Don’t you hate it when you click on a recipe and have to read a whole back story about every ingredient before you get what you came for? To spare you that familiar angst, reader, let’s get right to the chase and then follow with the back story. Happy angst-free reading!
Embedded finance is the name that has emerged from the idea that every app is about to become a financial services company. Specifically, it is the addition of traditional financial services functions like savings, lending, insurance, investing and planning in nontraditional places like Walmart Inc. and Uber Technologies Inc.
Why is this happening? And why is it happening now?
1. Many financial services apps have a value proposition problem.
You’ve seen just about every company add services to increase customer engagement and revenue. Take gig apps, for example. They hit a plateau during the height of the pandemic, from both a user and a consumer perspective, and the number of competitors is growing. So where does Instacart, for example, turn to create stickiness and additional revenue?
Embedded finance seems an obvious answer. Offering their shoppers savings, investing, and lending seems like a natural step that fits with most gig apps.
2. Customers are more transient than they’ve ever been (less sticky).
User retention on apps is declining. In 2019, the average mobile app user retention rate was just 32%, a drop from 38% in 2018.
We, as customers, have so much choice at our fingertips. We can instantly cancel one service via iTunes and download another app. Our stick-to-it-iveness has hit an all-time low. Take creators on social media apps, for example. A creator can focus on Twitch, YouTube, TikTok, Instagram or Clubhouse — to name a few. Who will win? Perhaps one good answer is for these apps to add financial services to capture, engage, and retain creators. A seamless, integrated experience to grow their wealth and measure their progress toward goals is a leading idea.
And before you write off creators as a low-revenue-generating group, know that YouTube has paid $30 billion to creators in the last three years.
3. Technology advances, specifically APIs, have made it easy for apps to embed financial services.
Sometimes there’s no better reason to do something besides: It’s easy. For the first time in history, banking, lending, and other traditional forms of financial services are available via API (or “as a service”), and embedding has never been easier. Apps can extract value easily, many times without worrying about becoming a regulated entity or securing a large capital commitment.
4. Customers are voting for lower friction with their wallets.
We can’t ignore the evidence. Especially evidence seen by the way dollars are moving. Research finds 43% of users would likely switch banks if they had a poor account opening experience.
We’d see more evidence of this if we compare the financial services offerings inside of traditional brokerages and wirehouses, including educational tools, technology platforms, customer service, and broad product selection, versus new entrants like Robinhood. There is no contest in terms of available functionality, but people likely choose Robinhood because it’s easy to get started, the interface is so simple, and because their friends are on the app.
5. There are billions of dollars doing nothing.
Opportunity is knocking. There are billions of dollars sitting idle on apps like Starbucks and DraftKings, tons of payments passing through companies like eBay and Twitch — so much opportunity for consumers to do more with their idle cash, and for companies to generate incremental revenue from those funds if they stick around. The easiest way to get money to stick around is to embed financial services tools and services, removing the friction and allowing customers to engage with these tools right where they already are.
It’s a forgone conclusion that embedded finance will become a new category of financial services. Additiv.com estimates that this category will be worth $3.6 trillion by 2030 in the U.S. alone.
We’re on the precipice of a tectonic shift. Investing and saving will happen differently. It will be friction-free, available to everyone, and enabled by a whole new demographic — consumer companies. Companies that know how to engage users, how to speak their language, and how to make experiences engaging and fun. These consumer companies will be changing the literal language of finance.
Dani Fava is Head of Strategic Development at Envestnet.
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