Embedded finance: how (and why) it completely changes the game

Thursday 18 May 2023 09:53 CET | Editor: Vlad Macovei | Interview

Panagiotis Kriaris, Commercial Director – Head of Business Development at Unzer and fintech expert, provides valuable insights about embedded finance, how it differentiates from BaaS, and what benefits it brings to businesses and customers.


Panagiotis Kriaris, Commercial Director – Head of Business Development at Unzer and fintech expert, provides valuable insights about embedded finance, how it differentiates from BaaS, and what benefits it brings to businesses and customers.


How would you define embedded finance in the context of the fintech industry?

Embedded finance is about incorporating financial services (FS) into non-FS offerings. It has been propelled to the fore by the dominance of digitisation and by changing customer preferences that call for seamless, all-encompassing customer journeys.

While the term is relatively new, its precursors have been around for decades. Store and branded credit cards, such as those offered by retailers or airlines are a good example. In such cases, however, traditional financial products were offered either through alternative channels or with a different branding (or both), but without the embedded concept. The game changer today is the ability to directly integrate financial processes and offerings into any (non-finance) environment, via interactive distribution rails that we call APIs.

One important distinction to be made is between the term Banking-as-a-Service (BaaS) and embedded finance. The two terms are often used interchangeably, but they are not the same thing. BaaS is the bottom, infrastructure layer that feeds into the various embedded finance offerings on the outcome, front-end side. The combination of these two distinct layers into one unique (bundled) offering builds and further expands on a revolutionary development that has long been unimaginable: the decoupling of the customer experience from infrastructure. This simple concept has been one of the main drivers behind the fintech revolution of the past years and is an equally disruptive force when it comes to embedded experiences.


What are the main advantages of embedded finance for consumers and businesses? Any interesting use cases?


For the end user, embedded finance makes the process of paying for products or services simpler, but it also enables value-added services, such as incentives, discounts, or additional products.

For brands and companies, it provides opportunities for increased loyalty and additional revenue streams. 

The attractiveness of the model has three main pillars:

  • The use of technology so that (finance) products that are seemingly very different from the underlying offering can be natively incorporated into the end-to-end target customer experience. The rule says that the harder it is to distinguish between embedded and target offerings, the better the integration is. 

  • Flexibility (companies of any size and type can integrate financial services offerings in their end-to-end flow using on-demand servicing and pay-as-you-go pricing).

  • Diversification (both on the business and on the revenue side, given the connection with new revenue and growth sources as well as with customer retention).

However, beyond the tri-dimensional win-win-win set-up (for providers, target companies and clients), the model would not have had any chances, had it not been able to provide a compelling business case connected to customer acquisition: based on a famous rule of thumb acquiring new clients is five to ten times more expensive than keeping existing ones.

It is exactly the heart of the customer acquisition challenge that embedded finance is addressing by going where the clients are and positioning finance offerings at the core of several industries. Retailers, BigTechs, insurance players, telcos or payment providers are good examples.

Perhaps we don’t realize it at first glance, but embedded finance services are already abundant as we speak - mainly on the B2C side but also on the B2B side: taxis integrating payments, retailers offering BNPL at check-out, SMEs getting financing from their payments’ provider or e-commerce platforms offering merchant accounts.

Looking at the use cases, market potential and reached maturity, it is clear that some segments like payments, lending and insurance are bigger and more advanced than others – for example banking or wealth management. 


What are the main challenges businesses face when adopting embedded finance solutions?

  • Not having the right strategy in place, which quite often is a result of not properly understanding what the model means, what their role entails and why embedded finance would in the first place make sense.

  • Seamlessly integrating finance offerings in their end-to-end flow, without causing friction and without disrupting existing competitive advantages (i.e. operational set-up).

  • Managing trust from an end-customer perspective, selling products that go beyond what is perceived as their core competence.


How can traditional financial institutions leverage embedded finance to stay competitive in the market?

Today traditional financial institutions must act in a competitive landscape that is completely different from what it used to be even 10 or 15 years ago. Instead of having a few vertical players (usually banks) owning the entire value chain, different (old and new) players are now spread among a multitude of layers, competing in one or more of these by assuming multiple roles. Add in a new distribution model called platform economics and you have disruptive forces cutting through all key elements of finance as we (used to) know it (mechanics, operations, monetization, distribution).

And here is exactly, where embedded finance comes into play: even though many incumbent financial institutions perceive it as a threat, I firmly believe that embedded finance is one of their best chances not only to adapt to this new landscape but also to thrive. The reason is that embedded finance is enabling them to play across layers and roles in ways that were unimaginable a few years ago:

  • Incumbents can employ the platform model and own the delivery channels without necessarily owning all the services in-house but rather aggregating or embedding them from third parties like fintech players. The model could fit players of different sizes and sophistication levels: larger incumbents that have the resources and the customer base to build an ecosystem around them or small challengers that want to grow and cannot afford to develop any of the offerings in-house.

  • On the flip side, traditional banks looking for differentiation could expand to BaaS via leveraging their banking license. However, given that incumbents tend to run on outdated technology stacks, a technology provider (i.e. a FinTech player) would be needed to bridge the licensing piece with the outside world, effectively the (B2B) customer side. This is the so-called fronting.

  • More advanced players can leverage the full-stack BaaS model, building on both licensing and technology with the advantage of being able to offer end-to-end vertically integrated models with a high degree of customization. Being in a position to publicly release APIs that allow developers to integrate the bank’s services directly into their own products is the key to success here. 


What role do partnerships and collaborations play in the success of embedded finance strategies?

Partnerships and collaborations lie at the heart of embedded finance strategies. The diversity of the models we find on the market today is directly linked to the ability to combine in different ways two major parameters: licensing and the back-end technology stack. Whereas both parameters are needed to synchronize in a bundled way, they do not (necessarily) have to be offered by the same provider. And in many cases, layers can be added or removed depending on the positioning of the partners along the value chain. A couple of examples:

  • Online SME lender Kabbage (bought by Amex in 2020) is offering businesses interest-bearing checking account services (Kabbage Checking) via Green Dot Bank. Whereas this is a typical use case with Kabbage as the client, Kabbage itself has pioneered the SaaS (or BaaS) business model via enabling banks to expand their SME portfolios through the Kabbage platform. Kabbage sits simultaneously at the two different ends of the same business model, in a setup that broadens the appeal of the final offering. 

  • Stripe, one of the most successful challengers in payments (B2B2C model), has found an additional revenue and differentiation trigger by partnering with multiple banks so that it can become itself a BaaS provider: via Stripe Capital and Stripe Treasury it is offering businesses financial services through integrated APIs, adding a layer of added-value creation (B2B2B2C).


How do you see the future of embedded finance evolving?

The rise of embedded finance is signaling the end of finance and banking as we know it. Traditional business and industry boundaries are disappearing fast, and embedded finance is in the driving seat of the transformation, for enablers and providers alike.

There are strong signs suggesting that going forward a large part of customers’ product acquisitions, including finance decisions, will be made in a non-financial context, catapulting embedded finance into a mainstream pole position.

Despite all the evolution so far, I firmly believe we have just started scratching only the surface of the potential of embedded finance with more use cases coming to change the fate of a plethora of industries, such as retail & ecommerce, automotive, healthcare, travel & hospitality and with platforms and marketplaces in the lead.

About Panagiotis Kriaris

Panagiotis has spent his career in the borderline between business and technology with a leadership background at an international level. Panagiotis brings senior expertise across Financial Services, Banking, Payments, FinTech, Retail and E-Commerce. Innovation, strategy, business development, strategic partnerships and building businesses and products from scratch have been at the center of his work and attention throughout his career. Being a recognised voice in the financial services industry, Panagiotis has contributed to various publications and podcasts and is often invited as a public speaker at events around the globe.

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Keywords: embedded finance, fintech, BaaS
Categories: Banking & Fintech
Countries: World
This article is part of category

Banking & Fintech