As Vilve Vene, CEO of Tuum, writes on Linkedin, the Future of Banking is ‘Embedded Finance’.
Vilve describes the inflection point the industry is going through. Previously banks would sell their products like loans and payments directly, now they can be ’embedded’ into the services of non-financial organizations, from retailers to utility companies.
Banking as a Service
Open Banking provides the technical foundations for building these integrated models but even more so consumer demand is accelerating the trend. Customers are less concerned with staying loyal to their primary bank and more driven by the immediacy and convenience of the buying process.
This is especially compelling when you consider the integrated nature of the transaction context. When dealing with an estate or travel agent, having the financial component of the service come as part of a packaged service makes for an improved customer experience, such as a better mortgage journey.
McKinsey writes that Banking as a Service enables every company to become a FinTech company, empowering them with a new monetization layer, and that companies of all types and levels of maturity—including retailers, telcos, big techs and software companies, car manufacturers, insurance providers, and logistics firms—are considering and preparing to launch embedded financial services to serve business and consumer segments.
They identify six trends key to this market, centred around the increasing use of Open Banking API capabilities, making banking services more accessible to more organizations for them to integrate into their digital business models.
From Startups to Starbucks – The Embedded API Opportunity
At the heart of the trend is the use of APIs to interconnect businesses.
TechCrunch writes about the evolving landscape of tech giants moving into this field, such as Google’s banking and payments announcement along with IPO bound companies such as Airbnb, DoorDash and Affirm all mentioning “financial services” in S-1 filings.
“Imagine if you are a global airline company and the benefit of not having to staff a know-your-customer compliance or fraud detection team. Or for lenders who can minimize risk and increase speed by not having to request a pay stub or personal information verification?”
They highlight recent news such as Stripe’s launch of Stripe Treasury, a Banking-as-a-Service API. A developer can take advantage of Stripe Treasury to open bank accounts directly from their service by triggering Stripe’s API, and you can move money or pay bills using API calls. Combined with Stripe Issuing, you can also issue a virtual or physical card and connect it to a bank account.
Examples of digital businesses building on this capability include Shopify, who will be utilizing it to power their Shopify Balance service – a bank account, card, and rewards program for Shopify merchants.
The move represents a major expansion into the FinTech vertical for Shopify and put the company in competition with homegrown FinTech startups like Koho, Wealthsimple, and Borrowell, as well as global players including Revolut and Monzo.
The FinTech Times writes about Square’s strategy:
“The payments company known for its point-of-sale dongles turned itself into a sprawling financial apparatus by adding traditional services like small business loans through Square Capital, but it’s also been able to hook merchants with its array of add-ons like email marketing and payroll support. These are tools that small business merchants need, and the ability to access them from within a platform they are already on is invaluable.”
Naturally given it is such a hot sector there are startups emerging to specialize in enabling the trend, such as Intergiro, Stitch, OpenPayd and Weavr.io, founded and led by Alex Mifsud and specializing in enabling ‘Financially Integrated Digital Businesses‘, recently raising a $40m series A round.
Their solutions include Mono – issue cards and IBANs for your business, and manage all your banking activity via API, Multi – issue cards and IBANs for your customer via a white labelled API, and Meta – their platform for creating and deploying embedded banking products.