Over the past few decades, one key trend has transformed the financial industry: democratisation. 20 years ago, if you wanted to withdraw, deposit, or transfer your money, you would have to walk into a bank branch. Nowadays, however, you can do all this from the palm of your hand. And democratisation goes far beyond personal finances alone. The rise of fintech solutions means that businesses have more control and flexibility over their finances than ever before.
Embedded finance, where brands integrate white-labelled financial solutions within their own offerings, is a particularly noteworthy example of this newfound democratisation. Consider the following statistics:
- Embedded finance could be worth over $7TN in ten years’ time;
- This is twice the combined value of the world’s leading 30 banks;
- Banks are increasingly looking for alternative revenue sources, with their revenues having declined by $800BN between 2015 and 2018. COVID-19 also means that banks will forego between $1.5TN to $4.7TN in cumulative revenue from 2020 to 2024.
Embedded finance allows companies to create an all-in-one ecosystem with payment functionality seamlessly built into the customer experience (CX). Take Uber, for example. Thanks to embedded finance, non-financial institutions can increase their service offering, generate more income, and improve their CX.
Consumers prefer all-in-one, integrated experiences. Banks are looking for alternative revenue streams. For non-financial institutions, this means one thing: embedded finance is only going to become more popular.
This post will explore what embedded finance is and why it has the power to transform collections.
So, what is embedded finance?
In short, embedded finance allows non-financial institutions to embed finance capabilities within their offerings. As McKinsey states: “Financial institutions are increasingly offering banking as a service (BaaS)—bundled offerings, often white-labeled or cobranded services, that nonbanks can use to serve their customers.” Their research highlights that this trend has been hastened by a few crucial factors:
- Customers increasingly demand integrated experiences, with 6 of the world’s top 7 companies being ‘ecosystems’ that offer a wide array of products and services;
- The rise of fintechs means that businesses (and consumers) expect more functionality from their financial services providers;
- Open banking has led to many banks introducing BaaS offerings;
- Banks are struggling to combat declining revenues;
- Long-term trust in traditional banks plummeted after the global financial crisis, while COVID-19 further impacted general levels of trust in said banks.
By embedding financial capabilities into their existing offerings, non-financial institutions can create a more holistic experience. Consumers do not need to deal with multiple companies, on multiple different tabs, when making a purchase, managing their account information, or receiving a refund.
Instead, they can simply handle all finance-related matters with the same company that they’re dealing with in the first place. Win-win.
Current examples of embedded finance
Right, enough of the theory—what does embedded finance actually look like in practice? The two examples listed below shed more light on how this approach works.
- Shopify: Shopify was an early adopter of embedded finance, introducing Shopify payments (a white-labelled version of Stripe) back in 2013. Consumers simply pay using the Shopify payments platform, with Shopify charging from 2.4 – 2.9% plus $0.30 for any given transaction. In Q3 2020 alone, Shopify payments processed a massive $14BN.
- Square: Square, which is itself a fintech, developed the Cash App—a basic P2P transfer service. After seeing how much users loved it, they then embedded the Cash App into the debit cards that they distributed to their consumers, with all payments linked to the Cash App P2P payment service. In three years, the Cash App brought in $325M gross profit (and this excludes profits from Bitcoin).
Collections and embedded finance
Collections is a key part of the accounts receivables (A/R) process. Despite this, the collections experience has yet to be transformed by embedded finance. Consumers are still by and large dealing with company X regarding payments they made with company Y. In the age of holistic, interconnected experiences, this is a major CX violation.
The path to repayment must be as frictionless as possible. However, dealing with multiple parties (first the vendor themselves and then the collections agency) violates a customer’s need for a frictionless, integrated experience.
Enter embedded finance. By integrating collections functionality within their offerings, non-financial institutions can provide customers with a complete experience from browsing, to purchasing, and finally, to repaying.
What embedded finance within collections would look like
By embedding collections functionality within your CX, you could introduce:
1. Personalised payment portals
Once a customer logs in, they can head to an all-in-one payment portal to manage their existing cards, see all future, previous, and outstanding payments, and set up a personalised payment schedule going forward.
This is not just limited to credit/debit cards. They could even manage all IBAN payments, set up payments through services like Klarna, or handle paper invoicing changes (like adding a new address).
2. Segmented email outreach
Embedded collections affords companies in-house control and visibility over a consumer’s payments. They can then use this information to send out targeted dunning emails, having segmented customers into like-minded groups.
Given that these emails come from your company (and not an unknown third party), it is more likely that consumers will respond favourably. Ergo, you have a better chance of receiving swift repayments.
3. Repayment/instalment plans
Imagine you are a telecommunications company, where medium- to long-term contracts are the norm. If a customer’s financial situation has suddenly changed for whatever reason, they might want to adjust the terms of their contract.
Perhaps they would prefer to pay the remaining €450 of their contract over 15 months instead of 9, paying €30 per month instead of the previous €50 per month fee. Providing this level of flexible finance will do wonders for your CX. The trick to successful collections is viewing the process as a dialogue—not an imposition of terms.
Bring collections capabilities in-house
Collections can be tricky at the best of times—let alone when you are trying to negotiate repayments via a third party. Thanks to embedded finance, however, non-financial institutions can now use APIs to integrate collections functionality into their own offerings.
This will likely create a smoother CX, increase customer satisfaction, and boost repayment rates. No matter your business model or your industry, embedded finance has the power to make the collections process easier for both you and your consumers.
So what are you waiting for? To learn more about how receeve’s API allows non-financial institutions to adopt white-labelled collections functionality, book a demo to speak to one of our experts today.
Jan is one of the first members of the receeve team, and has become an expert on the fintech industry, particularly digitising collections and accounts receivable processes. He is a talented multi-disciplinary professional with immense drive to bring modern technologies and processes into financial services.