News & Insights

This blog reflects on some of the options and observations regarding the fourth step of the approach. Our Embedded Finance radar – in which we keep track of emerging business models and partnerships – has revealed insights that incumbent banks broadly take 3 different approaches to play in the EmFi space. The options are shown in the visual below. 

A. Build

Setting up a dedicated business unit or launching a new venture within a group can help to bundle resources to build capabilities and know-how in-house. This mitigates the risk of dependencies with other partners or acquired businesses. Furthermore, full share of wallet remains at the bank. Typically, banks either keep the business unit in-house or separate it into an independent venture, that is not burdened by corporate processes. This approach can also change along the way, as described in the case study further below in this blog.

However, this is typically associated with higher investment costs and longer time-to-market, as capabilities need to be developed in-house and require therefore patience, senior executive commitment and willingness to invest. 

B. Partner

A less investment-heavy approach is to join forces with other relevant tech providers – thus combining capabilities and know-how of both parties. 

Next to a shorter time-to-market, financial services can also be tailored and further enhanced through partnering, as additional data or features can complement the core financial product. In practice, two different approaches can be observed – forming a “lighter” partnership, mainly consisting of e.g. a referral model and maybe some joint marketing towards clients versus moving into more advanced partnership models, i.e. joint ventures, where a bank takes a (minority) stake in a tech company (BaaS provider), which is further described in the case study below. 

Partnerships however come with dependency risks that need to be mitigated – both from a reputational, operational point of view (e.g. unforeseen technical issues or lack of compliance) and strategic perspective (e.g. exclusivity of partnership and consequences and exit strategies when the partner is acquired by a direct competitor). Furthermore, agreements need to be made regarding the distribution of revenue between involved parties.

C. Buy

The final method, which involves purchasing an existing provider, combines elements of the first two strategies, as capabilities and know-how are being acquired almost instantly, bundled in a dedicated team with experience and clear strategy on the market offering. This can either be an acquisition of a niche capability provider, focused on a specific service like payments or specific industry like energy, or the acquisition of multiple providers to enable a full-suite EmFi offering (see case study below).

Same as with the build-option, these efforts usually go hand in hand with higher investment cost needed upfront. Post merger integration and operating model considerations need to be carefully assessed to maintain the agility, flexibility and rapid go-to-market approaches of the acquired asset(s).

Conclusion

Banks are in the driving seat to determine their embedded finance strategy. However, as the pace of new market entrants continues, banks risk losing a significant part of their current revenue streams as embedded models are gaining traction across financial products. Therefore, banks should carefully consider their embedded finance strategy starting with developing a solid understanding of the market, where to play and how to win.

INNOPAY’s Embedded Finance Radar tracks EmFi trends and developments

The radar tracks evolving use cases, and the players involved throughout the value chain and around the globe, across six product categories (e.g. payments, lending) and six major industries (e.g. retail & ecommerce). For more details or insights, please reach out to Mounaim Cortet, Patrick de Haan, or William Hanley.