Embedded wealth is a concept that has come to the fore and has become more widely understood recently. Essentially, embedded wealth is the use of wealth tools or services by a non-wealth provider.
It is designed to streamline wealth processes for consumers, making it easier for them to access the services they need when they need them. Embedded wealth should mean people can trade, invest, or even access services such as financial planning or behavioural assessments at various points within their broader digital consumer journey.
According to Celent, embedded finance is reshaping how customers engage with financial products and expanding the distribution of tools and services offered by banks, insurance companies, and wealth managers. It is an emerging trend that will significantly influence the delivery of financial services over the next few years, potentially disrupting existing distribution models.
With an estimated worth of around US$33 trillion in assets in the next 15 years or so worldwide, this is an opportunity that banks would be foolish to miss.
Reasons why
Besides the fact that it makes sense to offer products not as products but as services embedded within a context, there are many other reasons banks should be looking to leverage the opportunities conferred by embedded wealth.
Changing customer behaviour and new customer segments mean customers are more digitally entwined. Digitalisation will mean that users are more open to accessing wealth services via a relevant product or service. This is more accessible for Gen Zs, who are digital-first and would probably not think to have a physical meeting with a wealth manager as the first point of contact.
In a horizontal sense, the bank’s role is as a mass provider, if retail, and as a specialist provider, if wealth. With wealth, there will also be different horizontals; for example, a wealth manager may offer only a few specialist services, such as access to digital assets, or provide a comprehensive and holistic service covering many facets.
Horizontal integration is easier because the business model or regulatory aspects are already similar. In Switzerland, there are many examples of horizontal integration in wealth, e.g., Yuh, Kaspar & Lend, and Vontobel volt.
Embedded wealth can also be a means to attract a new audience by meeting them at their point of need in other areas. This is vertical integration. Banks can act as a producer, a distributor, or a tech provider to the financial industry, with possible integration into other industries, e.g., selling banking products via the consumer goods industry, travel, or healthcare.
On the generic embedded finance level, the most prominent examples are the Buy Now Pay Later (BNPL) offerings like Klarna. This has made significant inroads into consumer behaviour in retail. There is also a range of mass-market low-cost brokerage and investment services that did not exist ten years ago.
Vertical integration is, however, more challenging, although more revolutionary, because of its integrative character and the fact that, for example, customer proximity is more likely to be found in brands that are not part of the industry.
However, it does confer advantages in that the reach of the wealth manager becomes broader. One of the primary benefits of embedded finance is its ease of use for consumers. By removing consumer pain points, such as the need to seek credit elsewhere, customers may be more likely to complete a purchase and experience customer satisfaction, which is essential in achieving brand loyalty, and the bank gets more business.
To make the most of this opportunity, however, it looks, banks need to find the right partners to host their embedded offering or the bank itself to host.
The former model makes the most sense. Along the value chain, most banks tend to be strong in products (service producer) but not that strong in technology (service provider) and distribution (service distributor). So, it makes sense for them to partner with firms that have technology and distribution as their core focus. This way, the partnership is mutually beneficial: the bank gets the tech and distribution, and the tech and distribution partners can benefit from the products and services that the wealth manager offers.
Figure 1: Comparing key issues of vertical and horizontal integration
This provides an end-to-end value chain, from product to technology to distribution, something that is not currently in place. In doing so, banks can fend off the threat posed by other providers, such as FinTechs or BigTechs, and turn it into an opportunity by working with them.
Embedded wealth is quite obviously a transformation that requires strategic thought. Where do I position myself as a bank? Do I accept that my own brand becomes more invisible but has a greater reach, or do I not want to give up my brand under any circumstances (and I also believe that I have a strong brand) and enter collaborations on products for this purpose?
There is no one size fits all, and models can be unique. For example, Vontobel, which started as a service producer with strong investment know-how, collaborates with a service provider partner. In the second step, Vontobel already has this technology in-house, so it has expanded its position to service providers and is reaching out to other service distributors.
Ultimately, this trend will increase its reach and grasp on the market – in whatever shape or format. It feeds nicely into the broader theme of open APIs and ecosystems and a culture of collaboration between all value chain members. Selecting the right partnerships will, it goes without saying, be key to success and banks wanting to succeed in their embedded wealth journey need to give that some careful thought.
This article is from The Wealth Mosaic’s Swiss WealthTech Landscape Report 2022. Access the full report here.
