Apple card. Shopify merchant accounts. Amazon loans. Increasingly, non-banking players are branching out into banking services to improve user experiences and tap into new revenue lines. Such native integrations of financial services into non-banking verticals, e.g. accounting SaaS or marketplaces, are called embedded banking. We expect the embedded banking trend is here to stay: New technologies, distribution and business models as well as evolving customer expectations have created the foundation for a fundamental rethinking of how and where the key functions of finance are delivered.

Banking-as-a-Service as key enabler of embedded banking

First, Banking-as-a-Service ("BaaS") providers build the foundation of the emerging embedded banking trend. These providers offer the regulatory and technological infrastructure that allows third parties to launch their own-labelled banking products on top of the "BaaS backend" via APIs. Thus, third party brands can fully concentrate on building their own brand, propostions and customer experiences, while using the BaaS infrastructure for accounts, cards, payments or loans and compliance-related services, such as customer identity or anti money laundering checks. Many BaaS providers either build on top of licensed partner banks in the background or even obtain their own license, such as solarisBank.

It's worth noting that modern BaaS providers are, unlike traditional whitelabel banking offerings, delivering a developer-friendly experience with extensive documentation and support, modern RESTful APIs, modular services and very customer-friendly pay as you go pricing models. Consequently, they are the first choice for modern technology providers or fintech challengers.

After the fallout of Wirecard, we listed the latest BaaS alternatives on Twitter.

Customers expect convenient banking services

In the digital era, convenience wins. Customers are already used to native payment capabilities inside their everyday apps. Thus, brands can streamline the customer journey even further by adding additional banking capabilities, such as lending, cards or accounts. Instead of dealing with separate banking providers, customers can get access to tailored banking services that are seamlessly embedded into the customer journey. Frankly, not every single brand will and can do this, as customers' willingness to fragment their banking providers is limited. However, in selected use cases embedding banking services can significantly improve the customer experience, so it's a worthwile thought exercise.

For example, a small business owner already has his accounts payable and receivable data, payroll data, and often transaction data available in his accounting software. So why shouldn’t she get factoring or loans directly in the same interface? The underwriting of such loan offerings could be improved with the real-time accounting data. Furthermore, she could use integrated credit cards, provided by the accounting provider, to simplify expense management for her employees. Thus, the use cases for natively embedded banking products by non-banking players are vast.

More embedded banking propositions will very likely pop up by innovative companies of a wide variety of business verticals, such as specialised SaaS, marketplaces, e-commerce, mobility or telcos. It's not only the big tech companies, such as Amazon or Uber, but e.g. also local SaaS businesses that can gain tremendous business opportunities by seamlessly embedding banking features. Thanks to modern BaaS providers, they now have the opportunity to do so.

Fintech boosts business model innovation

Another compelling reason for embedded banking is the additional revenue stream. The venture capital firm a16z predicts that, by embedding banking into their existing offerings, software companies can grow revenue per user by up to 5x, compared to a standalone software subscription. Adding a fintech layer can thus add substantial new revenue lines, such as capturing interchange revenue or revenue share agreements. By leveraging fintech features as key monetisation drivers, new propositions can be created that ususally were hard to monetise, e.g. as the customer segment was too small or the willingness-to-pay simply wasn't there. Consequently, brands can leverage existing client relationships, distribution power or brand equity to open up new revenue lines with embedded banking

What's next in embedded banking?

In the past, companies that wanted to integrate financial services via whitelabel partners still had to deal with tremendous operational coordination and technological plumbing in the background. With the emergence of Banking-as-a-Service (BaaS), there's an increasing amount of technology-driven suppliers that underpin the infrastructure of banking - both for financial services players as well as non-financial companies. While established BaaS providers, such as solarisBank or Railsbank, have heavily focused on enabling companies that still have financial services as their core value propostions, new entrants, such as HUBUC, focus on smaller, non-banking players across Europe. 

While embedded finance is still a nascient field, we expect many more use cases to come. It's a great opportunity for selected start-ups, SMEs and large corporates to create more client value, while capturing new revenue lines.