By Emma Hagan, Chief Risk and Compliance Officer, ClearBank
We are experiencing a huge shift in the types of companies offering banking services. Over the last decade, retailers, airlines, ride-sharing applications and many more have embedded licenced financial services into their customer offerings. In the coming decade, the embedded-banking market is expected to reach $100 billion. No wonder some of the biggest corporations in the world have decided to become involved.
Apple’s foray into financial services with Goldman Sachs (Apple Card) is only one example of nonbanks expanding their customer offerings. Businesses have identified such growth opportunities on a simple premise: By integrating more services for their customers, they can keep them within their ecosystems for longer and create another revenue stream.
The appeal of embedded-banking partnerships is that a partnering company can tap into capabilities the other partner doesn’t have. Apple has a brand almost like no other, even if we’re past its peak at which people would queue for hours to grab the new iPhone. Its core customer base remains loyal and views the Apple logo as a mark of quality. Goldman Sachs, the second-largest investment bank in the world with a 150-year history, is a similarly formidable brand, bringing its reputation, banking expertise and licence to the partnership. On paper, two of the biggest names in banking and technology collaborating seemed like a guaranteed winning combination.
Instead, it has become probably the most high-profile embedded-banking partnership to go south, despite the strong takeup of the offering. Reports suggest that the partnership contributed to a $1.2-billion loss for its consumer-lending services, a considerable amount even for a company of its size.
This suggests the underlying model still needs work, and much of the success of an embedded-banking partnership can depend on the chemistry between the two firms. Finding the right chemistry isn’t easy—if it can go wrong for two of the biggest companies in the world, it can go wrong for any company.
For better or worse: Why are partnerships crucial?
Companies venturing into unfamiliar markets can choose between building their own capabilities, acquiring other companies or forming partnerships. So, what’s the case for partnerships? In most cases, they are simpler and more cost-effective. They allow businesses to harness pre-existing capabilities, unlike the more complex and expensive alternatives of starting from the ground up or acquiring other companies.
This is especially true of banking, with all its complications: integration into different payment systems, card schemes, compliance issues (including anti-money laundering [AML] regulations) and much more. Embedded banking is taking off because only banking specialists want to roll up their sleeves and tackle it.
While a partnership may be less complex, it is not a simple process and still has the potential to lead to unfavourable outcomes. Of course, partnerships can turn sour for many reasons, but businesses can create the best potential for success by choosing banking partners based on their specific ambitions. Companies should consider certain factors when choosing the sensible partnership option.
Partnerships are so much more than simple supplier relationships. They require much from both sides. Even if they are not equal partnerships—in embedded banking, for instance, the banking provider will often be far less visible but may be doing more work—they require both businesses to have a shared goal and be invested in outcomes.
Exchanging the right vows: what companies need to make partnerships work
The embedded-banking business model is one of dependence. One company will provide the licence and banking services, while the other supplies a customer base needing banking services and a brand with which those customers are happy to do business. So, the natural course is to identify partners with compatible business models, technologies and experiences. But a less tangible and measurable metric must be considered: Whatever it is called, culture or compatibility, it is critical for the successful delivery of embedded-banking solutions. Consider these three compatibilities:
Technology: Integrating technology is not straightforward, even when built with that principle in mind, such as application programming interfaces (APIs). Many banks operate with legacy systems that are difficult to integrate or build APIs onto. And while many of the brands that embrace embedded banking are technically minded, this will change as the market expands. Integration is a process that can take a long time if there are issues that slow it down, and honesty and openness about the reasons for any delay and how it might change timelines must exist on both sides.
Business objectives: Potentially, the biggest lesson of the Apple-Goldman Sachs deal’s failure is that if business goals are not aligned, a partnership can be one-sided. Questions that need to be answered include: What kind of customers is the partnership looking to attract? What is its risk appetite? How long will it be willing to wait before the partnership is profitable? What happens if the partnership works out spectacularly for one partner and is a disaster for the other? Goldman Sachs’s consumer products were somewhat experimental, and its losses, while substantial, are perhaps not significant for a business of its size. This won’t be the case for many (if any) other partnerships.
Culture: Choosing the right partner for long-term success also depends on aligning company values. Questions to ask: What are your partner’s perspectives on privacy, diversity and ESG (environmental, social and governance)? Do you agree on fundamental ethical values? What values do you consider non-negotiable? Ensuring the partnership works effectively and can launch a united front to confront potential publicity issues is critical. This is true of any partnership, of course, but with an embedded-banking partnership, two businesses from different markets are coming together. Assuming that all values are shared values could make for some tricky conversations down the line.
Till death do us part? The right time to call it quits
There are so many reasons for partnership breakdowns, even those that, on paper, look as if they will be huge successes. When is it best to call a timeout or even walk away?
We often fall into the trap of the sunk-cost fallacy—refusing to abandon a particular course of action because we’ve invested in it and giving up will mean losing that investment. While it’s great to be resilient, it’s equally important to identify when partnerships are failing, whether from a business or cultural perspective. After careful evaluation of the situation, walking away may be best. If Goldman Sachs can walk away from one of the biggest companies in the world, anything is possible.
Embedded banking is, in some ways, a very simple concept: providing banking services thanks to banking experts. But making it work can be a far more complicated process. The best partner may not be the biggest, the most experienced or the one everyone else would choose—it will be the best fit.