December 6, 2022

Chief Growth Officer at OpenPayd, 3x BAAS & Embedded Finance Exec, Founder of Beyond Fintech series

The embedded finance movement is growing at an extraordinary rate. New embedded finance-enabled products and services are being launched every day, and both consumers and businesses are seeing the difference in the way they conduct their finances.

This explosion is driven in part by extraordinary growth in the number of new entrants to the embedded finance ecosystem. The fintech startup scene is now dominated by companies using embedded finance practices to help brands solve consumer problems, alongside new brands with embedded finance at their heart.

Of course, I think this growth will continue. But the medium-term future for embedded finance, and as a result for fintech generally, is, I think, one of consolidation. 

A Shake-Out Is Coming

The number of participants in the embedded finance ecosystem is growing rapidly, both as established brands and legacy institutions buy into the movement, and as entirely new companies are established to provide embedded finance services.

This growth is extremely welcome, and it is enabling a period of extraordinary innovation in financial services. But there is increasing overlap between the purviews of the different players. The boundaries between service providers and brands are going to become very blurred.

The key reason for this is the proliferation of specialist skills and knowledge – the things that currently differentiate service providers.

Soon, that expertise will be available within every reasonably-sized fintech. They will be able to build the products they want in-house, with dedicated developer teams.

Meanwhile the growing trend for ‘augmented teams,’ where third-party development agencies are brought on and ’embedded’ within an existing organization, widens the field even further. The augmented team model allows startups and growth companies to secure the tech and design skills they need without the overheads associated with growing their headcount.

As a result, there is an increasing incentive for players to move up the value chain. If brands can harness the skills they need in order to do the work of service providers, then it follows that service providers will need to change their model in order to survive. There are two key ways in which this is likely to happen.

Rebundling Is The Watchword

The first is the move toward ‘rebundling.’ Following a period of fragmentation and decentralization, we are likely going to see the focus shift toward services that bundle a collection of products and tools within single umbrella platforms.

These ‘one-stop shops’ will allow customers (whether an individual or business) to carry out a range of financial (or non-financial) tasks within a single interface: a single integration, a single contract, a single supplier relationship to manage to access a multitude of pay-in and pay-out services.

One model for this has been set by Shopify, which provides an overarching platform through which merchants can run their business. We are going to see more of this type of product, with Shopify-esque platforms revolutionizing new verticals.

Meanwhile, open banking will continue to provide some of the connective tissue for the embedded finance ecosystem. It will enable platform and product providers to incorporate pay-in and pay-out processes and account aggregation for end-to-end financial experiences. This is seen in many banks already, including Halifax, Revolut and many others

Likewise, card acquirers have started moving down the value chain by offering embedded finance services such as Stripe with their Stripe Treasury platform, Checkout (a client of OpenPayd) with their payout offering, and VivaWallet with the acquisition of their banking license and launch of banking offering for small business merchants.

Licenses Are King

Ultimately, the goal for many embedded finance providers will be to capture value throughout the chain — and this will eventually require the serious players to seek their own banking licenses.

License holders are the cornerstones of the embedded finance ecosystem, and embedded finance players can cement their position through their acquisition.

They can also serve their customers and the ecosystem at large by establishing positions that capture value at every stage of the chain, from the nuts and bolts of brand integrations all the way up to the banking and regulatory infrastructure that makes the whole system possible.

Embedded finance is growing and evolving at a remarkable rate. As the field reaches maturity, licenses will again become paramount.

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