolutionized the financial world to what we know today as Fintech.

The main question that arises from this revolution is: Can any company become a Fintech company?

The Fintech transformation began with the development of pure players in the financial sector; nonetheless, today we find financial services as a complementary offer of products and services of any non-financial company; the financial enablement of these players is known as Embedded Fintech or Embedded Finance. This term refers to the integration and offering of financial services together with the offer of any other service of a commercial nature. This is possible since market players (for example, Banking as a Service company) provide technological infrastructure and regulatory approval that allows third parties to offer financial solutions with their brand.

Embedded Fintech enables third parties to create new revenue and profit streams, as well as significantly improve user experience and loyalty by providing real-time digital access to complementary financial services.

Have you ever thought about the lack of financial infrastructure, not only in emerging countries but also in developed ones?

Embedded Fintech is happening around the world with multiple applications and in multiple industries. Here are the main transformations:

Debit and credit cards

According to Fundera, 80% of people in the United States prefer to pay with a credit card instead of cash. Furthermore, 76% of consumers have at least 1 credit card. So, in response, Fintech companies help non-financial companies with the issuance, processing, and acquisition of cardholders. This is a huge market that companies like Apple and Amazon are tackling. In 2019, Apple released its proprietary Apple Card with Goldman Sachs backing, designed to be used primarily on its devices. This value proposition is complemented by generating cashback rewards of up to 2% to the user. On the other hand, in 2015 Amazon launched its Amazon Store Card with Synchrony Bank. It subsequently issued its Amazon Rewards VISA Signature Card and Amazon Prime Rewards VISA Signature Card.

Accounts and payments

According to the World Bank, 69% of adults worldwide have an account at a financial institution. Fintechs have aided in financial inclusion by reducing the underbanked population gap. For example, WhatsApp, through WhatsApp Pay, has enabled its users to carry out financial transactions through its application, with initial launching plans in India and later in Indonesia and Mexico. On the other hand, Amazon has enabled Amazon Cash, which allows users to make purchases on its platform without the need for accounts or bank cards.

Loans

In 2019 the global loan market was USD$6.8tn. Due to the size of the market, this sector has been quite attractive for Fintech companies, which provide all types of credit, such as consumer lending, SME lending, real estate lending, automotive loans, among others. By doing this, non-financial companies can capture customers and generate greater income by focusing on this sector, such as the case of Amazon Lending, which offers loans for small and medium-sized companies to grow within the platform. Today Amazon’s loan business is available mainly in the United States and Europe, in alliance with Bank of America, Goldman Sachs, and ING for amounts up to USD$1mm.

Wealth management

In North America alone, the value of personal wealth is more than USD$100tn, this unleashes the potential acquisition of a large market for all those non-financial companies that take advantage of this Fintech opportunity.

Insurance

According to Research & Markets, the global insurance market is approximately USD$6tn. It is a large market that companies such as Amazon have been entering since 2016, through Amazon Protect, a white-label service in the United Kingdom, which provides insurance for accidents or theft of consumer goods.

Other sectors where we will see innovation and financial complementarity in traditional companies are:

- Capital markets: Mainly through sales and trading, analysis, and access to infrastructure

- The Foreign Exchange (FX) market which during 2019 averaged a global daily transaction volume of USD$6.6tn.

- Licenses: Traditional Banking as a Service product through risk management, asset safeguarding, and regulatory coverage.

It is important to mention that the Fintech sector is not only very vast and has a lot of potentials, but it also has great flexibility for players in the ecosystem to generate income in different ways, such as fees and commissions, per transaction, financial interests, by assets under management or by premiums.

In the following years, the integration of financial services to non-financial companies will be increasingly noticeable. Also, emerging technologies such as biometric analysis, cloud computing, cognitive computing, distributed ledger technology, machine learning & predictive analytics, quantum computing, and robotics among others, will transform the future of financial services and its infrastructure by enhancing the toolbox for non-financial companies to increase sales and get closer to the customer.

“You have to serve these markets, re-imagine how money can be managed and moved because there’s going to be more change in the next five years in financial services than happened in the past 30” — Dan Schulman, CEO PayPal

Written by:

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund.

Ricardo Latournerie. Investment analyst at ACV.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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