Lectura en inglés. Artículo original publicado por la revista The Innovator
Like other retail banks worldwide, Standard Chartered faced a major dilemma: how to efficiently and economically scale up customer acquisition. The problem was particularly acute for multiple countries within the global footprint of the London-based bank. Expanding its traditional operations across its franchise of Asia, Africa, and the Middle East would have been challenging economically without relevant scale. So, Standard Chartered did what until recently would have been unthinkable. It launched an international banking-as-a-service (BaaS) offer last March called nexus, that enables digital platforms and ecosystems like e-commerce, social media or ride-hailing companies to offer loans, credit cards and savings accounts to their customers under their own brand name.
Two partners have signed up in Indonesia so far and one of them have been announced: Sociolla, the number one beauty and personal care e-commerce in Indonesia. The partnership will enable Sociolla to offer financial products, like savings accounts, loans, and credit cards that are powered by nexus in late 2021, subject to regulatory approvals. It is the second partnership nexus has forged in Indonesia, with as many as 10 more in the pipeline across the bank’s footprint, giving Standard Chartered Bank the opportunity to reach the unbanked and expand its customer base in the world’s fourth most populous country, where the e-commerce adoption rate is among the highest in the world... The bank says it intends to further roll out the service to other markets in Asia, as well as those in Africa and the Middle East that have the right regulatory frameworks and established digital platforms. “The plan is to white label internationally”, says Kelvin Tan, the global lead for nexus’ (pictured here). “In this model, there are no marketing, sales or scaling or infrastructure costs, so the margins work out better.”
Standard Chartered is one of a few banks – including BBVA, Goldman Sachs’ Marcus and Banco Sabadell Mexico – pioneering BaaS offers that underpin embedded finance, a new addressable market opportunity estimated to be worth over $7 trillion in ten years, twice the combined value of the world’s top 30 banks today, says Simon Torrance, an advisor to corporates on business model transformation.
Embedded finance is about abstracting banking and insurance functionality into technology and enabling any brand or merchant to rapidly and economically integrate innovative financial services into their offerings and customer experience. It allows those who are closer to customers to create personalized solutions that are more relevant, says Torrance, who wrote a report and organized a master class on embedded finance in December for consultancy Rainmaking. That’s not all. Embedded finance could help with financial inclusion – one of the United Nations Sustainable Development Goals, as it promises to allow many more people access to convenient bank accounts, cheaper loans and appropriate insurance.
Embedded finance could help with financial inclusion – one of the United Nations Sustainable Development Goals, as it promises to allow many more people access to convenient bank accounts, cheaper loans and appropriate insurance.
Torrance’s Rainmaking report explains how banks can use embedded finance to generate high margin revenues from new distribution channels, insurance services and bundled propositions. Other sectors can also reap big benefits. Retailers can generate new high margin revenues from supply chain finance, consumer finance and richer loyalty/rewards schemes; insurers can use the model to generate new revenues from debit/credit services and new distribution channels; manufacturers could generate new revenues from supply chain finance, consumer finance and insurance; and healthcare providers could create new revenue streams from behavior-based insurance and supply chain finance.
The Next Big Thing
It is no wonder then that some see embedded finance as the Next Big Thing. In a published presentation, Angela Strange, a partner at Silicon Valley venture capital firm Andreessen Horowitz, predicts that embedded finance will enable every company to become a fintech company. Just as today, anybody can start a software company with a credit card and a laptop because Amazon Web Services offers infrastructure as a service, dramatically reducing cost and complexity, this same monumental change — infrastructure “as a service” — is coming to financial services. This transformation will reduce the cost and complexity to become a financial services company, and importantly, it will unleash thousands of experiments that will pave the way for the future of banking, she says. Owning and controlling payments data could also be key in helping large companies outside of the financial services sector collect invaluable information about their customers and build successful platform businesses.
Think of it as the latest development platform for the digital world. The Internet itself was the first platform. It brought connectivity, says the Rainmaking embedded finance report. The Cloud followed and brought on-tap computing power and intelligence. Mobile was the third development platform which bought ubiquity. The fourth platform is financial technology, which will enable all kinds of new businesses.
Today many of the independent BaaS companies focus primarily on supporting digital companies, especially fintechs. But Torrance says he believes that non-financial sectors will constitute the larger part of the future market. As they digitize and they will also demand and expect developer-friendly solutions which are fast and easy to integrate. “This creates the perfect storm for those creating embedded finance solutions: the digitation of every sector combined with mature financial technology and integration simplicity via finance -as-a-service platform,” says the report. “The danger for banks and primary insurance companies is that they could become marginalized and commoditized in this market. Due to open banking regulations and open APIs it’s now possible for more and more finance service capabilities to be delivered by non-regulated third parties.”
Who Is Profiting From The Demand For BaaS?
So far, fintechs, such as U.K.-based Railsbank, which was featured nine months ago as a “startup of the week” in The Innovator, are taking the lead in creating sophisticated embedded finance offerings via BaaS platforms, according to Torrance’s embedded finance report. Railsbank, a four-year-old startup backed by Visa, offers fintechs, financial institutions, digital banks as well as non-financial brands and merchants a single API into the global financial system. It enables them to create and prototype any finance use case in days and launch it within weeks. Other players include Galilleo, Synapse, Marqueta, Bankable and Bond, a well-funded new startup led by senior talent from Blackrock, Goldman Sachs, Twilio, an American cloud communication platform, and Social Finance, an American online personal finance company.
“It is time for incumbents to fight back against the commodization and marginalization of the current business model and upgrade it for the digital economy,” says Torrance.
There is plenty of incentive. Even before COVID banking and insurance were ranked as two of the worst performing sectors worldwide. According to a recent report from McKinsey the economic profit of the world’s top banks and insurance companies declined by $800 billion and $300 billion respectively between 2015 and 2018 and, says Torrance, the pandemic has made things worse.
But, he says, entering the embedded finance space requires a deep understanding of the types of digital business model available and how to build a portfolio out of them.
How Embedded Financing Works
An example of embedded finance that many people are already familiar with is Uber. Uber product designs have enabled payments to be embedded into the experience of getting a ride and for the driver, into their experience of getting paid the right amount of money at the right time. Payment facilitation companies like Stripe (now worth around $36 billion) and Square (now worth about $57 billion) have grown rapidly over the last ten years by enabling this sort of capability for digital companies. And they are adding new capabilities all the time. In December Stripe announced that it is partnering with Goldman Sachs and Citi to offer business banking services including interest-bearing bank accounts, debit cards, and other cash management services. Stripe Treasury will work through a BaaS API that lets Stripe’s U.S. clients offer bank accounts to their own merchant and vendor customers. Goldman Sachs will manage the checking accounts and handle all payments made through them.
B2B e-commerce platform Shopify will be the first to integrate the Stripe Treasury offering in early 2021: Under the name Shopify Balance, it will offer bank accounts to the hundreds of thousands of merchants that use its platform. Shopify already makes over $500 million per year from financial services that it offers to its merchants and the business is growing at over 50% per month, according to Rainmaking’s embedded finance report. It explains that Shopify’s underwriting costs are much lower as it already has a huge volume of data about its users. For this reason and more financial services are, and will continue to be, very lucrative addition to the core businesses of a variety of companies.
The Banks That Are Seizing The Opportunity
If banks play their cards right, they too can enable players like e-commerce companies, telcos, ride-hailing services and big tech players to create new financial products and take a cut of the revenues.
Standard Chartered’s Tan explains the pitch. “If I were a social media or e-commerce platform and I wanted to offer financial services, I could apply for digital banking licenses in each market, set aside a couple hundred millions of dollars in paid up capital, wait about 2 years for approvals in each market, build the offering in 18 to 24 months and deal with all of the regulatory and reporting requirements. Or I could come to Standard Chartered’s banking-as-a-service solution and roll out to each market in nine to twelve months.” He says he believes BaaS will eventually help shape the future of the bank.
So does BBVA, a global Spanish bank, which went live with a similar BaaS service called Open Platform, two years before Standard Chartered. Since entering the market with its dedicated Open Platform business unit, BBVA, which focuses on Europe and North and South America, has started to win BaaS business from big U.S. and Chinese tech companies like Uber, Google and Alipay. In Mexico Uber now offers debit cards to the 35% of its new drivers who have never before accessed banking services. It has partnered with Alipay in Spain and Google Pay recently announced that it will now offer bank account and other financial management services to its users in collaboration with several banks, including BBVA, in the U.S. (In November BBVA’s U.S. operations were purchased by PNC Bank)
Globally BBVA is offering both white-label and co-branded BaaS products to clients. “Open Platform and open banking are becoming the central strategy of the bank,” says Abhishek Gupta, head of BBVA Open Platform. “Although we plan to continue to invest in our own channels we do want to be able to acquire and engage customers in partner ecosystems. Instead of opposing or being threatened by these platforms we are embracing them and doubling down on it as a strategy.”
Such deals move “the context from millions to potentially billions” of customers,” says Gupta. While revenues from BaaS services “haven’t really made a big dent yet, the leadership team at the bank recognizes the potential,” he says.
Like BBVA, Banco Sabadell, another global Spanish bank, is using Mexico as a testing group for BaaS services. It started a bank in Mexico from scratch seven years ago and quickly realized that although physical bank branches were still popular in the country that the future would be digital. What’s more some 65% of Mexicans are unbanked so there was a lot of potential to create new types of services. “Our approach was why not set up a B2B2C offer?” says Banco Sabadell Mexico CEO Francesc Noguera. “We saw that there was a huge opportunity to create a new revenue stream.” The bank started working on developing an offer in 2019 and launched a local BaaS service in 2020. One of its first customers was a Mexican telco.The phone company, which has 25 million customers, uses Banco Sabadell’s BaaS to offer digital credit to their customers. “They did not know how to start,” says Noguera. “It took us nine months to understand what data they have and what could be used. We identified over 100 variables on each customer that can be used -with the customers’ consent – to qualify them for credit.” That deal alone could bring the bank two million new loans, under a shared revenue structure.
In Mexico loan applicants often pay interest rates of 100% because risk is very high. Having the right data points from the telco partner helps the bank reduce the risk and what consumers are charged. The telco deal, like most of Banco Sabadell’s deals, is white label. “I don’t care,” says Noguera. “What I want is the business. By using this approach, I am opening a highway to customer acquisition.” For now, the bank is only using the BaaS model in Mexico but Noguera says he is convinced “the bank in Spain should do the same.”
Marcus, Goldman Sachs’ global consumer business, offers online savings accounts, certificates of deposit, personal loans, financial tools, credit card capabilities, and soon investment and checking services. It serves more than five million customers, reaching them both directly and through a BaaS strategy. It built Apple Card in partnership with Apple and it has created financial service offerings for Amazon, Walmart, JetBlue and the American Association of Retired People. “In our case we care about our brand and reputation,” says Marcus chairman Harit Talwar. “We will not do business with companies that do not share our value system.” The goal for both sides of its business, is to “to provide customers with value in a simple, relevant, transparent way,” says Talwar. “The future of finance is not engineering, or AI or design or data, it is how you fuse these capabilities together to make life simpler and more transparent and valuable for the customer.” Getting the execution right is hard work, he says. “You need to bring a kind of flash mob energy to the execution.”
Tips For Moving Into The Embedded Finance Space
Goldman Sachs and BBVA created separate business entities to tackle embedded finance, a reminder that new digital business models require radically different skills, technology and metrics, says Torrance, the author of the Rainmaking embedded finance report. Establishing joint ventures with proven entrepreneurs as Pingan, a Chinese conglomerate whose holdings mainly deal with insurance, banking, and financial services, does to kick-start its ventures, is one of the most effective approaches to reducing risk, says Torrance. It is also critical for banks and any other business that wants to capitalize on the embedded finance trend to re-allocate sufficient capital and resources from other initiatives to support their entry into the market in a meaningful way. In order to determine where to play and how to win corporates can quickly test and learn by collaborating with startups in the space. “This can help fast track customer engagement and internal understanding, create opportunities for acquisition, and in so doing build technical capability faster,” says Torrance’s report. “There is no time to waste when there is $7 trillion at stake.”