Embedded Finance: What Europe can learn from the rest of the world

The integration of financial services into non-bank businesses, or to put it simply, embedded finance, is reshaping the way consumers engage with financial services. It’s a great opportunity from many different perspectives: businesses that offer financial services directly to their customers can both strengthen their customer loyalty, while also tapping into new revenue streams.

In a recent study we conducted with the Handelsblatt Research Institute, we surveyed over 2000 participants to analyze the willingness of German consumers to use financial services from a selection of leading online shops. We found that 61.4% of all respondents said that they would be open to using a financial service from at least one of the online shops surveyed – a hefty demand.

A wake-up call for Europe

Though the embedded finance development in Europe is still in its infancy, we can take lessons from other parts of the world, like the US and Asia, where the big tech companies have already entered into the vast potential of embedded finance.

Lightyear Capital estimates embedded finance will grow tenfold in the next four years, reaching $230 billion by 2025. While Bain Capital Ventures speculates that by 2030, the volume of this segment - in the US market alone - could reach around $3.6 trillion. Together, these forecasts and, the success so far, confirms an immense opportunity for the European market.

So which retailers and big tech companies can Europe learn from? Here are few stand-out examples:

Walmart: brick-and-mortar retail meets embedded finance

When the largest US retailer announced in the beginning of this year that it was creating a fintech startup in partnership with Silicon Valley-based venture capitalist Ribbit Capital, it caused a stir in the financial services industry.

For Walmart, their aim is to "develop and offer modern, innovative and affordable financial solutions" and deliver "tech-driven financial experiences tailored to Walmart's customers and associates." Or in other words, to better serve their more than 230 million customers with the power of embedded finance.

How? By creating an ecosystem of financial services for their customers' needs. That includes a Walmart credit card, a money card, money transfer services, and the option to pay purchases in installments.

For Walmart, a retail store that was founded on providing great value and customer service, integrating financial services into their substantial portfolio of offerings is a natural step in deepening their customer relationships and supporting their core business.

Grab: the transportation app that became an everyday-everything-super app

Grab is Southeast Asia's biggest ride-hailing and food delivery company. The company started out as a basic taxi booking app and later evolved into a super app with an impressive ecosystem of services.

Grab started embedding financial services into their offerings in 2019, launching a digital insurance marketplace in a joint venture with ZhongAn Insurance. Since then, the company has continued adding other financial services by securing a number of partnerships with fintech companies.

Their financial offerings now includes GrabPay, a payment solution that includes a card and a mobile wallet, AutoInvest, a micro-investment solution released under the GrabInvest’s umbrella, as well as consumer loans and buy now pay later (BNPL) payment options.

Thanks to embedded finance, Grab can tap into a growing market, leveraging more than 200 million registered users in eight countries, opening up new revenue streams, and driving financial inclusion in South East Asia.

Lyft: more security and instant payments with a debit card for drivers

Lyft, the second-largest ride sharing company in the US, uses embedded finance to retain drivers by enabling them to manage their finances directly in the Lyft app.

With Lyft Direct, Lyft provides a debit card and a bank account - in partnership with Payfare and Stride Bank – which allows their drivers to receive compensation instantly after every ride, eliminating any transaction fees and increasing financial security by solving cash shortage issues.

WhatsApp: adding payment capabilities to its biggest market

WhatsApp is the most popular messaging service, with about 2.5 billion users worldwide. The Facebook owned company recently embedded payments directly into its instant messaging app in its biggest single market - India.

The payment feature is powered by BHIM UPI and processed by various local payment partners. The value proposition is pretty straightforward – allowing users to send money to friends and family with no additional fees. However, what makes it so much more convenient than other P2P payment services, is that it is directly embedded into the very same application that users already use to communicate with their friends and family.

Europe’s future

European corporates:

European corporates have a glaring opportunity to improve their position by adopting embedded financial services. Google, Apple, Samsung and Amazon are just some of the proven cases demonstrating what there is to gain for corporates in Europe when they extend their offering by financial services.

EU market regulators:

There is a clear incentive for European regulators to foster embedded finance. On the one hand, it levels the playing field for financial services in Europe. If not just banks, but any company can offer compliant financial services, then the result is far greater competition and, consequently, more variety and better-quality services for consumers. On the other hand, embedded finance will be an essential tool for strengthening European tech companies against American and Asian competition.

If Europe wishes to position itself as a stronghold for tech, it needs to shape a favorable regulatory landscape for embedded finance to thrive. With the Digital Single Market strategy, the European Commission is steering in the right direction. Furthermore, with the Payment Services Directive 2 (PSD2), which entered into effect in 2019, a concrete step was taken to create a better integrated European payments market. Nonetheless, further harmonization across the European financial markets would be welcome, including, e.g., an alignment of KYC requirements across all member states.

Banks:

It's time for banks and traditional financial institutions to take action and decide how to position themselves concerning the embedded finance trend.

There are three main options that they have:

1. The platform approach: Banks could attempt salvaging their existing customer relationships by partnering with big tech and fintech companies and aggregating third-party services through their banking frontend.

2. The super-app aproach: Banks could attempt to outpace the fintechs and bigtechs and keep hold of their existing customer relationship by building up their own ecosystem of value-added services that go beyond banking.

3. The Banking as a Service (BaaS) approach: Solarisbank’s approach, where the bank moves into the background and becomes a technological and regulatory enabler leaving the customer relationship and the creation of value-added services to the selected partner (e.g., the path Goldman Sachs is following).

The role of Solarisbank in the embedded finance ecosystem

As the leading European Banking as a Service (BaaS) platform with a full banking license, Solarisbank is optimally positioned to act as a centerpiece for the European embedded finance ecosystem. With our expansion to the Spanish, French and Italian markets, we are connecting the dots for corporates to enter the space and grab this extensive opportunity to scale their embedded finance propositions Europe-wide.