Embedded Finance: Enabling ecosystems to drive financial growth and inclusion.

Oluseye Farodoye is the head of Telco Industry strategy at Google Cloud. This article discusses enabling ecosystems to drive financial growth and inclusion.

What is Embedded Finance?

In a nutshell, it is just finding ways to seamlessly integrate your services and products within the offerings of any other service to all the customers you serve within your ecosystem.

It is not about trying to deliver digital products and services within your own digital surface. It’s about trying to ensure that you meet the customers where they do their daily activities. So, it’s about trying to embed your services within a large and diverse digital ecosystem.

Embedded finance tries to ensure that at any point within the customer journey, you can find financial services that are relevant to your journey at that point in time. E.g., a rideshare driver being paid and insured directly through a platform app.

Embedded finance goes beyond finance. It can permeate every aspect of our lives in which money is involved. It can work so that users might never know they are interacting with a financial institution.

The trend is customers and users spend a lot of their time within other digital platforms and digital surfaces. So they may be on Instagram, Facebook, or anywhere else, not necessarily on the app, website, or financial brand.

For a US Bank, the average customer spends about 300 visits on the mobile bank and 10 visits to the actual bank.

Is Embedded Finance old or new?

The opportunity is expected to grow over the next couple of years. It’s expected to grow and generate about $230 billion in revenue by 2025. It cuts across every sector within the financial industry – wealth management, customer lending, and insurance payments.

Banks generally embedded themselves in several aspects of the customer journey in the pre-digital era. So you had branches near where people had to do deposits, branches close to certain businesses, branches set in certain towns, and branches close to retailers. So banks have always participated in or practiced the embedded finance approach by creating branches across different sectors of different parts of the economy. What banks are starting to do now is to move away from physical branches and ensure that financial services or financial products are available at every single point of a customer journey.

The bank of tomorrow must serve tomorrow’s customers and provide omnichannel experiences, practice support, and real-time embedded banking, both for your back-end and front-end systems. Banks must ensure that their digital back-end systems are able, resilient, and available to support the high-impact, high-throughput transactions to deliver their services and provide them to customers within their entire digital touchpoints.

What is API Monetization?

In the pre-digital era, branches were established and set up for-

• new customer acquisition,
• to be able to target new market positions
• ensure new transaction volumes,
• direct monetization for some services within the branches.

This is how banks have done monetization in the past. They’re doing the same thing now with API monetization.

How can you have a successful go-to-market strategy for entering the world of embedded finance? 

• Embrace a new digital brand and personality.
• Treating developers as customers is key to being successful in the API economy.
• Targeting micro-segments rather than having large micro-segments
• Set enterprise-level goals to track and measure your progress on your performance as a whole.

How can you have a successful go-to-market strategy for entering the world of embedded finance? 

• Embrace a new digital brand and personality. You should not focus solely on your app, website, or portal. You should understand what customers within your ecosystem want to do and show that you can meet them at that point. You need to change your brand and personality to meet the customers or the preferred digital interface. And this is extremely important in the world of embedded finance. Because changing your personality means you change the way you look at innovation. You’re outsourcing some of your innovation to the overall community. And you’re supporting a broader ecosystem of developers. So overall, the value chain for delivering digital services would need to radically change from being one-sided to ensuring that you’re supporting the overall value chain from the back end all the way to the customer.
• Treating developers as customers is key to being successful in the API economy. Developers are the ones building the apps that the customers use eventually. They’re the ones ultimately using and testing your APIs to ensure they’re able to deliver the experiences you desire. So you need to empower them as fast as possible. You must ensure that the experience of using APIs is as seamless as possible. This allows them to build the apps and experiences that customers that enter this value chain would use. The marketing mix for developers looks at a broad range of domains, from products, place, price, the promotion of APIs, the people, the process, and the physical environment. Your APIs become your physical evidence of capability. The pricing needs to be supporting the ecosystem as a whole. And the customer’s preferred digital interface becomes the place where you do business. It is an extremely difficult task to know what APIs developers want and extremely difficult to understand which APIs you’re going to launch first. So working with your development and product teams to identify the APIs usually requires a lot of experimentation. Once you get that done, you launch that API and send it out to the market. The data you get from the API users allows you to get more information on building new API products and expanding your API portfolio.
• Targeting micro-segments rather than having large micro-segments. When you start to work within the domain of API marketplaces and ecosystems, microsystems start to emerge within your ecosystem. Rather than having large macro segments, your API products and developer programs become reusable entities. To identify micro-segments, first, you identify domains. For example, let us consider the “Home” domain. There are five customer stages within the home domain: renting, buying or selling, living, upgrading, and aging. Within these five domains, a couple of micro-segments emerge- letting agents, renting, utilities, security, insurance, and living. By looking at this, you can imagine the kind of products and services you might want to offer within these five domains. You can identify the APIs that can be built for the services. You can support a diverse range of third-party apps, compared to having just one set of journeys within your propriety ecosystem, your app, or your websites. You can start to see the products you could build for the overall customer journey and the APIs you need to develop to ensure that developers can build those apps within their own ecosystems. Getting sales conversions from your app and third-party apps leads to doubling the business impact of your API. It leads to several network effects. On the one hand, you can get the same side network effects, which means customers who use the third-party app will attract more customers making developers happy to build more. It also leads to the same side network effects on the developer side. The developers happy with your API products will attract more developers to use those types of API products. On the other hand, it also leads to cross-side network effects, which means developers will attract new customers by building new engaging experiences. And because you have got more customers, it will attract more developers to use your APIs to build new digital experiences. So the effects are not just about the journey or the impact on your business; you start to grow the ecosystem significantly without putting too much effort.
• Set enterprise-level goals to track and measure your progress on your performance as a whole.

How should the C-level mobilize the entry into Embedded Finance?

Embedded finance is usually treated as a foreign market entry. It is a new domain for most organizations and needs to be funded as an internal corporate venture.

If you enter a new market, there are cultural differences between Country A’s and Country B’s markets. There are geographic differences, economic differences in some cases, and administrative differences. It is the same for embedded finance. It is generally what we see within the world of API-led programs as a whole.

When you start to move from running your API program to support your internal use cases to building an ecosystem to support external use cases and a diverse ecosystem of partners, you start to understand and see that this is a shift from the way you used to do things before to support your own business to supporting a larger ecosystem of people across the ecosystem. So your culture needs to change.

The economics also changes. You must ensure that the entire end-to-end experience and intellectual property stay within my brand. Governance changes as you add on business partners and third-party APIs. Segmentation also changes. It is a shift in how funding needs to happen.

So, overall it is a mindset shift.

Going into the world of embedded finance requires entrepreneurial activity within the corporate infrastructure and showing that they can do that without impacting the business.