Summary of "Embedded Finance: The Choices and Trade-offs for US Banks"
The report "Embedded Finance: The Choices and Trade-offs for US Banks" by Andy Dresner, Brian Pike, and Harry Schiff outlines the evolving landscape of embedded finance in the US banking sector, focusing on the strategic decisions and trade-offs that banks of different sizes and profiles face.
Main Points:
Overview of Embedded Finance
- Definition: Embedded finance refers to the delivery of financial products such as loans, insurance, and payments by non-financial entities as part of a broader non-financial offering.
- Value: Estimated to be worth $20 billion in the US, it enriches the value and customer experience by integrating financial services seamlessly into everyday activities.
Key Players and Partnerships
- Major Brands and Tech Platforms: Examples include Toast, Uber, and airlines partnering with banks and fintechs to offer services like merchant cash advances, debit cards, and installment loans.
- Partnerships and Offerings: These partnerships enable banks to expand their distribution footprint with low overhead, targeting diverse customer segments.
Risks and Opportunities
- Opportunities: Potential for revenue growth and diversification through partnerships.
- Risks: Loss of direct customer relationships, potential cannibalization of core products, and commoditization of services.
Strategic Postures for Banks
- Durbin-Exempt Banks: Smaller banks benefit from the Durbin Amendment, allowing higher interchange rates, making them attractive partners for EF. However, they face challenges in technology integration and differentiation.
- Regional and Segment Specialist Banks: Larger banks with specific market boundaries can leverage their scale to offer unique EF solutions without significant cannibalization risks.
- Large, Diversified Banks: Face significant challenges due to cost structures and regulatory constraints, but opportunities emerge with the shift towards credit and lending use cases, leveraging balance sheets and risk management capabilities.
Six Strategic Postures
- In-House Integration: Larger banks could integrate EF-like experiences into their core offerings, enhancing customer experience.
- Targeted Proposals: Leveraging niches within the product portfolio for targeted EF propositions.
- Partnerships and Aggregators: Collaboration with software platforms, marketplaces, and retailers to expand reach without direct cannibalization.
- Diversification Strategies: Focusing on lending, credit, and specialized areas to maintain market position amidst potential cannibalization.
- Differentiation Through Technology and Customization: Enhancing technology infrastructure and offering customizable compliance processes through APIs.
- Repositioning as Challenger Banks: Launching new platforms or services aimed at underserved segments or markets.
Conclusion:
The report underscores the dynamic nature of the embedded finance sector and the critical decisions banks must make regarding their participation, partnership strategies, and internal capabilities to navigate the opportunities and challenges effectively. Each bank archetype faces distinct trade-offs, influencing their approach to embedding financial services within their broader offerings.
