Embedded finance: how any retailer can become a fintech

Depart­ment stores have been offer­ing cred­it lines since JCPen­ney start­ed to do so in the US in the late 1950s. And many super­mar­ket chains have pegged a white-label bank­ing ser­vice on to their back ends with vary­ing degrees of suc­cess over the years. But now, with the aid of appli­ca­tion pro­gram­ming inter­faces, bank­ing-as-a-ser­vice (BaaS) tech­nol­o­gy and so-called embed­ded-finance arrange­ments, everyone’s favourite flat-pack fur­ni­ture store can poten­tial­ly offer a whole host of finan­cial ser­vices.

In Feb­ru­ary, the invest­ment arm of Ing­ka – the Swedish hold­ing com­pa­ny that owns Ikea – took a 49% stake in Ikano Bank, which already man­ages some of Ikea’s cred­it prod­ucts, such as its store card. 

The fur­ni­ture retail­er has decid­ed to offer “com­pet­i­tive and acces­si­ble finan­cial ser­vices”, which will enable “even more peo­ple to have bet­ter homes and, there­by, bet­ter lives”, accord­ing to Ing­ka Invest­ments’ MD, Kris­ter Matts­son. “As cus­tomers and retail­ers increas­ing­ly seek bank­ing solu­tions with a strong dig­i­tal foun­da­tion, our com­mit­ment to work even more close­ly with Ikano Bank dur­ing its dig­i­tal trans­for­ma­tion is a great oppor­tu­ni­ty for us to serve new and exist­ing cus­tomers alike.”

Ikano had actu­al­ly start­ed life as part of the Ing­ka group, but was spun off as an inde­pen­dent busi­ness in 1988. The bank has been oper­at­ing in the UK since 1994, run­ning oth­er retail­ers’ store cards and offer­ing its own-brand accounts. When the deal was announced, the bank’s CEO, Hen­rik Eklund said: “The clos­er part­ner­ship enables us to fur­ther accel­er­ate our trans­for­ma­tion to become a ful­ly dig­i­talised bank.” 

Ing­ka has since bought a stake in fin­tech firm Jifi­ti, with a view to rolling out the latter’s point-of-sale buy-now-pay-lat­er plat­form in Ikea stores.

Matthew Williamson, vice-pres­i­dent of glob­al finan­cial ser­vices at dig­i­tal con­sul­tan­cy Mobiq­ui­ty, describes these devel­op­ments as the for­ma­tion of a “col­lab­o­ra­tive ecosys­tem”.

“In the past, you might have bought a sofa on cred­it from DFS, say, but the finance provider would be a third par­ty. Ikea’s increas­ing move into finan­cial ser­vices makes sense, because it’s about stream­lin­ing the customer’s jour­ney,” he says.

Williamson explains that banks’ strengths lie in data man­age­ment and reg­u­la­to­ry com­pli­ance, while Ikea’s lie in its mass appeal. That, com­bined with con­sumers’ mind­set when fur­ni­ture shop­ping, could nat­u­ral­ly see the offer­ing extend into home improve­ment loans, for instance.

Zoopla Prop­er­ty Group is devel­op­ing a col­lab­o­ra­tive ecosys­tem along sim­i­lar lines. This sum­mer, RVU, part of the Zoopla group of com­pa­nies that owns Uswitch, Confused.com and Money.co.uk, added online mort­gage bro­ker Mojo to its port­fo­lio.

Bring­ing togeth­er prop­er­ty search­es, mort­gage lend­ing, removal ser­vices and util­i­ty com­par­isons sup­ports the group’s plans to deliv­er an “end-to-end dig­i­tal mort­gage expe­ri­ence”.

Explain­ing the acqui­si­tion, RVU’s CEO, Tariq Syed, says: “Dig­i­tal­i­sa­tion has been slug­gish in the mort­gage sec­tor, but we will have the teams and tools to super­charge the process and give con­sumers the expe­ri­ence they deserve.”

The log­ic behind the embed­ded-finance mod­el is clear: it promis­es ben­e­fits for all con­cerned. The tra­di­tion­al finance house gains cred­i­bil­i­ty by pig­gy­back­ing on a more trust­ed brand, gain­ing access to that cus­tomer base in the process. The con­sumer brand can deliv­er a spe­cif­ic finan­cial ser­vice to a cap­tive audi­ence with­out hav­ing to go through the pain of nego­ti­at­ing a bank­ing licence. Each par­ty plays to its strengths and the out­come is a slick­er cus­tomer expe­ri­ence. 

One of Asia’s lead­ing ecom­merce busi­ness­es, Bukala­pak is an Indone­sian online mar­ket­place through which 13.5 mil­lion mer­chants and 100 mil­lion users have been enjoy­ing the ben­e­fits of sav­ings accounts and dig­i­tal deb­it cards since 2020 through Stan­dard Char­tered Bank’s BaaS plat­form. But the embed­ded-finance rela­tion­ship can work both ways: Stan­dard Char­tered has also estab­lished an alliance with dig­i­tal chal­lenger bank Star­ling in open­ing its sus­tain­able finance mar­ket­place, Shoal, this month through inno­va­tion arm SC Ven­tures. This shows that even big banks can find BaaS a use­ful tool in cer­tain cir­cum­stances.

Con­sumers are increas­ing­ly demand­ing the same high qual­i­ty of dig­i­tal expe­ri­ence from their finan­cial ser­vice providers as they are accus­tomed to receiv­ing else­where. Tra­di­tion­al bank­ing insti­tu­tions are not yet best equipped to deliv­er this, but they do at least bring reg­u­la­to­ry rigour.

Joan Med­land co-found­ed Shoal on behalf of SC Ven­tures. She notes that, while Stan­dard Char­tered is based in Lon­don, it has no branch pres­ence or oper­a­tional infra­struc­ture in the UK. Starling’s tech­nol­o­gy, trust­ed rela­tion­ship with the reg­u­la­tors and abil­i­ty to attract skilled recruits meant that the ven­ture could be up and run­ning far more quick­ly than it would have been if built from scratch.

Apart from planned expan­sions into Europe and the Amer­i­c­as, the next steps for Shoal include adding select­ed “pos­i­tive-impact part­ners” to offer oth­er finan­cial ser­vices, such as green invest­ments and mort­gages, Med­land explains.

“We will demon­strate how we test their cre­den­tials and why they were cho­sen, mak­ing it sim­ple for our users to under­stand. We would like to add prod­ucts such as pen­sions in due course,” she says. “We’re also plan­ning to build a retail space where cus­tomers can go into and save, invest or spend. We’ll be fea­tur­ing sus­tain­able brands there as well.”

In Sep­tem­ber, Open­Payd report­ed the results of a large-scale sur­vey of firms’ atti­tudes to embed­ded finance. Near­ly three-quar­ters (73%) of respon­dents said that they intend­ed to start offer­ing embed­ded finan­cial ser­vices with­in the next two years. 

In a recent blog, OpenPayd’s founder, Dr Ozan Øzerk, described the finance ele­ment of these embed­ded ser­vices as “hard­er to see, but that’s the way con­sumers and B2B cus­tomers increas­ing­ly pre­fer it: so con­ve­nient that they don’t have to think about it.”

When Angela Strange, gen­er­al part­ner at US ven­ture cap­i­tal firm Andreessen Horowitz, assert­ed in 2019 that “any com­pa­ny could become a fin­tech com­pa­ny”, Uber was one of the main exam­ples that she cit­ed. The busi­ness may have launched as a dis­rup­tor of the tra­di­tion­al taxi mar­ket, but the ride-hail­ing busi­ness is now also offer­ing cred­it cards, a dig­i­tal wal­let and instant-pay­ment ser­vice for its dri­vers.

“For Uber and Lyft, adding finan­cial ser­vices has two ben­e­fits,” Strange said in a con­fer­ence pre­sen­ta­tion that’s become high­ly influ­en­tial in fin­tech cir­cles. “These com­pa­nies both spend hun­dreds of dol­lars acquir­ing dri­vers. Then they have to make up that cost through a mar­gin on rides. It’s much faster to make up that cost if they also have a mar­gin on bank­ing ser­vices. Fur­ther­more, if I’m a dri­ver, I’m more like­ly to stay with a com­pa­ny that is also pro­vid­ing my finan­cial ser­vices.”