In Chapter 2, we explored the history of financial services, which have been intrinsic to society since its earliest days. As technology has advanced, more sophisticated financial systems have been developed to connect with customers. Money has grown increasingly abstract and the customer deals with it at a distance, even invisibly. Embedded finance plays a crucial role as part of this evolution, where financial products are offered in non-financial contexts.

In this chapter, we will explore how technology companies are implementing embedded finance to better serve their customers and the impact it has on the customer and on their business model.

A MATCH MADE IN HEAVEN

Oftentimes, whether it be on the news or through social media, we hear about the Big Tech companies, the companies like Facebook, Amazon, Google, Apple, and others. We call out these four in particular because the total market cap for these four tech giants as of mid-2020 was over $5 trillion and they continue to be four of the five most valuable American companies to trade on public markets.¹ How often do you engage with one of these four players? Our guess is that you engage with a few if not all of them multiple times a day. Big Tech companies have huge audiences and are as much part of our lives as waking up in the morning. It seems that Big Tech has dabbled in just about every market and financial services is no exception. Big Tech companies have been moving into financial services for several decades, but they don't necessarily want to replace banks. And they don't have to. Investors and consumers alike seem to prefer technology companies to banks, so rather than Google calling itself a bank, we have Capital One and many other large banks calling themselves a technology company.

According to a 2019 survey by Bain & Company, accounting for more than 150,000 consumers in nearly 30 countries (Figure 3.1): “54% of respondents trust at least one tech company more than banks in general, and 29% trust at least one tech company more than their own primary bank.”²

Before we look more closely at technology companies and their involvement in financial services, let's take a high-level view at embedded finance and how it is developing today. Embedded finance means that any company can offer financial services to its customers at the moment of need and plays to the strengths of everyone in the value chain. Regulated financial institutions create the basic products (for example, a checking account), fintech intermediaries make those services available via API, or application programming interfaces, which allow the two pieces of software of the fintech intermediaries and consumer-facing tech companies to connect and exchange data, which the consumer-facing tech companies use to deliver the product to customers. The services are offered in context, at the time of purchase as an add-on that makes sense to the customer and naturally integrates into their journey.

Embedded finance makes sense for Big Tech because these companies know their customers, have strong relationships with them, and use their data to predict their needs, offering the right products, at the right price, at the right time. Big Tech excels in areas that make a difference in customers’ lives. Apple delivers beautifully designed products. Google provides an array of useful services. Amazon offers a finely crafted customer experience and customer service. Facebook offers connections to friends and loved ones.

As mentioned earlier, the system of payments is one of the first areas that startups and technology companies take on when approaching financial services, and it was also one of the first areas that banks backed out of, because the margins were so low. This is the classic innovator's dilemma case, where steel companies in Europe and the US focused on high-quality, high-margin steel, and ceded low-margin, low-quality steel to small-scale manufacturers in India or elsewhere. But eventually these low-margin manufacturers develop expertise and economies of scale and are in a position to outcompete the established companies.

This is not exactly what happened with banks, but what banks have given up by surrendering payments is data. When other companies manage the customer interactions, they also get access to payments data. When tech companies manage the cash flow of small businesses, they are also in a position to make loans, because they understand how the business works. As Dave Birch, author and commentator on digital financial services, points out, there has been a pivot from owning the account to owning the data. Banks have given up much of the data, and this presents a huge opportunity for embedded finance.

Before the digital era, aside from (perhaps) the government, financial institutions possessed the most complete picture of their customers’ lives. When customers took out auto loans, mortgages for homes, or life insurance policies, their banks saw the payments going out, and these were strong indicators of important life events. But today most of these expeditions to find the right product begin on the internet, and a handful of technology companies have the longest and most complete views on customer journeys. It is this data on which the businesses of Google/Alphabet and Facebook/Meta are built. How many times have you gone to search for a gift for your spouse or child to then find that you are shown ads for similar products across your social media? There has been a fundamental shift and financial institutions are not privy to most of this decision-making, especially around the intent to purchase. The digital era has removed financial institutions from their place of prominence in viewing the customer's life events.

MEETING EVERY FINANCIAL NEED

The concept of meeting every need of a customer is a simple one but one that has historically been extremely challenging to execute brilliantly. Through embedded finance, virtually every financial service product can be delivered via API. This includes open banking services and card processing services; payment methods like digital wallets and cross-border payments; traditional banking services, such as checking and savings accounts; lending; and credit scoring. Let's look at a handful of these products in more detail.

BIG TECH IS PART OF CUSTOMERS’ EVERYDAY LIVES

By now most of us are accustomed to seeing recommendations on Amazon or Netflix that seem to indicate the services know us better than we know ourselves. We are used to seeing marketing on Facebook that makes it seem like Mark Zuckerberg has been listening to the conversation we just had with our spouse about a trip to the Caribbean only to find ads for hotels in the Bahamas on our next log in.

The tech giants know us, for better or worse, and because of their transactional nature, each of these companies is already deeply involved in the world of payments, traditionally the domain of banks, and they are increasingly part of the lending and credit landscape as well. But embedded finance means tech companies can assume an even larger role in customers’ lives and earn money and customer loyalty by doing so.

Let's talk about the loyalty piece for a moment. To this point, we have continuously emphasized the importance of experiences and meeting customers where they are, but let's explore another side of this, loyalty and brand affinity. Remember when the iPhone and subsequent versions launched? People were rushing to YouTube and other streaming channels to watch people unbox the devices—it was a collective moment in time.

For those who have iPhones, do you remember your first iPhone and how it felt to open that box for the first time? The design and wrapping were done in a way that was very Apple and you felt part of a club. This passion for brand is not only true for electronic devices, but across retail as well. Nike is famous for their unboxing of limited edition sneakers with no attention to detail being overlooked. Each part of the unboxing has a story and a moment within it. This connectedness and true brand affinity differentiate these iconic brands from traditional financial services. That feeling that was just described with the unboxing of the iPhone above, have you ever had a similar feeling opening up your first bank account or receiving a new credit card?

It has been mentioned that there is little incentive for tech companies to become banks, which would sink them into a world of regulations and capital requirements, so why would they want to be involved in embedded finance? For the revenues, of course, but also for increasing customer loyalty and ultimately lifetime value. Companies actively participating in embedded finance are predicted to reach a market capitalization of $7 trillion by 2030, making it a very attractive business to get into.⁵

But why should customers entrust their financial lives to technology companies rather than the traditional players in the space, the banks? As the data in Figure 3.1 showed, most customers have a less problematic relationship with technology vendors than banks. Our relationship with money is a complicated one, and if the only experience you have with your finances is to spend money and then check your balance or get notified of fees, it makes sense that you would not have the warmest feelings toward your bank. Technology companies offer much more diverse experiences, and money is secondary. It is possible to cruise around Amazon for hours, reading reviews and discovering new products, without buying a thing. But when it comes time to buy, we feel very informed about our purchases.

It's also worth remembering that the Big Tech companies have a history of financial innovation. Mobile payments are now an everyday feature in the lives of millions of consumers. The most common services used today were pioneered through partnerships spanning the entire payments ecosystem, and delivered to customers not by the big banks but by Apple, Google, and Samsung.

Technology companies may not be perfect, and some of them indeed have a history of troubling behavior regarding privacy and customer data, but the majority of consumers care less about these details than governments do, as evidenced by their willingness to voluntarily share their data. Tech companies manage to keep their often huge pool of customers satisfied, and they're good at selling. Not only do people trust tech companies more than their banks but they trust the tech companies to offer financial services. McKinsey found in 2019 that 58% of customers said they would trust Google to provide them with financial services.⁶ This is not surprising. Google, like the other tech giants, has a loyal following and a strong brand, being nearly ubiquitous in the online experience of billions of users. And it is not just consumers. Investors are also betting on tech, and why not? Very few people think technology companies are due to shrink or lose market share in the near future, except in highly specific contexts, such as countries barring them from operating, or regulators interfering with their operations. In the same McKinsey report, it was found that in 2020 the market capitalization for the seven largest technology companies exceeded $8 trillion, almost double that of the top 200 banks in the US.

This disparity in valuations is at least partially due to technology companies beginning to offer financial services, according to the McKinsey report. Technology companies are also seen as more resilient to economic crises.

Embedded finance provides wholly new experiences for customers, removing the historically cumbersome checkout payment experience entirely, as with Uber rides and deliveries where customers don't have to pull out their wallet while getting out of the car at the airport or when their food is delivered to their front door. Technology companies invest in creating superior user experiences, to the point of removing “banking” from the process entirely.

Because Big Tech enjoys overwhelmingly positive customer sentiment, companies have the opportunity to meet and exceed their customer expectations to further increase their brand loyalty. One of the things that Big Tech has proven to be good at is anticipating customer needs. Apple proved that, though the customer may always be right, sometimes they must be strongly guided to give up things they previously thought essential, such as floppy drives, USB ports, and headphone jacks. Big Tech gives customers what they want, and in this case what customers are asking for is financial services, whether or not they are classifying it as such.

The maturation of fintech offerings, from neobanks to digital subscriptions, means modern customers are increasingly habituated to getting their financial services needs met outside their traditional bank. They can now access financial services at the point of use, without having to think about it or having to go somewhere else. They want the convenience and the relevance of being offered the right financial service at the right time, based on the data shared with their favorite brands. Data shows time and time again that consumers will welcome increased interaction with their preferred brands if it is relevant and helpful. Every company must ask itself, after studying the data, do you really know what your customer wants, and are you prepared to deliver it in a way that is beneficial to them?

Look at Apple's forays into financial service in the last decade. Apple allows payment at the point of sale and online with the click of a button because its Apple Pay system is embedded in the iOS operating system. Apple leveraged Apple Pay into the Apple Card, offered in partnership with Mastercard and Goldman Sachs. Although Apple is a manufacturer of hardware and software, its services, including its payment and card services, form an ever-larger part of its revenue mix. Apple's services revenue grew 25% in 2021 over 2020.⁷ Apple's payment functionality is easy to embed in new iOS apps made by third parties, since it is native to the operating system.

Google and Amazon offer similar payment functionality, though each has different areas of strength and customer penetration. But are the large technology companies exceptions rather than the rule? How do other companies without these structural advantages participate?

BEYOND GOOGLE, APPLE, FACEBOOK, AND AMAZON

We've been speaking primarily about the very largest technology companies so far, but embedded finance is not limited to companies with vast budgets and hundreds of millions of users. Any company with customers that trust them and that has a product customers want to buy can also offer financial services. We will talk more about how, what this looks like, and models for success throughout this book.

BENEFITTING THE END CUSTOMER

Much like the “win-win-win” philosophy that Tui shared, Marqeta CEO and founder, Jason Gardner discussed his strategy for successful partnerships:

We think about it as a network of networks where we benefit because those cards are being built and deployed on Marqeta's platform, we help our customers grow, which they see a direct benefit of that and we see a benefit because it helps our platform grow.

Anything that can dramatically improve the experience for the end customer will gain the most traction. Oftentimes within financial services, there is a tendency to focus on the transaction, but if we shift the thinking to the desire or the event, the process changes. The event is ordering the Uber, the payment is invisible and happens in the background. If you order food off of Grubhub, you focus on what you will eat, when it will arrive, and the payment becomes secondary.

Jason believes that every large tech company will eventually want to become a payments company. Why would this be the case? The reason is actually quite simple: banks have large constituencies that they know a lot about, and many of these constituencies have had the same bank account for a decade plus. As Jason says, “Money creates loyalty. To create loyalty, it makes a lot of sense to embed banking services within their constituency. Shopify and Grab are great examples of companies doing this well." Providing the value proposition to your customers in a way in which they get something in return for it is a significant thing. There are many ways to define what that value looks like. One way is through speed. With the Square Card, people get their money faster. Through Bill.com, businesses are able to pay their bills faster, helping their business grow more quickly.

THE CASE FOR E-COMMERCE

Big Tech has led the way in embedded finance, but many smaller technology companies are beginning to follow these examples. Carvana is an online marketplace that sells second-hand automobiles. It is famous for its “car vending machines” that stand several stories tall—more memorable marketing than a billboard and communicating the brand's core message of making car-buying easy and unintimidating. Carvana is a software company that sells cars, but it also sells financing on the vehicles it sells, as well as insurance options. The sale of each vehicle may not bring much money (though the margin on used cars is significantly higher than on new cars, and used-car prices stood at record highs as this book was being published) but financing and insurance cost little to add on and may bring in meaningful revenue while also being convenient to the customer and forging stronger bonds with them for a continuing relationship.

Similar opportunities are offered by e-commerce platforms that serve multiple sellers. Those that serve sellers help them get business done without worrying about regulations or paying high banking fees to accept payments and send disbursements. This is a virtuous cycle, helping e-commerce platforms attract more customers while serving them better. One example of this concept playing out is Salesforce. Salesforce's core offering is customer relationship management (CRM) software. Its product is its software, making it a software-as-a-service (SaaS) provider, and it is known as a horizontal rather than vertical SaaS company because it serves many industries, not just one. But through its Commerce Cloud offering, an e-commerce platform, Salesforce is also an e-commerce company. It can provide not only marketing and inventory management, but also accounting software and payment processing. Accounting is another launching point for embedded finance. The accounting software provider Xero manages the business data of its customers, and this integration makes it perfectly placed to offer business loans, which it does in Australia and the UK.

Amazon, the paradigm of online marketplaces, has spawned imitators around the globe. Each region of the world faces distinct challenges, and companies must come up with creative solutions to capture market share and meet customers’ needs. Many regions of the world have faced chronic shortages in financial services and lack financial instruments such as credit ratings to determine the likelihood of borrowers repaying loans. This presents a huge opportunity to fill this gap for both businesses and consumers by businesses that have relationships with these types of customers.

Nigeria-based Jumia is a marketplace of goods and services that is sometimes called the Amazon of Africa. Because it hosts multiple sellers and understands their businesses, it can offer lending services to those sellers. These data-rich relationships enable highly efficient underwriting. The sellers can do more business, which in turn benefits Jumia. Marketplaces can even offer full-fledged banking services, enabling sellers to borrow money in order to stock up before the holiday rush, enabling more sales. Offering Buy Now, Pay Later options to sellers’ customers at the point of sale is also a revenue boost and is a perk that is being offered more and more across geographies.

Another industry that has seen strong traction around embedded finance over the past few years is cryptocurrency exchanges. (Cryptocurrencies are digital currencies whose transactions are run by decentralized systems relying on cryptography, rather than governments or central banks.) Some of those platforms started by providing existing cryptocurrency holders the ability to exchange coins on their platform for other cryptocurrencies held in separate wallets.

Bitstamp, one of the leading crypto exchanges in the world, very early on spotted the advantage of adding the capability of fiat deposit and withdrawal by their users to their platform. Bitstamp was launched in 2011 by its two founders, Nejc Kodrič and Damijan Merlak, after they realized the massive opportunity arising from the fact that to buy cryptocurrencies at the time it was necessary to send money to Japan, and purchases took three to five days. They decided to launch a crypto exchange in Europe, where the European clients could buy crypto very rapidly by giving them the ability to make fiat transfers to the bank accounts of European banking partners. Jean-Baptiste Graftieaux, CEO Europe of Bitstamp, believes that is the reason why they are now one of the platforms with the strongest network of banking partners as they invested very early on in building those relationships and capabilities for their users.

In an effort to seize the opportunity of more volume that the democratization of cryptocurrency trading would bring, many exchanges have added the ability to come with no coin and buy them directly onto their own platform, shifting the model of the separation of crypto exchanges and crypto wallets to a more integrated one with a one-stop-shop offering. Coinbase's mission is to “create an open financial system for the world” and in that context, beyond the simple purchase and sale of cryptocurrencies, has started offering the ability to save and borrow against one's crypto assets.¹⁰

Marqeta CEO Jason Gardner sees a tremendous amount of value in exchanges. Outside of the partnership with Coinbase, they have also partnered with Bakkt and Shakepay. Today, it is still challenging to convert crypto. The easiest way to do it is through your card where you are able to spend your crypto at whatever shop or restaurant you want. To help solve this challenge, Marqeta created a gateway with Coinbase so that people who hold different forms of crypto in their accounts can connect a card to their Coinbase wallet and make purchases at the point of sale. The transactions are funded in fiat currency at the prevailing dollar price in real time. The cards work both online and offline and allow people to find value in their crypto beyond converting it to fiat currency. The end user can use the card as if it were any debit, credit, or prepaid card.

While a few of the cryptocurrency platforms have also taken the leap of self-regulation, such as Coinbase, Bitstamp, and Kraken, those platforms rely on banking-as-a-service providers such as Clearbank or Fiat Republic to enable those on- and off-ramp fiat flows to ease their user journey in the world of cryptocurrencies.

The arrival of the Metaverse, immersive virtual worlds incorporating virtual reality and using a blockchain infrastructure, with players such as Meta (formerly known as Facebook), the Sandbox and Decentraland, will further accelerate this trend of the intersection between fiat and cryptocurrencies and eventually, embedded finance in those immersive worlds.¹¹ Many opportunities for real-world players will stem from it as we can see already with the opening of the first H&M shop in CEEK city,¹² the acquisition of the virtual shoe company making non-fungible tokens (NFTs) and sneakers for the metaverse RTFKT by Nike,¹³ or the launch of Adidas's Into the Metaverse NFTs that minted in a matter of hours.¹⁴ We will see more about this upcoming trend later in the book.

The business cases may be very different, but in all these examples, sellers are layering financial products and services on top of non-financial products and services to deliver deeper value to their customers in the time and place where it is needed.

WHY EMBEDDED FINANCE MAKES SENSE FOR BIG TECH

As a brand or tech company that engages in embedded finance, when more and more of your primary revenue comes from financial services through things like payments, lending, and insurance, the software portion of your revenue actually becomes less important. Why does this matter? According to the Software Products Global Market Report 2021, the total addressable market for global software products was $930 billion in 2020.¹⁵ According to the Business Research Company's Financial Services Global Market Report for 2021, the global financial services market size was $20.4 trillion in 2020.¹⁶ That is a market size 20x the size of software companies. The market opportunity is enormous. Building out the embedded finance part of your business, therefore, is a huge differentiator, because now you can get creative around your pricing models in ways that your competitors can't. Potentially removing the cost for the software portion of your offering can quickly result in greater customer acquisition, which in turn allows you to offer more embedded finance products, giving you more data on more customers and greater revenue and the cycle continues from there.

Big Tech is already layering financial products on top of its core offerings, and this will only increase. Even Apple, the most profitable consumer-facing company in the world, has benefited immensely from financial services. The largest technology firms are well positioned to profit from embedding financial services in their user experiences. They enjoy massive customer bases, positive consumer sentiment, large budgets and skilled product teams, and can roll out products rapidly, skillfully, and at scale.

Most companies do not enjoy all these advantages, but they can still participate in the embedded finance revolution, and indeed it would be a missed opportunity not to get involved. And those that get in early have an advantage. Embedded finance is here and only growing. As Matt Harris, partner at Bain Capital Ventures, puts it:

For software companies facing off against retailers broadly defined, whether it's a Shopify merchant or WalMart, they will be majority financial services in five years, for sure. No question. It will be slower in other verticals where the payments acceptance wedge is less prominent, but, as B2B payments get more and more digital and therefore monetizable, I think it'll get close to 50 percent in every vertical.

Ron Shevlin, chief research officer at Cornerstone Advisors, points out that embedded finance, while it can deliver revenue and advantages over the competition, can also be viewed as another way for companies to make life more convenient for their customers. “This is not about companies trying to become financial services providers,” Shevlin said. “They're trying to find ways to add more convenience to their customers’ lives, simplify the financial transactions and generate and create more loyalty among their customer base.”

Technology companies already know their customers and have data on their needs. They have product teams that can build quickly. Fintech companies and certain digital-forward banks have built out the infrastructure to plug into tech companies’ front ends and are eager to partner on solutions. Several successful implementations have been described in this chapter. What other companies will join them in the months and years to come?

Chapter 4 will examine the growth of embedded finance offerings in the offline, or brick-and-mortar world where the bulk of spending still takes place. Traditional points of sale present different challenges to offering financial services, but with hybrid online-offline offerings, powerful opportunities are available to retailers and brands that can craft the right experience for their customers.