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2022 Retail Banking Monitor: Repositioning for embedded finance

Andreas Pratz and Timm Niethammer
June 29, 2022

While the top line for customers has proven resilient in the retail banking space, with growth of approximately 3-4% on a per customer basis, we need to focus on another factor of importance: Within the banks analyzed in the Retail Banking Monitor, we observed that several banks are gradually losing customers rather than adding new ones.

This raises the question of where these customers are shifting towards. As pressure from Embedded Finance is growing, the retail banks’ share of the retail banking revenue pool is decreasing. Non-banks are driving the business within Embedded Finance, reducing the banks’ relevance in the retail banking segment. Based on our estimates, Embedded Finance is expected to account for >15% of the share of the revenue pool in Europe in 2030.

The integration of financial tools and services into user journeys is changing the way people are consuming financial services. Tailored financial solutions are now offered to consumers directly when they need them most: Be it as part of a media or communications subscription, via the car, or through an online or offline retailer – Embedded Finance is becoming an integral part of the user journey.

Benefits for partner firms, consumers and financial services providers

By embedding financial services into the sale of another product or service, these distributors or producers are seeking an improved customer experience (and resulting sales conversion), stronger customer loyalty and relationships, and a slice of the cake in respect of payment, insurance or lending revenues. Apple’s venturing into Buy-Now-Pay-Later or retailers’ setting up their own payment divisions (e.g. Zalando, Otto, MercadoLibre) are prominent examples.

For financial services providers, Embedded Finance offers a growth opportunity beyond mature and saturated traditional sales channels that still sits within their core value proposition. In addition, understanding emerging customer needs and benefitting from the image and trustworthiness of the partner’s brand helps Financial Services providers to emancipate themselves from the dusty image of being e.g., an “insurer” or a “bricks and mortar bank”.

Especially in recent years, the topic of Embedded Finance has gained traction, based on an increasing range of offerings and examples. This is driven by customers who are increasingly welcoming attractive, one-stop shopping experiences - powered by Embedded Finance. At the same time, an increasing number of companies has started to integrate financial offerings into their service portfolio, fueling the opportunities for users to consume financial services.

The market for embedded finance is currently estimated at USD 22.5bn in the United States alone and is expected to grow by more than 10 times to USD 230 bn in terms of new revenue volume by 2025.

A variety of use cases is emerging

While there is a great variety of use cases across areas, we want to highlight a few selected use cases as part of Embedded Finance:

  1. Mobility - Mobility subscription solutions enabled by Embedded Finance: Traditional car ownership models are evolving as new mobility solutions are launched. Mobility subscription models are on the rise and gaining popularity, e.g. Care by Volvo. For a monthly fixed price the service includes full insurance coverage, maintenance and a contract with just 3 months’ notice period.
  2. Travel - Rise in BNPL offerings: Across the travel industry, Buy-Now-Pay-Later offerings are growing in popularity and attracting customers to go on a sought-after vacation, especially following the easing of Covid restrictions, even if the budget is tight. Airlines in particular, which have been hit hard during the pandemic, can leverage BNPL offerings to increase sales and utilization of airplanes.
  3. Agriculture - Pay-per-use solutions: Within agriculture, pay-per-use solutions are offered by providers to enable customers to shift away from traditional ownership of machines and instead pay only for the actual usage of the machinery. This increases financial flexibility for firms, as they only pay for the equipment when they actually use it and don’t have a fixed monthly minimum payment.
  4. Health - Financing of major interventions: By partnering with Embedded Finance providers, hospitals can offer patients solutions to finance major interventions. In these partnerships, Embedded Finance providers pay the hospitals upfront, while providing low interest options to the clients.
  5. Durables and Furniture - New add-on retail offerings: Embedded Finance enables retailers to offer additional services for their products – be it for financing purchases or to allow consumers to insure their new products. For example, Ikea offers Home Insurance in partnership with iptiQ as a white-label provider (part of Swiss Re Group). In typical Ikea fashion, the insurance is called HEMSÄKER and can be purchased online via the Ikea website.
New capabilities are required

So, how to keep up with Embedded Finance? Succeeding in Embedded Finance requires adding a new skill set and approach to the core direct-to-consumer business traditionally known to retail banks. In addition, banks are under pressure to sustain their unique identity, given that bank brands are fading as consumers are primarily driven by their brand loyalty to businesses rather than banks.

In this context, we use the B-U-I-L-D framework in our work to identify key requirements for staying competitive within Embedded Finance:

  • Basis: Banks need to provide white-label enabling platforms and need to have corresponding business processes in place to support Embedded Finance solutions. This basis is critical to being able to offer Embedded Finance solutions and serves as the backbone of the offering.
  • User Experience: A holistic and superior user experience is the key to success in Embedded Finance. Therefore, the Embedded Finance offering needs to be integrated in a frictionless manner to support a positive user experience. It is critical to fully understand the needs of the consumer and how they can be addressed in the various contexts - be it in the car, while online shopping or while consuming media.
  • Intelligence: Intelligence in the background is required for advanced scoring and risk management. Banks need to be able to score partner customer profiles and associated risks (e.g., KYC, fraud) to be able to offer the products and services at the right price and to anticipate shifts in risk patterns early on, to adapt prices accordingly.
  • Leadership in partnering: Partner relationships need to be actively managed by banks to stay successful. Banks also need to focus on their positioning with respect to specific coverage to best position themselves within Embedded Finance.
  • Development and Innovation: Given the constantly evolving Embedded Finance landscape, it is necessary for banks to adapt and constantly innovate in order to stay relevant. Offerings need to be adjusted to the latest consumer preferences, and products need to stay innovative in order to be attractive for consumers.
Reposition now to be ready for the future

As shown, there is a plethora of future opportunities within Embedded Finance, in line with strong expected growth in the market. Banks and payment players now need to carefully assess how they have to reposition themselves and adapt their value proposition to address these trends, stay relevant and participate in the growth.

Timm Niethammer also contributed to this report.

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Andreas Pratz

Andreas Pratz

Partner, Strategy& Germany

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