17,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Embedded finance is here and having global impact. Are you ready for it? In Embedded Finance: When Payments Become An Experience, veteran growth strategists, entrepreneurs, and fintech disruptors Scarlett Sieber and Sophie Guibaud deliver a thought-provoking and page-turning discussion on the most impactful and exciting trend of fintech yet: embedded finance. In the book, you'll explore the past, present, and future of fintech, from how embedded finance is being leveraged today by industry heavyweights like Google and Amazon to supercharge their customers' experience to the offerings of smaller, niche players who stand poised to dominate their own corners of the market as their answer unmet customers' needs. The authors present: * Practical examples around the world of how embedded finance is being used today by technology companies and brands to redefine our online and offline retail experiences as we know them * The key trends, players, and technologies that are paving the way for embedded finance to take a dominant position in our lives * The role, opportunities, and strategies for banks, technology companies and brands, providing them with all necessary tools to define their own embedded finance strategy * The impact of embedded finance on society, consumers, companies, and the economy as a whole, highlighting the dominant force that is embedded finance for our future * An exciting view of how our day-to-day lives will look like in 2030, powered by embedded finance An indispensable and eye-opening exploration of one of the most exciting and influential technologies in development today, Embedded Finance details a revolution in financial services, banking, and technology that has already begun. Are you ready?
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 359
Veröffentlichungsjahr: 2022
Ähnliche
Table of Contents
COVER
ADDITIONAL PRAISE FOR
EMBEDDED FINANCE
TITLE PAGE
COPYRIGHT
DEDICATION
CHAPTER ONE: THE NEXT FINANCIAL REVOLUTION
WHY NOW?
WHY US?
WHY YOU?
WHAT YOU NEED TO KNOW
NOTES
CHAPTER TWO: THE ORIGINS OF EMBEDDED FINANCE
HOW WE GOT HERE: BANKING IN REVIEW
CATASTROPHE AS THE MOTHER OF INVENTION
THE TECHNOLOGY THAT MAKES IT POSSIBLE
THE BIRTH OF INSURTECH
FINTECH RISING
THE ENTRANCE OF THE NEOBANKS
SIMPLE
MOVEN
BEHAVIORAL SHIFTS ACROSS GENERATIONS
LOOKING ACROSS BORDERS: THE CASE OF CHINA
EMBEDDED FINANCE IS HERE
NOTES
CHAPTER THREE: BIG TECH AND BEYOND
A MATCH MADE IN HEAVEN
MEETING EVERY FINANCIAL NEED
BIG TECH IS PART OF CUSTOMERS’ EVERYDAY LIVES
BEYOND GOOGLE, APPLE, FACEBOOK, AND AMAZON
BENEFITTING THE END CUSTOMER
THE CASE FOR E-COMMERCE
WHY EMBEDDED FINANCE MAKES SENSE FOR BIG TECH
NOTES
CHAPTER FOUR: EMBEDDED FINANCE IN THE OFFLINE WORLD
A LOOK INTO THE FUTURE: THE SUPER APPS
THE DATA PLAY
OFFLINE TO ONLINE
THE IMPACT OUTSIDE FINANCIAL SERVICES
WHERE DO WE GO FROM HERE?
NOTES
CHAPTER FIVE: THE RIGHT INGREDIENTS ARE NOW IN PLACE
THE TECHNOLOGY: KEY PIECES ENABLING BRANDS
THE ROLE OF THE REGULATORS
BaaS: THROUGH THE LENS OF A BANK
THE FUTURE FOR BANKS
THE REAL IMPACT OF EMBEDDED FINANCE
NOTES
CHAPTER SIX: A MORE SUSTAINABLE AND EQUAL WORLD
DATA AS A FORCE FOR GOOD
ACCESS TO CREDIT
THE IMPACT ON SMALL BUSINESSES
FINANCIAL INCLUSION IN THE GLOBAL SOUTH
FINANCIAL PRODUCTS FOR THE UNDERSERVED
THE GIG ECONOMY: THE NEW WORKFORCE
UPSKILLING TODAY'S WORKFORCE
SUSTAINABILITY
THE LIMITS OF EMBEDDED FINANCE
THE QUESTION OF IDENTITY AND PRIVACY
THE NEW WORLD
NOTES
CHAPTER SEVEN: 2030: HOW EMBEDDED FINANCE TAKES OVER THE WORLD
A DAY IN THE LIFE, 2030 EDITION
WHAT ELSE CAN WE EXPECT FROM LIFE IN 2030?
THE VIRTUAL WORLD OF THE FUTURE
AN EMBEDDED REVOLUTION
NOTES
ACKNOWLEDGMENTS
ABOUT THE AUTHORS
INDEX
END USER LICENSE AGREEMENT
List of Illustrations
Chapter 2
Figure 2.1 Aggregate overdraft/NSF (non-sufficient funds) fee revenues by ye...
Chapter 3
Figure 3.1 Distrust of banks is widespread.
Chapter 4
Figure 4.1 Most consumers would think more positively of a retailer that pro...
Chapter 6
Figure 6.1 In 10 years, M-Pesa facilitated the creation of more than 30 mill...
Figure 6.2 Not able to fully pay current month's bills (by layoff in prior 1...
Figure 6.3 The future of the gig economy.
Figure 6.4 What do consumers want bond webinar.
Figure 6.5 Fintech employs more people than many financial centers.
Figure 6.6 Technology is eating finance. Source: CFTE 2021 https://courses.c...
Guide
Cover Page
Additional Praise for Embedded Finance
Title Page
Copyright
Dedication
Table of Contents
Begin Reading
Acknowledgments
About the Authors
Index
Wiley End User License Agreement
Pages
i
v
vi
vii
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
223
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
Additional Praise for Embedded Finance
“The next phase of insurance is going to see two directions: embedding insurance into real-world services that can be delivered or accessed digitally, and incorporating real world services as features or benefits into insurance products. Integrated digital providers have shown the path by redefining industry boundaries and bringing together value propositions in a powerful way.”
—Jonathan Larsen, Chief Innovation Officer, Ping An
“Scarlett's and Sophie's combined backgrounds give them a unique perspective into the future of this space. Their strategic thinking, operational excellence and deep understanding of key players and technologies afford them background knowledge that few people have mastered. If you want to master it, too, read their book.”
—Jelena McWilliams, Chairman, FDIC
“Embedding is not an incremental step forward, it's actually transformative. Eventually it's going to sound goofy to say you're a fintech company when such a large percentage of all technology companies and brands are leveraging embedded financial services. Getting to know about embedded finance is a must for tech and brand executives, and this book is a good place to start.”
—Matt Harris, Partner, Bain Capital Ventures
SCARLETT SIEBER SOPHIE GUIBAUD
EMBEDDED FINANCE
WHEN PAYMENTS BECOME AN EXPERIENCE
Copyright © 2022 by Scarlett Sieber and Sophie Guibaud. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data
Names: Sieber, Scarlett, author. | Guibaud, Sophie, author.
Title: Embedded finance : when payments become an experience / Scarlett Sieber, Sophie Guibaud.
Description: Hoboken, New Jersey : Wiley, [2022] | Includes index.
Identifiers: LCCN 2022008545 (print) | LCCN 2022008546 (ebook) | ISBN 9781119891055 (cloth) | ISBN 9781119891079 (adobe pdf) | ISBN 9781119891062 (epub)
Subjects: LCSH: Financial services industry—Technological innovations. | Banks and banking.
Classification: LCC HG173 .S524 2022 (print) | LCC HG173 (ebook) | DDC 332.1—dc23/eng/20220322
LC record available at https://lccn.loc.gov/2022008545
LC ebook record available at https://lccn.loc.gov/2022008546
Cover Design: Paul McCarthy
Cover Art: © Getty Images | Jose A. Bernat Bacete
We dedicate this book to the people who have made it possible for two full-time working moms and wives to try to follow their dreams and share their passion with the world. To our husbands, and kids, we love you and we hope we are making you proud. To the rest of you, thanks for your continued support.
CHAPTER ONETHE NEXT FINANCIAL REVOLUTION
Go back for a moment to the early 2000s and imagine hearing about a new phone concept that was going to be more than a phone. In fact, it was actually a mini-computer with most of the screen as glass. That concept would have seemed unbelievable at the time but of course we know now that the concept was the first iPhone. The story we are about to tell about another new concept is as exciting as that and will arguably have an even larger impact. This is the story about embedded finance. It's about a revolution in how people live, interact with, and manage their money.
The early versions of it are already here, whether you realize it or not. Embedded finance is changing how every company in the world, from the largest bank and tech company to the smallest mom and pop shop, does business and how they engage with you.
Part of the history of financial services is the separate but related story of financial technology, popularly known as fintech. Fintech emerged from a crisis in banking and delivered a smoother customer-centric experience with less friction. Have you sent money to a friend via Venmo, Zelle, CashApp, or another app? You were utilizing fintech. Have you used your phone or a tap of your card to pay for your groceries? You were utilizing fintech. What about opening up an account to directly invest in the market yourself through Robinhood, Acorns, or Public? You were utilizing fintech.
How did this technology transform banking, and who were the companies and entrepreneurs to make it happen? How did fintech change consumer expectations, and what impact did this have on banks’ strategies? These are all critical questions, because they were the basis of fintech, and fintech is the foundation for embedded finance. Fintech brought banks and technology companies together in order to create new products and serve the digital-centric customer. As we will see throughout this book, embedded finance completes the journey fintech started.
The embedded finance revolution is fundamentally about the seamless movement of money that keeps our society functioning. The friction, the barriers that slow it down, are disappearing. Everyone knows that in most cases, we no longer have to wait in line at a bank branch to complete basic transactions. You can do all (or most of) your transactions from the comfort of your home through your phone or your computer. But it's getting even easier than that. Your money—or rather, your access to your money—is everywhere. It appears when needed at every point of context, instantly and transparently. It's a natural evolution powered by genuine consumer need, enabled by technology. This is a cool concept, but what does this look like in practice?
Today this takes the form of loans at the point of purchase, enabling you to finance a flat tire, or home insurance that appears alongside your new rental agreement. The companies we deal with every day can offer us financial services exactly when we need them, and often we don't need to do anything further, just agree to it. The services, informed by data and powered by machine learning, are optimized for us and are up and running in minutes, sometimes even in seconds.
We call this “embedded finance” because the finance is embedded in another context—a checkout line, a mobile app, etc. From the consumer perspective, it could be summarized as “invisible payments” or “invisible finance,” because the key message is that the financial transaction becomes naturally integrated into what you are doing to the point it feels invisible.
Embedded finance is different because it enables companies across industries, with existing audiences, to cater to their customers’ financial needs at the point of context. It is an enabler of new revenue streams, stronger customer engagement, and better visibility and access to key pieces of data. Most importantly, it equips technology companies, brands, and retailers with the ability to provide a banking and payments experience to their customers in a seamless, convenient, and authentic way by providing financial services when they need it most, naturally integrated into the experience.
Those of us who have ever gone to a car dealership and explored the option of purchasing a car (new or used) will be familiar with car dealers offering loans on cars. The dealer is not making the loan himself, he is a conduit for the loan, which is made by a bank or a captive finance company affiliated with an automotive manufacturer. The dealership is not offering finance as an act of charity. Without it, the dealer wouldn't make the sale to you, and he earns a percentage of the money you pay for on the loan as well. This works for all sides though, because without the loan, you might not be able to buy the car.
Another classic case of embedded finance in today's world is through Buy Now, Pay Later (BNPL), which happens at the point of sale. You are at an appliance store and want to purchase a $500 TV but only have $200 available to spend. The appliance store, typically backed by a network of partners, will front the money and you, the consumer, have a certain period of time to pay it back.
Buy Now, Pay Later is experiencing a tremendous renaissance today. A recent study from the financial marketplace LendingTree notes that 33% of consumers have tried BNPL and 67% of them plan on continuing to use it.1 Later in this book, we will explore the reasons behind this trend, and the companies and factors driving it.
WHY NOW?
This book was written to capture a moment in time as well as to serve as a guide to what lies ahead. Whether you operate within financial services, technology, a brand, or business in general, or if you happen to be tech curious, this book is relevant for you because embedded finance is here and only growing and, as with much of life, it is best to be prepared. Embedded finance, by definition, is a global phenomenon and is not limited to any one region or demographic. It touches everyone, which is part of its power. This book tells that story.
It begins with the consumer. She has lived through great financial upheaval, experienced changes in the delivery of services, and is comfortable performing financial transactions digitally. She has a need that a financial product can meet. How does the product get to her? This book tells that story, along with many others. How have her needs and expectations evolved in the digital age? How has the ubiquity of computing power and internet access in the mobile era empowered her? What will her life look like in 2030?
This book will look at all consumers, not just those in the middle class who have the luxury of choosing from financial providers. We will also look at the underserved, the struggling consumer who works multiple jobs and needs innovative financial solutions to make ends meet. For this consumer, investing, and even saving, may be only a dream. How will embedded finance help all consumers live stronger, healthier financial lives?
And while consumers are a crucial part of the story, embedded finance is not only for them, but also for the small businesses. It is for the small businesses who are growing and scaling rapidly, not only the ones who will become the next big IPO, but it is also for the struggling businesses who need a loan to hire that extra pair of hands to take their business to the next level. It is for those small businesses traditionally overlooked by traditional banks but who have great ideas and interesting data points to support a strong probability of success in the future. Those businesses who can utilize embedded finance to make a massive difference in their story.
From an industry perspective, this book provides a glimpse into the future of financial services. The industry is evolving at a rapid pace and while at one time in the past, the bank was the only place you could get a loan or deposit your money, now there are many options. What role will banks, as we know them today, play in the future? How will banks adapt to this new role? Which banks are poised for success and what are the strategies and technologies they have in place to make this happen? We will look at the banks that are embracing the change and thriving, and the banks that are building new products for the new digital age.
WHY US?
Scarlett, the Strategist and Leader, and Sophie, the Entrepreneur and Operator, have been friends for a number of years, sparked by their shared passion around the conversion of technology and financial services. Their combined experience offers a unique, truly global approach to embedded finance. Scarlett has experienced these changes first hand in the boardroom while designing the strategic roadmaps for banks, large and small, on the global level, with a particular focus on the approach to Banking-as-a-Service (BAAS) and the opportunities that lie within. On the other hand, Sophie has spent the last 10 years designing the go-to-market strategy and execution of BAAS providers and more recently, embedded finance propositions across the continent of Europe.
As Jelena McWilliams, the chairman of the FDIC puts it, “Scarlett's and Sophie's combined backgrounds give them a unique perspective into the future of this space. Their strategic thinking, operational excellence and deep understanding of key players and technologies afford them background knowledge that few people have mastered.”
With deep expertise in the space, they share a vision and excitement about where and how embedded finance will impact the lives of everyday consumers and the role that Big Tech companies and beyond will have as they become a monumental part of the fintech ecosystem.
After many conversations and many sleepless nights contemplating the vast opportunities, they have agreed that now is the time to tell this story.
WHY YOU?
Whether you're a banker, work at a fintech company, are a business owner, or just a curious consumer excited about the space, we have a lot to share about this new way of connecting consumers with financial services and most importantly, share how your day-to-day life will be impacted for the better.
Banks need to learn to adapt to remain relevant in the new hierarchy. Fintech companies need to shape the financial products that the consumer-facing businesses will ultimately deliver. Once financial services can be delivered through a company or product consumers use every day, there is a tremendous opportunity to reach a greater number of people than ever before, and there is already evidence from early success stories that more progress is possible. We are just at the beginning.
WHAT YOU NEED TO KNOW
The book will provide you everything you need to know about the evolving world of embedded finance from inception to predictions for the future. We will cover:
The Early Days
: Proving the historical context and lessons learned from early players and how their efforts shaped the future.
The Present
: Identifying the global enablers today, including detailed case studies about their approach with key takeaways you can start enacting immediately as well as highlighting the role that traditional financial service providers continue to play.
The Future
: Predicting how the momentum of embedded finance will pick up, what the world of the future will look like, and what the impact on the consumer could be both for individuals as well as society as a whole.
Failing to prepare for, and at minimum be aware of, this monumental shift in how financial products are delivered to customers could lead to serious challenges down the road. The challenges have the ability to impact your talent, revenue, technology you use, and more. This is not the first push toward a new technological world order and we are not far from the days of Kodak failing to seize the digital picture boulevard or Best Buy failing to capture the future of cinematic entertainment. Not everyone should partake in such a journey but, regardless of your ambitions, it is important to understand what is happening at the macroeconomic level as the impact will reverberate into all parts of business. Taking your strategic career hat off and acting as a consumer like everyone else, as a consumer, this book will prepare you for the seismic changes you are about to experience in your day-to-day life.
After all, with a projected $3.6 trillion global market capitalization by 2030, why wouldn't you want to know more?2 Let the journey begin.
NOTES
1.
https://www.lendingtree.com/tree-news/holiday-shopping-behavior/
Accessed January 25, 2022.
2.
https://www.forbes.com/sites/matthewharris/2019/11/22/fintech-the-fourth-platformpart-two/?sh=45ed1e6f5be6
Accessed January 29, 2022.
CHAPTER TWOTHE ORIGINS OF EMBEDDED FINANCE
How big of an opportunity is embedded finance? We will answer this question throughout the book, but before we talk about where we are now and where we are going in the future, we must start with the past.
HOW WE GOT HERE: BANKING IN REVIEW
Let's begin our journey by going back to the beginning of financial technology—fintech. Some industry experts say fintech began in the 1950s when the first credit cards were mailed to 60,000 consumers in Fresno, California. Others point to the widespread adoption of ATMs in the 1970s. Still others look much farther back, all the way to the telegraph system used to transmit financial orders in the nineteenth century.
But the very earliest instance of “financial technology” may be even older than that. Cuneiform is a system of writing developed more than 5,000 years ago in Mesopotamia, what is now Iraq and Kuwait. It was here, and in a few other areas such as Egypt, India, and China, that agriculture developed to a point where dependable harvests could provide food for urban developments, which served as centers of commerce and other forms of specialized labor. On clay tablets unearthed in the Middle East, archeologists have discovered a system of accounting in cuneiform, including loans and credits to farmers for the purchase of seeds, land, and equipment. It may be said without exaggeration that financial services accompanied the very earliest flowering of civilization.
Note that this is well before coins or cash or fiat money. This was an age of barter, of goods themselves being the means of transaction, rather than abstract symbols of value. The first coins seem to have appeared 3,000 years ago in China and a few hundred years later in Turkey. Both were advanced, literate societies with established social norms and laws protecting persons and property. But the act of borrowing and lending is more fundamental to human activity than the idea of “money,” as any child on the playground can tell you.
Lending appears to have been a family matter in ancient Mesopotamia, with wealthy families lending from their own reserves. In ancient Greece and Rome, banking became more formal and less personal, with lending and money-changing often tied to the economic activities of powerful entities such as temples or government offices.
The institutions we recognize today as banks originated in Italy during the Middle Ages. Banking groups would finance voyages, gambling that ships would return to port with more valuable cargo than they shipped out. In Renaissance Italy, banking became available to more of the population, what we would today call retail or consumer banking. The word bank comes from the Latin bancus, meaning bench or table. Bankers (banchieri) set up tables outdoors, at the entrance to markets, to help customers solve liquidity problems. They changed currency, operated as pawnbrokers, and made loans to people visiting the market. Wall Street brokers began much the same way, trading securities at tables along the tree-lined streets of lower Manhattan, when commerce was still an out-of-doors activity.
The consumer banking most of us are familiar with arrived in Europe and North America in the nineteenth century, along with industrialization and the emergence of the middle class. And of course, the twentieth century saw the trappings of traditional financial life become standardized: the checkbook, the bills arriving like clockwork every month, the plastic cards, and the bankers in their suits and ties.
Financial services companies have always been one of the most avid and enthusiastic adopters of whatever new technology is available. We already mentioned the telegraph. Banks were also early adopters of computers, the first to bring computing power to their employees—after all, banks have a lot to compute. Today the idea of banks being tech-forward may seem antiquated, because banks typically seem to be behind the times when compared with technology companies, but a look at the technology budgets of the largest banks shows that bankers’ enthusiasm for technology remains strong. For example, JP Morgan Chase, the largest retail bank in the US, budgeted an astonishing $12 billion for technology in 2022.1
What has changed is that technology is moving more quickly than banks’ internal processes, and banks must play catch-up. Mobile technology was taken up enthusiastically in the private world, by consumers, before it saw widespread use cases in business (beyond reaching employees at off-hours). This is in contrast to desktop computers, which first saw adoption in business offices before they became known as “home computers.” This gap, along with the stringent regulations banks have followed since the crash of 1929, and later 2008, has created an enormous opportunity for technology companies to enter financial services.
The intersection of banking and technology, or financial technology now commonly known as fintech, began in the internet era. It got its start with digital banking over dial-up internet connections in the 1990s, the arrival of application programming interfaces (APIs) as a communication tool between applications in the 2000s, and truly came into its own in 2009, as the financial crisis wreaked havoc on consumer credit and the entire business of banking. Why was this the moment? The 2009 financial crisis meant that traditional banks became subject to new regulations stemming from repeated crises, and at the same time millions of smartphones (the first iPhone was released in the summer of 2007) found their way into consumers’ hands. This created a unique confluence of circumstances for the new wave of fintech companies to emerge and challenge the banks.
Fintech relies on a number of technology layers from a multitude of providers whose interactions can be quite complex, but consumers don't care how all the processes work together on the backend. Very few users know about the financial systems and programming languages used to deliver services to their touchscreens. An important point about fintech is that, whenever possible, it is automated, and performed with minimal human intervention, removing friction as far as possible to complete any desired action. However, when human intervention is needed, fintechs offer this service, and often more seamlessly than the banks because they focus on providing the best possible customer experience.
Though technological innovation is expensive, it is worth the investment, as paying humans to interact with other humans every step of the way (even to check one's balance in a checking account) is even more expensive and does not provide the benefit of scale. The consumer, using sophisticated technology platforms and tools available nowadays, is serving herself and guiding the actions. This means that she should be able to perform the same transaction at 3 AM that she could at 3 PM, and can do it just as well from home or on a train as at the bank branch. She interacts when it is most convenient for her that naturally intertwines with her everyday lifestyle. As we will see, embedded finance takes this key idea even further.
But to return to 2008, financial services in this era still relied on physical locations to deliver products and services to their customers. Branch tellers and their cordoned-off lines were a familiar sight for millions of consumers every day. But bank branches were expensive to maintain, from rent to cleaning to utilities to supplies to employee salaries, and more. To offset these costs, banks had to make revenue elsewhere, like any other business, or think of a way to reduce those costs drastically. The end result of this necessary cost of doing business negatively impacted the customer. Banks retreated from certain products to focus on others, and fintech entered the breach.
One thing that fintechs collectively aren't focusing on is building storefronts. Since 2008, the US has seen a 12% decline in the number of bank branches.2 In the UK the drop is even more dramatic—a 17% decline since the financial crisis struck in 2008.3 These declines are to be expected as digital banking is adopted. Indeed, bank branches have been in general decline since the 1980s, as card payments have taken transactions away from cash, and telephone and internet banking offered different means to transfer money. As you might infer from these numbers, digital banks have had more success in the UK than in the US. Particularly for small businesses, digital offerings in the US financial services sector still have a long way to go. Its revenue model is not aligning with customer needs, because banks make money when customers make mistakes. When customers don't pay back their loans on time, or spend more than they have in their accounts, the banks profit. When customers are financially healthy, banks can earn money alongside them, instead of against them.
A word here about the basic revenue model for a bank. Banks earn revenue by providing loans, including home loans (mortgages), auto loans, business loans, and personal loans, including credit cards, and from interchange fees received from card payments. For the privilege of borrowing money, consumers and businesses pay interest. Banks also hold customer deposits, and sometimes charge for this service. These deposits provide the capital to make loans.
Customer needs have changed, and the customer base has grown younger and more diverse. New products and services are required to meet the new customers’ needs. Consider how radically other industries have changed over recent decades. It is happening in banking too, but up until now banking has lagged behind the rest of the economy.
CATASTROPHE AS THE MOTHER OF INVENTION
The financial crisis of 2008 resulted from a cascade of causes within the banking industry and in society at large. Loose regulations led to irresponsible lending and borrowing, particularly in the mortgage sector, and then losses from failed loans led to catastrophe for consumers and financial institutions alike. Ivy League graduates formerly flocked to the large investment banks and the secure life they promised, but in 2008 this changed forever. The five largest investment banks at that time were Goldman Sachs, Merrill Lynch, Morgan Stanley, Bear Stearns, and Lehman Brothers. All five were severely compromised by toxic assets (mortgages in default) that were worse than worthless—they were negative equity.
Lehman Brothers went bankrupt in September of 2008, the largest bankruptcy filing in American history, and disappeared. Bear Stearns also failed and was bought for a fraction of its previous value by JP Morgan Chase. Merrill Lynch was similarly acquired by Bank of America. A week after Lehman's collapse, Goldman Sachs and Morgan Stanley announced they would become traditional banks offering deposit services to retail customers. American Express also became a bank around this time. This move afforded the banks more protections by bringing them under closer supervision from federal agencies, which was, for a brief period, an attractive prospect. Japan's MUFG Bank subsequently bought a considerable portion of Morgan Stanley, which also borrowed more than $100 billion from the federal government, more than any other financial institution. Goldman Sachs has since seen considerable success innovating on the retail model with its digital bank, Marcus, named for the company's founder, Marcus Goldman, and more recently with its newly launched transaction banking division and TxB platform, which already supports embedded finance use cases.
The financial crisis resulted in a significant tightening of consumer credit, with some banks pulling back entirely from lending to consumers and small businesses outside of established channels such as credit cards. Just because banks no longer wanted to lend didn't mean that the needs of consumers and small businesses changed. They still needed to borrow money, but the traditional providers were no longer available.
THE TECHNOLOGY THAT MAKES IT POSSIBLE
Smartphones, following the birth of the iPhone in 2007, came of age in the wake of the financial crisis, delivering internet access and computing power to consumers wherever and whenever they wanted it. Apple sold nearly 1.5 billion iPhones in the 2010s, according to company sales figures. Here are a few data points to consider. Nearly all adult Americans (97%) own a mobile phone. Most (85%) of adult Americans own a smartphone, and 62% of them have made a purchase on the device.4 The average amount of time a person spends interacting with a smartphone is more than three hours per day.
As of May 2021, China counted more than 911 million smartphone users, and India 440 million. The US was next with 270 million users, out of a population of 329 million. One of the marks of a highly developed economy is the percentage of its population that uses a smartphone. The cutoff is generally 70%, though Japan is a notable exception at only 60%.
Deloitte estimated in 2018 that 59% of the global population had used mobile phones for banking needs.5 This number is likely considerably higher today, especially in response to the pandemic and an acceleration of digital adoption.
As smartphones proliferated in the developed world, feature phones, mobile phones with internet access but lacking the advanced interface of a smartphone, became ubiquitous in the developing world, including the Global South, such as Latin America, Southeast Asia, and Africa. While smartphones allowed consumers in developed nations to avoid the bank branch for everyday issues and to make purchases, feature phones allowed consumers in countries with underdeveloped financial systems and very few bank branches to access financial services for the first time.
Most consumers, some 70%, in Latin America and Africa are underbanked, meaning they lack access to traditional financial services. The transformation of financial services in countries that had underdeveloped banking infrastructure is far more dramatic than the changes happening in countries with advanced banking systems. Smartphone penetration is also expanding rapidly in the Global South, and with it, so are more sophisticated financial services. Brazil counts 110 million smartphone users, and Indonesia,160 million.
One thing we can say is that using mobile phones for finance can be tremendously empowering. With a few clicks, users can see balances, pay bills, and send money to friends and relatives.
Mobile phones open up a whole world to the curious and seekers of knowledge. The potential is endless, though the reality may sometimes fall short. But on a fundamental level, mobile phones opened up rather than closed off humanity, and connected us with every other mobile user.
While much of the focus has centered around mobile phones, the other component to mobile phone success is mobile internet. Mobile internet access has changed the world forever. Mobile, unlike most previous technology, moved from the consumer sphere to the workplace instead of the other way around. Adoption scaled rapidly, we might even say virally, in the consumer world, forcing companies to adopt policies around bringing these powerful devices into the workplace. When we think about the leading indicators that drive the evolving changes in mobile, they lead back to consumer behavior. This behavior not only drives the consumer but also the business world that interacts with consumers. The consumer has never before been as empowered as they are now, and the way they are consuming cultural products such as books (Kindle), movies (Netflix, Hulu), food (Deliveroo, InstaCart, HelloFresh, JustEatsTakeaway), and music (Spotify, Apple Music) is constantly evolving. This has repercussions across their expectations toward other industries, including financial services, as the lines are now blurred on what specific industry offerings look like as consumers want all experiences to be as simple and easy as the last.
The internet provides communication and information tools to the majority of humans on Earth. It has toppled governments, upended industries, and changed the way people live. No business is insulated from its effects. As hard as it may be to believe today, when the internet was young, many experts downplayed its effects and ridiculed it as a toy or fad. Those predictions are laughable now, but underestimating the internet has happened again and again, always with the same result. Embedded finance represents another evolution along this arc.
Many in the banking industry doubted the internet would have much effect on their business. But, like many other industries, it has fundamentally shifted the way that humans interact with the companies they do business with and with each other. The ubiquity of the internet as a truly global platform is a primary reminder that technology and the ability to connect should not be underestimated. Shoppers now search online for deals first even if they intend on making their purchase at a brick-and-mortar store. How many times have you been at an airport, an appliance store, or an electronic store staring at that item that caught your eye to then go online and see how the price compares to a similar shop?
From the youngest to the oldest in society, this has become the norm. As with anything in life, macroeconomic factors from natural disasters, global health crises, etc. change the way that humans operate in their day-to-day life. When applied to the present, the Covid-19 pandemic, and resulting lockdowns, forced many businesses around the world to shift their business model and interact digitally first with their customers. While this had broad scale implications, it was felt strongest with brick-and-mortar shopping experiences and mom and pop businesses. The pandemic caused them to adapt or die and unfortunately, many of them failed as a result of the inability to connect with their customers digitally. The car rental giant Hertz was among these casualties, as were the retailers JC Penney and J Crew.6 While the pandemic is a deeply timely and personal example for many, it is important to note that there will continue to be large-scale factors that will push consumers online for many of their everyday needs.
Let's now bring this back to the financial services world, one industry that saw both the positive and negative impact of Covid. Those institutions that were already digital first or at least had an adequate digital strategy fared better than those that had digital as a roadmap item that was never quite checked off as complete. Why has this continuously been a theme where banks are slower to adopt change than most, as with the financial crisis of 2008? It goes back to a relatively simple concept: trust. Banks (and other banking institutions such as credit unions, etc.) are the trusted custodians of our financial lives. The financial services industry is conservative with good reason. It is charged with securing the movement and storage of money for both consumers and businesses. It cannot be overemphasized how important a role this is and may be a strong reason why the industry as a whole still uses technology built as long as half a century ago. This has made innovating on time-tested models challenging and expensive. That fact combined with the utter scale that banks had built on the mindset that banks had a monopoly on financial services for consumers. As the world has shifted to external factors, some within the financial industry have tried to get on board by collaborating with startups through acquisitions, investments, innovation labs, and accelerators, but the harsh reality is that large percentages have not. Finding the winning formula can be challenging. In addition to technological challenges, banks are often large organizations with multiple decision-making levels, numerous stakeholders with differing priorities, and departments that often compete for customers. These large ships are difficult to turn, even when the iceberg is clearly visible ahead, but it is possible, as we will see further in the book.
Because of the aforementioned reasons, banks were slow to react to the moment, so when consumers went looking for financial solutions, it was other companies that met their needs.
THE BIRTH OF INSURTECH
According to an article by Jennifer Rudden in Statista,7
