‘Embedded Finance’ Is the New Cool Kid on the BlockBy Cristian Huertas | Tue, 08/24/2021 - 08:58
“Embedded finance” is the new cool term adopted by fintechs and corporations to define the fusion of any product and financial services. To give a clear example of embedded finance, let's talk about Apple, which has a LARGE user base and decided to promote a financial product: the Apple card, within its portfolio of services. The card is powered by Goldman Sachs but is offered in an Apple flavor.
In Latin America and Mexico, there are several companies that are trying to do the same thing to get more value from their customers (and more data). Some companies have made a strong bet on this, like Rappi, which went hard on fintech (at least in my opinion) to be able to keep raising massive amounts of money while it figures out how to get closer to profitability. Others, like Oxxo, are trying to leverage their footprint to build a financial company and digitize their user base.
The huge difference in these two companies is that one of them was born digital, has a board that is fully aligned with losing money while building an amazing product, and has a stockholder base that is OK if the company fails and goes bankrupt.
I carefully chose these three examples (Apple, Rappi and Oxxo) to talk about what, in my opinion, are the do's and don'ts of embedded finance.
Let's first talk about Apple, which partnered with a subject matter expert in financial services and didn't acquire a banking license or a card processor or build credit scoring on its own. They chose to make a partnership because getting a banking license is freaking hard, because if something goes bad with the product, they can always blame their partner, because they are not experts in financial services, because it was quicker and because it was WAY easier.
Of course, a company this big could afford to allocate a couple billion dollars to build the product from the ground up but as a tech company they understand the most basic principle of product management: launch, measure, improve, and repeat. If this happens to be the next era of revenue generation, then they can build on what they have learned and eventually launch a more verticalized product.
On the other hand, Rappi also understands this product management principle but lacks the massive amounts of money that Apple has. Its bet is paying off: it has been able to raise superb rounds for its fintech units in its most attractive markets, although it still has the challenge of taking the company closer to profitability. If it is able to achieve outstanding results then it will be closer to profitability but if it accomplishes moderate results, the hole in the budget will be so large that it might have to close the company sooner, or at least heavily restructure the business.
Finally, there is Oxxo, which is trying to launch a fintech product on its own. Oxxo is one of the most recognized brands in Mexico, with one of the most formidable footprints and highly recurrent customers. But it is part of a conglomerate, not very digitized, with a shareholder base that is very profit-driven and trying to do tech. It relies on its footprint to drive clients to its product but it can't be very aggressive on the incentives because of its profit-first mentality. Also, Oxxo is entering into the regulated ecosystem. Any wrongdoing will not only affect the number of cards distributed but also the number of cokes sold.
If you happen to own or manage a large corporation and see the opportunity to embed finance products within your value proposition, remember:
- fintech is regulated; if something goes wrong your core business could be affected.
- fintech is capital intensive, especially if you are considering lending.
- fintech is a tech-heavy business.
- partnering is a good way to speed-up the experiment and learn.
- verticalizing will be hard and capital consuming, especially if you weren’t born digital; also, you will sacrifice time-to-market.
These points should make it easier for you to decide how to deploy an embedded finance strategy and to align it to your long-term goals.