What is embedded finance? 

Embedded finance can be defined as a set of technical tools for non-financial businesses to provide their customers with financial services. In practice, these businesses call on third parties, such as Treezor which integrates its own technology into their solution. It only takes a few months for the financial features to be integrated into the customer journey.

The BaaS (Banking-as-a-Service) partner provides its licenses and core banking and ensures compliance with regulations. Qonto, that has become a fintech unicorn, is one of the pioneers in the sector and that was able, thanks to Treezor’s solution, to quickly launch its offer and thus conquer market share.

In the beginning: the first integrated payment solutions

To understand how embedded finance works, let’s go back to its beginnings. Back in the 1930s, Ford had already devised the first “automotive bank”. As the financial services were integrated directly in the automaker, customers were able to pay for their vehicle through the latter. Later on, other brands would integrate financial services to facilitate the buying journey, including superstores and online retailers who were the first to establish financing solutions. When the Internet arrived on the scene, everything picked up pace. Loyalty cards became digitised and gained new services, such as consumer credit and payments in instalments. The development of embedded finance would then accelerate, driven by the development and mainstream roll-out of apps available on smartphones. This paved the way to BaaS providers, which would enable the integration of financial services directly on retailers’ digital platforms.

In Europe, the PSD2 – revised Payment Services Directive – which entered into force EU-wide on 13 January 2018 particularly set the stage for the BaaS model to emerge. This directive requires banks to open their ecosystems up to third party providers. Open Banking, with the implementation of APIs (application programming interfaces), now allows communication between the programs of banks and third-party providers. As such, banking data can now be retrieved by other financial stakeholders, especially fintechs. If customers want to transfer their accounts to new financial players, this process is now easier. With the large-scale roll-out of digital tools, consumer practices across the board are being overhauled.

A versatile and diversified ecosystem

The digital revolution has spawned new practices. It is now fairly common for a purchase to be carried out directly on a smartphone. This really is a high-stakes issue for brands, who don’t want to be putting consumers off with overly complex customer journeys. Financial services and payment solutions directly integrated into apps are experiencing strong growth in this context.

There are now many Banking-as-a-Service providers worldwide. Their solutions combine a technical solution (core banking), bank services (particularly with the option of issuing plastic and virtual payment cards) and a regulatory license. These can thus easily and directly be used by all market services (online retailers, fintechs, sale of services, etc.) who transfer regulatory responsibility to a third-party provider. This is the case for the French company Treezor, as well as the UK-based Railsr, and German provider Solaris.

With white-label payment services in mind, BaaS providers support companies in their growth. As key stakeholders in the payment sector, they position themselves alongside fintechs, startups and large corporations to provide them with turnkey solutions. Some fintechs, after expanding thanks to a third-party regulatory license, subsequently choose to become payment institutions themselves. The company Shine is a case in point, as it has just obtained its license from the ACPR, France’s banking regulator. Although responsible for regulatory compliance, they continue to partner with BaaS providers which can support them regarding technical aspects and core banking.

On a final note, some stakeholders have developed their own solution for managing transactions in-house. Uber is one such example, as it has deployed its own payment solution within its app. Fully integrated payment makes the buying process much easier, especially via an instant payment option. The US ride-hailing giant has gone a step further by making payment cards available to some drivers who had previously been remote from the traditional banking system. For that, Uber harnesses a BaaS solution powered by Green Dot and Barclays (Source: ProcessMaker article from 04/05/2021).

A booming market

The roll-out of digital technology is proving to be a game-changer for consumer habits. The pandemic has accelerated the movement: for the vast majority of consumers, transactions are now no longer done in a physical store, nor even on a computer, but directly from a smartphone. Online purchasing surged throughout Europe in 2020 and 2021. And far from waning as the pandemic has eased, the phenomenon is expected to grow further over the years to come. As such, according to data published by the French Federation of e-commerce and online sales (Fevad), online sales of products and services in France soared by 15.1% in 2021 to €129.1 billion. The e-commerce turnover for all European countries combined amounted to €757 billion for 2021 (Source : https://ecommerce-europe.eu/). On top of these figures we need to add B2B transactions coming from “neobanks” for professionals or new HR and expense report management solutions which are rapidly rising nowadays.

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The different dimensions of embedded finance

BaaS solutions open up a broad spectrum of possibilities

If a BaaS solution enables any stakeholder to quickly integrate a core banking option, achieve regulatory compliance and issue payment cards, embedded finance gives businesses that use it a whole host of other advantages.

Better customer knowledge

Whenever a new account is opened, there are regulatory requirements to verify the identity of the account holder: this is known as the KYC (Know Your Customer) process. There are innovative solutions available with that in mind, which do not hamper the registration process and also comply with local regulations, via fully online video-based verification.

The benefits of setting up a BaaS solution include more than merely streamlining the regulatory verification processes. Thanks to a seamless registration journey, the KYC procedure not only ensures the security of customer onboarding, but can also collect data about customers and consumers. Businesses will then be able to use this invaluable information to promote products and services in connection with their customers’ expectations. A BaaS solution combined with use of the services of identity verification platforms like Onfido, Ubble, IDNow, Webhelp, Vialink or Ariad Next can enhance the performance of the KYC process and make it more seamless.

More efficient payment and collection solutions

BaaS solutions can also streamline money transfers. With the establishment of the Single Euro Payments Area (SEPA), payments within the EU have become as efficient and safe as national payments. This is in addition to the framework of the PSD2, which enables the exchange of banking information. Against this backdrop, APIs that are easy to embed on a BaaS platform will make it possible to add services for end users.

Accordingly, thanks to more seamless transactions, new services are emerging, including automated savings apps, automated recurring billing software (such as Zuora or Chargebee) and automated invoice management tools for businesses (such as Libeo). Other providers, such as Checkout or Adyen, have designed business-tailored solutions for accepting payments, especially in the e-commerce sector. These ensure instant transactions and the possibility of handling foreign currencies.

A host of innovations to come

By streamlining the registration journey and facilitating transaction flows, BaaS solutions make it easy to roll out new financial services. This is setting the stage for new fintechs and new offers to emerge. One fintech for example, October, is a lending platform which provides SMEs with financing solutions by putting businesses looking for funding in touch with investors. Businesses using Alma, meanwhile, can give their customers the option of paying in instalments, a solution which empowers retailers to significantly increase their turnover. The potential for rolling out innovative solutions by leveraging embedded finance is clearly demonstrated. US private equity firm Lightyear Capital thus estimates that the embedded finance market could generate USD 230 billion in revenue by 2025, versus USD 22.5 billion in 2020, which equates to an annual growth of around 40% between now and 2025. Sectors which could swiftly drive up their revenues thanks to BaaS solutions include payment services as well as wealth management, insurance and consumer loan specialists.

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