Digital transformation in financial services and commerce is evolving. Just as we thought we understood its ways with Fintech partnerships with other Fintechs and with banks, new evidence appears calling us to transformation journeys differently.

I am starting to feel that embedded finance in this phase has similarities with the culinary trend of `deconstructed desserts`. Have you ever tasted a deconstructed milles-feuilles or a deconstructed cheesecake? Apparently, there is an entire culinary trend `Deconstructed food` that consists of ingredients traditionally combined but presented separately. The customer experience (e.g. deconstructed lasagna) is about choosing how to savor the ingredients in your own way to recreate the bundled original taste and of course, change the entire experience.

A brief walk down memory lane
During the first FinTech phase of unbundling, Solaris Bank was an early disruptor in Europe with its Banking-as-a-Service offering. You could count on the fingers of one palm, the Baas providers in 2016 (e.g. Fidor Bank). They delivered several Fintech babies — Fidor enabled Telefónica’s O2 Banking mobile-only bank account in 2016, Solaris Bank enabled Samsung Pay in Germany. Fast forward to today, and Solaris`s new positioning is Europe’s largest embedded finance platform.

Today, there are dozens of Embedded finance platforms in Europe (e.g. Mambu, TrueLayer, Tink, etc.). But as Meaghan Jonhson remarked in our recent discussion on The future of Embedded Finance, there are increasingly more early-stage FinTechs that are looking to compete with Embedded finance plays in the front-end, middle wear, or at the base layer. CoverFlex is a Portuguese FinTech focused on employee benefits, and now they are getting into embedding payments and cards. This Fintech is not categorised as an Embedded Finance provider but at the same time, its TAM is growing through embedding finance in its core offering. This will be increasingly the norm for FinTechs from their earlier stages.

Embedded Payments, BNPL, cards will be at every touch point for the end consumer and for businesses of all sizes.

The next big area is embedded Revenue-based financing and a variety of embedded lending solutions for merchants using data and Machine learning to manage the associated risks. Shopify is a great example of a marketplace that has embedded several payment and lending products in its offerings for its merchants. Shopify offers funding through Shopify Capital, lines of credit, and term loans to its merchants. WebBank is its Banking as a Service provider. Merchants of all sizes on the Shopify platform are better served as the platform has all the `alternative data` needed to offer a variety of credit options. B2B marketplaces are prime candidates to leverage embedded payments and credit solutions.

We should be seeing more marketplaces like Etsy and GoDaddy embedding additional financial solutions beyond payments. GoDaddy was actually ahead of the embedded finance game, when they established a partnership with Kabbage in late 2019 to offer their business customers online quick access to flexible lines of credit of up to US$250,000 in minutes if approved. However, this went sour as Kabbage filed for Chapter 11 bankruptcy in late 2022. A reminder that Fintech embedded finance providers are not necessarily superior to incumbents.

Shopify is a great example of embedded finance for B2B marketplaces for several reasons. First and foremost, because they continue to grow their services (from credit products to inventory management, to tax and accounting services) for their merchants.

Second, is their fairly recent expansion to serve merchant needs in their physical stores. Shopify went from serving small business owners with their online stores to serving any size businesses with their online stores, to serving any size businesses with both their online and physical stores. In 2020, Shopify introduced its first physical POS for its merchants and in 2023, the POS Go, an all-in-one mobile POS device.

Shopify shows us how embedding finance in marketplaces can work for both physical and online channels.

A different `deconstructed` arrangement is the example of SuperApp Grab in Singapore. In 2019, Grab and Citi issued a co-branded credit card regionally, starting with the Philippines. This co-branded credit card was subsequently expanded into more regions and became embedded in the Grab app in more than one ways. Extra points could be earned on the co-branded card that could be spent on the Grab app for any Grab lifestyle service. Since 2021, existing Citi credit card customers could apply for a personal installment loan (or Citi Quick Cash) through the Grab app via API. Embedding consumer lending in a SuperApp.

This example shows us how embedding finance in SuperApps is enabled by incumbents via APIs. Beware that not all partnerships are enabled via APIs. Often businesses redirect their customers to the partner website. This is not embedded finance.

While we have plenty of examples of FinTech that bundled several financial services and sought eventually a banking license to rid themselves from third-party providers, I did not know of any examples of retailers who have sought a financial license. Klarna may be a shopping marketplace now but it did not start that way. Apple (a special ecosystem play) has money licenses. The first example of a pure retailer that received an EMI license, is Vinted, [1] the Lithaunia-based secondhand shopping app. Vinted, a consumer-to-consumer marketplace, became Lithuania`s first unicorn in late 2019. It is now operating in 20 countries in Europe and North America with 80 million registered members. It was using Mangopay for its payment needs and now has an E-money license that can be passported in the EU (since Sep 2023).

Conclusion
Embedded finance is changing the possibilities of digital transformation of financial services providers and non-financial businesses.

Will Embedded Finance, lead to Fintechs (like Revolut) becoming universal banks (albeit digital-native) like a JPMorgan with some extra select lifestyle choices?

Or will Embedded Finance deconstruct financial services to a large extent? With most marketplaces like Shopify becoming the new operating dashboards and making financial services increasingly distributed? And with retailers like Vinted also joining the `Deconstructed finger food` trend?

Or will BigTech Apple and X, who have and continue to accumulate licenses, be the party-poopers of the `Deconstructed Banking` experience underway?

The market is changing. Here are some of the types of participants shaping the market:

• Baas and Embedding finance platforms
• Early stage Fintech pivots creating enhanced customer journeys by using embedding finance
• B2B marketplaces deploying Embedding finance at scale
• Incumbent Banks with APIs enabling embedded finance within SuperApps and other growing ecosystems
• Non-financial Marketplaces embedding finance by getting licensed themselves

[1] Vinted has raised a total of US$562.3M in funding over 7 rounds. Crunchbase

Read the originial article here.