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Embedded finance refers to non-financial companies that significantly increase or even transform their value propositions through embedding associated financial products and services onto their platforms.
Essentially, these companies are embracing the trend of non-fintech companies venturing into financial services, and the first-, second-, and third- order implications of such a macro trend.
Embedded finance companies have an edge to distribute financial services because of distribution, data, and resources, and there are already examples of these across multiple verticals – from search engines (Google with Google Bank), ride-hailing (Grab with GrabPay), to marketplaces (Amazon with Amazon Pay).
Evolution and trends
At a high level, we see a three-step evolution in financial services.
First, financial services originated from banks and other such generalist financial institutions. For example, bank transfers were the only means of transferring money from one entity to another.
Second, a slew of first-wave fintech companies emerged. These firms were focused on using technology to enable financial services outside of/on top of a traditional banking process. For example, PayPal allowed people to make payments online.
Third, financial services were democratized. This resulted in specific financial transactions (potentially segmented by customer or industry type) that are better served or distributed by specific non-fintech platforms. For example, WeChat Pay can now be used for peer-to-peer transfers.
We see this trend happening across multiple core functions of fintech. If we break down the role of capital and value, we see three core functions:
- Transferring/storing value in space
- Transferring/storing value in time
- Managing the entropy in value (inflation, etc.)
Examples of companies that are tackling the different verticals include financial arms WeChat Pay, Udaan Credit, Shopify Capital, Grab Financial, and Uber Insurance.
We also see a range of corporate venture arms as well as generalist venture capital firms investing in embedded finance companies across all stages and types of verticals – from healthcare to ride-hailing.
Doing a global scan of embedded finance companies, we see startups taking advantage of unbundling the different stages of the financial value chain. In general, there are three main stages we see that correlate with the sophistication of the financial ecosystem in the region.
The first stage focuses on the distribution of financial services through an existing platform. This is more commonly present in Asia, where the central problem remains distribution and education. As such, these companies tend to focus on building an ecosystem of services that they aim to incorporate deeply across the value chain within their specific vertical. Companies in this space are Shopify, Udaan, Grab, etc.
The second stage focuses on connectivity between fintech and non-fintech companies. It is a recognition of the reality that financial services are incredibly difficult to manage well (especially by companies without institutional knowledge and moats of capital).
The catalysts for this are twofold: Regulators insisting products and services remain under the purview of banks, and banks looking to participate in the forefront of financial technology. By focusing on connectivity, these companies proliferate financial services. Companies in this space include financial services firms Flexmoney, Plaid, Instacred, etc.
The third stage focuses on the native integration of financial processes through an existing platform. As the ecosystems on these platforms become larger with increasing payment/transaction flows, dependency on external financial processes (payment processing, facilitation, etc) becomes more noticeable.
While building and maintaining such services in-house may not make economic sense, startups are empowering business-to-business companies to adopt white-label financial processes into their digital ecosystems.
Vast opportunities in embedded finance
We did a high-level mapping of what potential opportunities could look like across different parts of the financial value chain, across different industry verticals. Here’s a selection of them below:
The opportunities for embedded finance, particularly in Asia, are extremely exciting as digitalization takes place across traditional industries, allowing financial services to be built on top of traditionally non-fintech companies.
As embedded finance companies continue to unbundle financial processes, we expect this trend to be replicated in ecosystems around the world.
Credit: Chia Jeng Yang
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