Embedded finance: How banks and customer platforms are converging

Europe’s embedded-finance market is growing at double-digit rates. It is becoming increasingly important for banks, merchants, and other customer platforms to participate.

Two ways embedded finance is delivered to customers

🔹 Partnership archetype: Customer owner and financial services provider

Customer platforms and merchants that do not want the investment and commitment of building their own EF capability often partner with a provider. These partnerships range from plain-vanilla point-of-sale financing for electronics retailers to more specialized models. Amazon Germany offers preapproved and tailored loans to its SME sellers via a seller portal in partnership with ING. ING gets leads from Amazon through the seamless redirection of sellers and uses Amazon data on seller performance to make credit decisions and provide loans in a few clicks. Another example is eBay, which, in partnership with YouLend, offers sellers flexible funding that can be used for any business purpose.

There are many specialists and fintechs in the provider space, and incumbent banks are waking up to the challenge. Many financial services providers are investing in embedded finance, for example, by digitizing and automating credit origination and modularizing their ability to integrate with third-party channels so they can do it quickly and inexpensively.

This approach lets the party that owns the customer focus on their core business, retain the flexibility to switch providers, and keep their brand separate from financial services.

🔹 Merchant-alone archetype: Built and owned

If the customer owner is sizable and the EF offering significantly contributes to the core value proposition, the merchant may benefit from building and owning its EF capability. This archetype is common among auto OEMs. Volkswagen, for instance, offers loans though Volkswagen Credit. Since the company deeply understands the residual values of its cars, it can value its trade-ins more accurately than a third party, leading to better customer offers and margins. Customers also get the convenience of a financing offering at their point of need, online or at the dealership. As more customers buy online directly from the dealer, more OEMs may take ownership of financing, including leasing.

Several retail merchants have adopted this archetype. The UK-based online retailer Very evolved from a shopping catalogue business in 2009. It has offered its EF solution, Very Pay, to customers for more than a decade. The Polish online marketplace Allegro, which sells 70 million items a month, launched its fintech, Allegro Pay, in 2020.

The build approach provides a foundation for shared incentives and strong alignment, including the flexibility to modify offerings in the light of transparent economics. It can also ensure the control and use of data—for example, for personalized campaigning and offerings. However, these advantages should be weighed against the risk of later deciding to switch to a third-party provider, which could require abandoning a significant investment.

Author

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