By Andy Lyons, Head of Banking Solutions and Partnerships, Contis
It’s no surprise that ecommerce and retail are dominating the embedded finance landscape. For both sectors competition is fierce, stickiness is low, and each are laser focused on one thing: customer loyalty.
Buying a car is a major purchase made infrequently and once required either years of saving or significant time and administration to secure a loan. However, embedded finance, which uses application programming interface (API) for responsible credit decisioning, makes purchasing a car on the spot very possible.
Car dealerships can still be plugged into the traditional finance system, but in a way that is completely seamless for the customer. Even before the new owner drives away with their new car, a dealership offering embedded finance solutions could sell again. Bespoke insurance options can be integrated into the transaction process at the point of purchase, meaning the buyer is insured seamlessly before leaving the building and the seller has grown their offering significantly. Through the use of open banking technology, the consumer could pay their deposit via an account-to-account transfer with a couple of clicks and no inputting of bank account and reference information. Equally, the car dealership could collect the monthly repayments via open banking reduce their credit exposure if collecting via direct debits.
This entire process marks a significant change from the past, in which a customer would visit a dealership and return the next weekend once the credit decisioning was done. During that week, any number of things could have occurred that would cause the sale to fall through – including being beat out by the competition.
Conversely, other embedded finance processes are designed with efficiency in mind as the primary driver of customer loyalty. ‘Cashless shops’ which only require a QR code on entry before the customer simply walks out with their goods. This feels very unnatural at first and shows the extent to which appetite for efficiency has changed.
Although a stark and impersonal process, it’s exactly what consumers want when quickly grabbing a work lunch or groceries.
Creating ease in ecommerce
Over the last two years, the way we pay online has changed substantially. While previously you were given one option to enter your card details and two once PayPal kicked in, now you can choose to buy-now-pay-later (BNPL), opt for a company’s proprietary credit offering, or use an open banking provider to make a transfer with no card or data entry.
Cards have a long-established monopoly in the online payments world, often for good reason given their utility and the additional consumer protections they offer in terms of chargebacks and, in some instances, insurance. And they are more convenient than ever due to browsers’ ability to save our details and autofill them.
However, there is another interesting development nipping at their heels: Open banking payments increased by 500 percent in the UK in 2021, while in Europe, open banking payments’ value is projected to rise to $116 billion by 2026, from $4 billion in 2021.
Embedded finance via open banking payments marks a major shift that is extremely useful for consumers, as well as often being more affordable for merchants than card transactions. Most of us don’t know our card details by heart, but do know our banking log-ins. Analysis from McKinsey shows that that the boost to the economy from broad adoption of open-data ecosystems could range from about 1 to 1.5 percent of GDP in 2030 in the UK and Europe, to as much as 4 to 5 percent in India.
The most prominent (and controversial) embedded finance use-case in the online environment has been BNPL products, made most famous in the UK by Swedish fintech Klarna. Regulators, mainstream banks, and personal finance groups have – quite rightly – raised concerns about the level of debt these tools promote, especially amongst the young.
But that is not to take away from the fact that they can be useful for the consumer, which increases customer stickiness for the business, when used responsibly by people with a good understanding of what they can afford. Wherever you sit on this issue, ultimately BNPL creates a remarkably frictionless way to encourage customers to spend more with those who offer it, than they perhaps would if there was only an option to ‘pay now’.
Which method a customer will select often comes down to which is prioritised on a given website. Again, this leads us to an ecommerce ecosystem where consumers have more payments choice.
Your core business – and beyond
The rush into embedded finance is driven by a desire to increase customer stickiness and to be ‘not just’. The executives at Porsche or equivalents know that people love their brand. Ten years ago, they were already capitalising on this in a small way, via caps and t-shirts. But embedded finance means thinking much bigger. Someone who loves the car company may also be likely to trust buying insurance or lending their favourite manufacturer.
As society and non-financial industries evolve, new opportunities present themselves. A good example of this is service station forecourts. Five years ago, this payments conversation was all about how to get customers in and out as efficiently as possible. Then electric cars arrived, and focused switched with what to do with customers who were waiting half-an-hour for their cars to charge: could we sell them an investment or send them into the attached store to do their groceries?
But as any driver would know, with more power comes more responsibility, and offering financial products inevitably – and rightly – comes with an additional layer of regulatory scrutiny. It’s often easier for firms to use a banking-as-service-partner’s licensing and expertise to roll-out their offering, rather than building technology in-house, given the expense – and how quickly this sector is moving.
Companies also need to make sure they are helping their customers, rather than selling them products they don’t need. Retailers should carefully consider whether their products are appropriate for this method. Meanwhile, the Financial Conduct Authority has warned insurers they must protect customers during the cost-of-living squeeze, and put enhanced focus on not upselling unnecessary products. All businesses should be keeping in mind the financial pressure many households are under and be editing their strategies accordingly.
The global businesses of the future will be ‘not just’ retailers, carmakers, or vendors – but integrated financial services firms offering customers better efficiency and value-for-money.