OBSERVATIONS FROM THE FINTECH SNARK TANK
“The integration of financial services into non-financial companies’ websites, mobile apps, and business processes.”
The theoretical value of embedded finance rests on the assumption that consumers will choose financial products from their favorite brands if the brands offer them.
A new report from Cornerstone Advisors, commissioned by Bond, titled The Embedded Finance Flywheel, confirms the theory. The study found that:
- Three-quarters of gamers are interested in an in-game account where they could deposit money and use to buy and sell virtual in-game items and collect rewards for game achievements/progress.
- Two-thirds of home fitness fans expressed interest in getting health insurance from home fitness providers with rates based on their personal fitness habits.
- Nearly two-thirds of fashion aficionados would consider getting an investment account from a luxury brand that allowed them to easily invest in that company’s stock.
- Six in 10 car buffs would investigate auto insurance—with rates based on their personal driving history and behavior—directly from a car manufacturer.
- Half of home improvement do-it-yourselfers (DIYers) are interested in a savings account that automatically sets aside money to save for large home improvement projects from a Home Depot or Lowe’s.
Embedded Finance’s Loyalty Flywheel Effect
The impact of embedded finance goes beyond the revenue generated by the financial product, however. According to Matt Harris of Bain Capital Ventures:
“Having financial functions integrated with software enables new functionality, leveraging the persistent connection to move beyond transactions to relationships. These relationships are data-rich, which leads to smarter cross-sell, pre-qualification, and risk reduction. The monetization opportunities are not only large, but actually meaningfully larger than the original software opportunity.”
Among consumers who already get a financial product from a non-financial brand, a third said the product caused them to spend more money with the brand, three in 10 said they now choose the brand over its competitors more often, and a little more than a quarter feel more loyal to the brand.
The bottom-line result of brands providing financial products to consumers is a flywheel effect—the financial products not only generate revenue in and of themselves, but they lead to consumers spending more money on the brand’s products and services than they had before obtaining the financial product.
Embedded finance may be a relatively new term in the financial services space, but consumers have turned to non-financial brands for financial products and services for some time now.
The loyalty impact has been very positive.
Among consumers who have obtained financial products from consumer brands, 32% said financial products caused them to spend more money with the brand, 30% said they now choose the brand over its competitors more often, and 27% said they feel more loyal to the brand.
Brands’ Revenue Potential from Embedded Finance
What’s in it, financially, for a brand to provide embedded finance products and services? The Cornerstone report estimated the potential revenue impact on a few leading consumer brands: Playstation, Home Depot, and Coach.
Playstation’s Payments Opportunity
Roughly 100 million Americans are “gamers,” generating $14 billion in in-game purchases each year, or $140 per gamer.
A third of American gamers call Playstation their favorite brand in the category. Among this group, 79% expressed interest in getting a payments account that rewards them for in-game purchases.
If just 10% of them accepted a payments card offer from Playstation, they would ring up about $365 million of in-game purchases annually, yielding roughly $6.4 million in interchange fees (which would be split with a banking as a service provider).
Home Depot’s Home Equity Opportunity
Home improvement is a favorite product category for 42% of Americans, or roughly 105 million consumers. Among the leading home improvement brands, Home Depot was cited as the most popular company by 49% of them, or 51 million.
Among Home Depot DIYers, 53% said they would be interested in getting a home equity loan directly from Home Depot. If just 1% of them took out a $40,000 home equity loan (the average home equity loan amount according to Cornerstone Advisors’ benchmark database), that would produce about $11 billion in loans.
Based on Cornerstone’s data, the interest rate on a $40k home equity loan would average between 4% and 6% with a cost of funds at about 50 basis points. This would produce net interest income of $1,800 per loan per year (assuming the sponsor bank gets the $50 loan origination fee).
If half of the full line is borrowed against, Home Depot would generate $900 per loan. Assuming half the revenue is shared with the sponsor bank, Home Depot could reap $120 million in annual revenue from an embedded finance strategy.
Coach’s Wealth Management Opportunity
A third of survey respondents cited fashion and luxury goods are one of their top three shopping categories. Coach was the most popular brand in the category, with 15% of fashion fans mentioning the company as their favorite fashion brand.
Among Coach enthusiasts, 68% indicated an interest in an investment account integrated into the brand’s mobile app that would let them invest in the brand’s stock, crypto, and other assets.
If just 5% of Coach’s 12.8 million devotees opened this account, and the resulting 637,500 customers invested $2,500 in the account, Coach would have $1.6 billion in assets under management (AUM).
If those assets produced revenue at 1% of AUM—and Coach split that with a banking as a service provider—the fashion brand would generate an incremental $8 million in revenue.
The projected revenue in these scenarios doesn’t include the revenue will be generated from the increased spend on existing products.
Crafting an Embedded Finance Strategy
It’s not a “build it and they will come” proposition, though. Consumer brands pursuing embedded finance should:
- Drive mobile app engagement. Cornerstone’s survey revealed strong interest among consumers to get financial products from their favorite brands. Converting interest into account openings needs to start by driving mobile app engagement with brands’ already loyal customers. Consumers who use merchants’ mobile apps—and load funds—are the best prospects for brands’ embedded finance offerings.
- Develop strong product value propositions. Differentiating a brand’s embedded finance offering requires a combination of convenience and rewards. Making it drop-dead easy to integrate a financial product into the way customers already interact with the company is the key to an embedded finance product’s value proposition. Designing a rewards and incentive structure is the icing on the cake.
- Personalize the product offerings. While younger consumers demonstrated stronger interest in embedded finance than older consumers, that wasn’t always the case. For example, many Gen Zers don’t own cars or homes, making them unlikely candidates for an embedded auto or home equity loan. To succeed with embedded finance, brands need to offer different products that appeal to the different segments of their customer base.
To download a copy of the report The Embedded Finance Flywheel: How Financial Products Can Help Brands Generate Millions in Revenue and Increase Customer Loyalty click here.