61 % of Germans would purchase financial services via an online retailer, according to a study published by Solarisbank and the Handelsblatt Research Institute in April 2021 . In contrast, 65 % of German banks surveyed as part of a study published in 2020 by the market research company Lünendonk do not see their customer interface threatened . The situation is similar when it comes to the question of whether banks see themselves threatened by disruption on the part of digital competitors, with 68% answering in the negative. In view of these contradictory figures, the question arises whether German banks are about to miss one of the “most disruptive trends in payments, banking and technology today” according to Forbes contributor Jordan McKee : Embedded Finance.
What is Embedded Finance?
Embedded finance, also known as contextual banking, refers to the seamless integration of financial services into the customer journeys of non-banks so that they are offered to customers when and where they need them (see ).
“Buy now, pay later” (BNPL) is a classic example. The customer is on an e-commerce site and wants to buy a washing machine, for example, but does not have enough money at the present time. This is where the customer journey ends for many customers, who either shy away from applying for a loan or simply don’t think of it. The more determined among them would previously have had to either visit the branch of their bank or a credit institution or go through an often cumbersome process online, only to be rejected in the end. The potential for frustration is high. With embedded finance, on the other hand, the e-commerce merchant, cooperating with a bank or FinTech in the background, can offer the customer an installment payment option at checkout. The customer receives the machine, and everything else runs in the background. [cf. 4]
Embedded finance use cases initially focused mainly on the payments area , but they now can be found in every area of banking:
The most widespread form of embedded payments is the payment method stored in the online store or app, which makes the checkout process faster and more convenient. This also includes the use of payment solutions such as Apple Pay or Google Pay at the point of sale. Recent examples of payments via app include Uber and Starbucks . Uber rides can be paid for automatically via the app, which also offers additional features such as sharing ride costs or giving a tip . Starbucks customers can pay for their purchases at Starbucks with just one click in the app, and usage is rewarded through an incentive system that builds customer loyalty.
The “buy now, pay later” example mentioned at the beginning of this section is an increasingly popular embedded lending solution which sees financial service providers, such as Klarna, enabling e-commerce stores to offer different credit models. In another variant of embedded lending, e-commerce platforms or vertical software providers, such as Amazon, Alibaba, Shopify, or Mindbody, use their data about merchants to grant them loans or to actively offer them to merchants when there is an indication of need . In the education sector, there are already innovative financing solutions as well, such as with Lambda School, a training program for future programmers, where the training can be financed by paying a certain percentage of one’s income after being employed .
Embedded investment solutions are few and far between, primarily in the form of apps that invest a small amount in stocks every time a deposited card is used to make a payment (e.g., Acorns or Grifin). In the case of the FinTech Stash, this feature is part of a rewards program for using its debit card. 
In some areas, it has long been possible to add an insurance service at checkout, for example, travel insurance. However, such offers are often very standardized and managed by the insurer, and integration is time-consuming and expensive . Yet the market potential for personalized insurance is large, especially for high-value consumer goods, such as cameras . Or also for cars, where there are already car manufacturers offering embedded insurance, such as Tesla, but also BMW and Ford .
Who Benefits from Embedded Finance?
The benefits of embedded finance are many. The main beneficiaries are, of course, the customers, who can obtain financial services without media breaks via the brands with which they interact anyway, precisely when they need them. However, the potential for innovation through embedded finance is likely to offer even greater benefits than convenience. According to embedded finance consultant and expert Simon Torrance, today’s banking products cover just about one percent of the actual financial needs of bank customers . By cooperating with merchants who have completely different customer data, financial service providers will be able to offer customers completely new, much more personalized services tailored to their needs. What’s more, it is only through embedded finance that some customers gain access to financial services such as loans in the first place.
Merchants, in turn, can retain customers and generate additional revenue by offering simplified, integrated processes and expanding their service portfolios . The introduction of BNPL, for example, has been shown to lead to a greater shopping cart value per customer as well as a higher conversion rate .
Improved services as well as the expansion of existing and the potential opening up of new markets are of course also advantages for cooperating financial institutions. In addition, they benefit from lower customer acquisition costs, especially if they manage to cooperate with large e-commerce providers, because then they benefit from the strength of the brand. And since most companies rely on cooperations with existing financial service providers in order to be able to focus on their core business and to benefit from the existing infrastructure and the experience of the institutions in risk management and regulatory compliance, this brand strength has actually been more of an asset than a threat so far. 
According to estimates by Lightyear Capital, embedded finance could generate up to $230 billion in additional revenue for financial services providers globally as early as 2025 . Simon Torrance projects a total global market value of over $7 trillion by 2030 . The potential for embedded finance services is therefore great, and the demand exists in Germany as well. The fact that German banks do not see themselves threatened by disruption could be explained by the fact that they themselves are planning to position themselves as providers; however, this is contradicted by the fact that only around one in three banks is planning to participate in digital platform ecosystems as a contributor . If traditional financial institutions want to claim a share of the value creation for themselves and do not want to (completely) lose customer contact, especially in the payment area and in the granting of consumer loans, they should therefore address the issue now.
Positioning Options for Banks
In his keynote at Open Banking World Congress ’21, Simon Torrance lays out a vision for the future of embedded finance in which the customer interface is securely in the hands of digital platforms that help customers meet their everyday needs . Individual financial products and capabilities to deliver them will become commodities that platform providers will customize using intermediary developer portals and integrate into their processes and products to simplify and enrich the customer journey to best support their core business.
For banks, Torrance sees a number of positioning options in this regard. The most obvious and least risky option is to offer modular financial products, but this offers only limited differentiation potential. A second option is to try to build a digital platform yourself, as State Bank of India has done with its YONO super app, which combines e-commerce and banking. Such an undertaking should be thoroughly considered, however, as the position of ecosystem orchestrator is highly coveted and, accordingly, fiercely contested. The third and probably most promising option is to build a dedicated developer portal to support digital platforms in integrating the right financial services at the right point in the customer journey, as it is only through this step that the potential of embedded finance is realized. 
Embedded Finance – One Size Fits All?
As large as the projected market volume for embedded finance solutions is, it is striking that most applications to date have been in the areas of payments and lending, with only a few involving investments or insurance. According to Paolo Sironi, Global Research Leader Banking and Financial Markets at the IBM Institute for Business Value, the reason for this is the varying degree of complexity of the services . He sees the areas of payments, lending and investments, and the insurance business – in exactly that order – on a continuum between the poles of symmetric and asymmetric information. Here, he understands information (a)symmetry as how self-explanatory the value proposition of a service is to the customer. While the benefit of a payment service is obvious to the customer – the target is often visibly in the shopping cart – it takes much more education to make a customer understand the need for life insurance, for example. So the payment service may well fade into the background for the customer, just as, incidentally, the financing service, to which Sironi tends to attest a symmetrical information situation. Insurance or an investment, on the other hand, tend to be advice-intensive services whose value the customer must first be made aware of, which is why it would be possible, but not very useful, to try to incorporate them into a process. Of course, this does not apply to all services from a particular area, as can be seen from the example of car insurance. This classification is therefore more of a tendency than an incontrovertible rule. Nevertheless, investment or insurance services will escape the embedded finance trend for the foreseeable future, which brings us to the opposite, complementary trend: conscious banking. 
Embedded Finance vs. Conscious Banking
While in embedded finance – or to stay with Sironi’s terminology: contextual banking – the financial services provider recedes into the background and becomes invisible to the customer, in conscious banking he is still the customer’s primary contact. Nevertheless, the model is fundamentally different from today’s banking relationships, where customers are sold products that, according to Simon Torrance, cover only a fraction of their actual financial needs . Rather, conscious banking is about providing customers with comprehensive support in identifying and pursuing their financial needs and goals in their personal and business lives . The bank provides the necessary services for this, involving FinTechs and, in the case of non-financial services, other third parties via a digital platform. However, personal contact and advice also continue to play an important role. One Swiss bank that is already moving in the direction of conscious banking is Hypothekarbank Lenzburg, which also offers its customers services from FinTechs via its online banking, as in an app store .
And how are German banks doing in terms of implementing conscious banking? Currently still mixed: 68% of the banks surveyed by Lünendonk & Hossenfelder would like to offer digital platforms and integrate other providers in the future . Unfortunately, the type of platform is not specified, so it remains unclear whether this type of platform is the orchestration of a lifestyle ecosystem or a conscious banking platform described in the previous section. Furthermore, only about 27% of banks plan to actually invest in building a platform in the next 3-4 years . So there is also a need for clarification in the area of conscious banking, both in terms of its place in the banks’ vision for the future and in terms of how the realization of this vision can be ensured through appropriate investment activities.
Embedded finance is the seamless integration of financial services into the customer journeys of non-banks and will have a major impact on banking in the future. By cooperating with retailers, it offers financial service providers the opportunity to get to know customers better and thus offer them products that are more tailored to their needs. This not only redistributes existing market shares, but also creates new ones; the market potential is huge. The question that arises is therefore not whether, but how a bank wants to get involved here. In this context, the development of previous offerings by FinTechs should also be taken into account, which in some cases is very advanced. It is also important not to look at embedded finance separately, but to always consider where it makes more sense to remain visible to the customer as a brand and to apply the conscious banking model. Embedded finance and conscious banking are two models for the banking of the future that banks should be exploring today.
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