When financial technology company FIS asked banks and other financial services executives at the end of last year what their priorities were for investment in business innovation in 2023, embedded finance topped the list. But since then several companies implementing embedded finance strategies have run into trouble, raising questions about its value.
Accounting and business management software company Xero this month sold its lending subsidiary Waddle - just three years after acquiring it.
Fintech Douugh has had to postpone plans to offer a banking service as part of its personal financial management offering, after its partner Volt went out of business.
And Tyro Payments, which operates a banking business offering loans to its merchant customers, has put the banking operation under review.
FIS surveyed 2000 executives from banks, insurers, capital markets firms, fintechs, tech companies and merchants in nine countries for its 2023 Global Innovation Report.
According to an Australian version of the report, 89 per cent of respondents said embedded finance would affect their businesses in the year ahead and 92 per cent said it would have an impact over the next three years.
Embedded finance is the placing of a financial product within non-financial consumer platforms and business accounting and e-commerce platforms. White label services have been around for decades but what is new is the integration of financial products into digital interfaces that consumers and businesses use daily.
Thirty-nine per cent of financial services firms said they would invest “significantly” in the development of embedded finance products over the coming year.
FIS vice president for capital markets in Asia Pacific, Nick Aronson, said: “For financial services firms, embedded finance will enable new distribution channels and is seen as a key to staying competitive. We think it is likely to be an essential piece in every strategic playbook in 2023 and beyond.”
In another report, McKinsey estimated that embedded finance generated global revenue of US$20 billion in 2021, an amount that could double over the next three to five years.
But recent experience suggests it is easier said than done.
For Tyro, banking plays a small part in its overall business, making a contribution of $8.5 million of gross profit to group gross profit of $204.3 million in the year to June.
At a time when the business outlook is uncertain and funding costs are high, a lending business that makes such a small contribution to total earnings could be more of a distraction than a source of new business.
Waddle presented a similar problem for Xero. The business, which is being sold to Commonwealth Bank, is a cloud-based lending platform offering invoice financing. It was launched in 2014 and acquired by Xero in 2020.
Xero got out of the business as part of a streamlining program that saw the company’s headcount reduced by more than 700 staff. At the end of the day, a lending business was nice to have but not essential.
For Douugh, the problem was relying on a start-up bank that saw embedded finance as a way of establishing distribution but could not deliver. Douugh is still hopeful of adding a banking offering to its range of offerings but it has been over a year since Volt shut down and an alternative has yet to emerge.
Another concern for companies thinking about embedded finance is the risk that data privacy and security concerns will increase with a move into finance.