September 21, 2021
Global firms such as Amazon, IKEA, Mercedes-Benz and Walmart are cutting out traditional financial institutions in favor of financial technology, or “fintech” — startups offering everything from banking and credit to insurance. Embedded finance, a term for companies integrating software to offer services like “buy now pay later” at check out, are poised to disrupt the status quo, according to Reuters, which reports that while “banks are still behind most of the transactions,” analysts are warning that as they “get pushed further away from the front end of the finance chain” they’ll be frozen out of lucrative consumer data mining.
“Embedded financial services takes the cross-sell concept to new heights,” Bain Capital Ventures partner Matt Harris. “It’s predicated on a deep software-based ongoing data relationship with the consumer and business.”
As a result, the “good risk” is going to go to the embedded companies enjoying cozy customer relationships while “what is left over will go to banks and insurance companies.” However, Reuters concedes that at the moment, “areas of embedded finance are barely denting the dominance of banks” even though some are transitioning into areas like consumer lending.
Accenture estimated in 2019 that new entrants to the payments market had amassed 8 percent of global revenues, a share that has risen the past year due to the COVID-19 pandemic and its boost to digital payments. “The vast majority of consumer centric companies will be able to launch financial products that will allow them to significantly improve their customer experience,” explained Luca Bocchio, partner at venture capital firm Accel.
Square said last month it was buying Australian BNPL firm Afterpay for $29 billion. “Square is now worth $113 billion, more than Europe’s most valuable bank, HSBC” at $105 billion, Reuters reports.
Embedded Finance & Super App Strategies founder Simon Torrance warned that “Big banks and insurers will lose out if they don’t act quickly and work out where to play in this market.” Walmart is among the retail firms that have taken up the challenge, launching in January a fintech startup with investment firm Ribbit Capital. In August IKEA purchased a minority stake in BNPL firm Jifiti.
Automakers including Daimler’s Mercedes, Volkswagen’s Audi and Tata Motor’s Jaguar Land Rover are exploring embedding payment technology inside their vehicles to make paying easier. Canada’s Shopify looms large in the fintech space, providing software for merchants and, through its Shopify Capital division, merchant cash advances based on an analysis of more than 70 million data points.
By way of modernizing, Citigroup has teamed with Google on bank accounts, Goldman Sachs is making credit cards available for Apple and JPMorgan is buying 75 percent of Volkswagen’s car payments business, Reuters says. “Connectivity between different systems is the future,” noted JPMorgan head of EMEA wholesale payments, Shahrokh Moinian.