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When Brands Become Banks.Indd When Brands Become Banks The development of embedded finance as evidenced by the German e-commerce industry Content 3 Foreword 4 Executive summary 5 What is embedded finance? The development and function of embedded finance The origins of embedded finance The current development What is the impact of embedded finance? Why is embedded finance relevant today? 10 Key dimensions of embedded finance Identification/KYC Account From user account to bank account Payments Cards The growing importance of virtual credit cards Credit Digital Assets The potential of embedded finance 24 Industry development and potential Embedded Finance at the industry level 27 Deep dive: e-commerce in Germany E-commerce in Germany – an overview The digitalization of retail in Germany Embedded finance in e-commerce The conversion potential in German e-commerce The e-commerce matrix Conversion potential based on trust indicators Conversion potential based on the direct survey Using an account Using a credit card Using a credit product Conversion potential – conclusion Market potential of embedded finance in Germany 41 What’s next? Content 2 Foreword Traditional banks are having a tough time. Years of These brands have recognized that by enriching low interest rates have squeezed margins to a sliver their products with financial services they are able and Basel IV has dampened their maneuverability – to benefit from higher customer stickiness, more or so they say. But what if external factors are not touchpoints and additional revenue streams. Further, the key driver in their decline. What if, in fact, their if these players can augment the wealth of user data centuries-old business model needs to be rede- at their fingertips – data they already harness when signed? What if the next account you open or the assessing spending behavior – they can offer their next loan you take out won’t come from your bank, customers tailored financial solutions at a quality but from your favorite e-commerce shop? And what that is indistinguishable from that of a personal if I told you, that this has already been going on for financial advisor. some years, with the biggest wave yet ahead of us? Any company can become a fintech Embedded finance: financial services seamlessly synced with life In Germany alone, there are over 100 million checking accounts. We expect that in the next years half of The idea of embedded finance, also often referred financial services in Germany will be provided by to as contextual banking, is to “embed“ financial non-bank brands and challenger banks. That would services directly into the products of other non- be more than 50 million accounts up for grabs. This bank providers. This way, the financial service is figure multiplies as you look beyond Germany to the available precisely at the time and place it’s needed. wider European landscape. Specialized providers are enabling this by integrating services such as bank accounts, payment cards and With an opportunity of this magnitude, the ques- lending services seamlessly into the offerings of the tion is not if, but when, brands will become the new likes of Apple, Amazon, Samsung or Walmart. banks. We are only at the start of the journey for embedded finance, but time is running out for big brands if they want to win first-mover advantages. Dr. Roland Folz Chief Executive Officer, Solarisbank AG Foreword 3 Executive summary Embedded finance describes the integration of This study examines the conversion potential of financial services into non-bank products and embedded finance on the basis of the e-commerce business processes. As digitalization continues sector in Germany. By analyzing 21 leading e- to advance, embedded finance is becoming in- commerce providers in Germany, it can be shown creasingly relevant to the market. that that the interaction rate with the customer, as well as the customer‘s satisfaction, allow an approxi- Compared to other sectors, retail is particularly mation of the conversion potential of e-commerce predisposed for the integration of financial services: customers adopting embedded financial services. The rapidly growing sector is highly digitized and al- The 21 e-commerce providers chosen cover the ready reaches around three quarters of the German central retail segments of fashion, electronics & population today – with all signs pointing upwards. media, hobby & DIY, furniture & household as well as groceries & toiletries. Streamlining the user journey to match customer needs; enforcing a continuous digitalization; Along these parameters, the method can be applied establishing a network of partners to strengthen to all other providers in the e-commerce sector. customer loyalty - for many companies with a B2C focus, these developments have been well under- In addition, this procedure can be replicated to es- way for years and offer the opportunity to make a timate the conversion potential in other industries, move into financial services. simply by adapting the respective industry-specific indicators. In order to prove the conversion potential for the e-commerce sector in Germany in terms of con- crete values, a survey with a representative sample was conducted to directly determine the usage of the 21 e-commerce providers and the willingness to obtain financial services from these brands. The survey shows that a total of 61 percent of respondents are willing to use financial services provided by the brands analyzed. The results reveal that the conversion potential for embedded finance in Germany is already very high and, in view of the particularly high approval rates among younger respondents, is still growing. The analysis thus directly confirms earlier studies from the USA for the German market for the first time. Executive summary 4 What is embedded finance? „Banking is necessary, banks are not.“ This is how Bill Gates summed up his view of the development of the financial industry back in 1994. 27 years later, financial services are still generally handled by banks. More recently, however, Gates‘ forecast seems to be material- izing – banks have long since ceased to be the sole providers of banking services. Fueled by the massive wave of digitalization, embedded finance - also known synonymously as contex- tual finance and contextual banking – is spur- ring on a shift to „banking without banks”. What is embedded finance? 5 The development and function of embedded finance Embedded Finance is the integration of financial The current development services into products and business process- es of non-banks. It describes the cross-industry – convergence of financial services in products from companies not originally from the financial sector. In a digital world, offering These include retailers, mobility providers and, embedded finance has be- crucially, big technology companies. There is a simple economic rationale behind this: providers come much easier for a wide who „embed“ financial services into their products variety of companies. This deepen the value creation in their original sphere of business – and are able to penetrate new mar- opens up the possibility for kets. other sectors who may not have originally considered The origins of embedded finance the option. While integrated financial services are gaining – momentum in many industries today due to deep- er digitalization, it is by no means a new concept. Companies do not have to hand over the customer The idea behind embedded finance dates back relationship to a bank, but can maintain direct cus- nearly 100 years. In 1926, the Ford Credit Bank tomer contact throughout the entire value chain. was the first „automotive bank“ to be founded in They integrate the financial service seamlessly into Germany. Today, almost all major car manufactur- their customer journey, as opposed to ushering the ers worldwide have banks as part of their corpo- user back and forth between different user inter- rate structure: for most people, the car was and faces. The check-out process of an online store, for is a purchase that requires financing. Against this example, is designed in such a way that customers background, it is worthwhile for the Original Equip- do not have to leave the site. The payment process ment Manufacturers (OEMs) to offer this financing is fully integrated, and processing takes place in the themselves. background. What is embedded finance? 6 The provision of financial services requires a li- What is the impact of cense. So called “Banking-as-a-Service” providers embedded finance? therefore serve as the basis for embedded finance. Businesses partner with banks that contribute the – corresponding license. Today, a large number of providers covering different product ranges have In principle, an embedded established themselves in this segment. Along finance offering is applicable with the banking license, they offer suitable solu- tions ranging from parts of the infrastructure to the to any business that sells a entire technology and product platform. From the service or product. perspective of the end customer, the brands always remain in the forefront, while the Banking-as-a- – Service provider remains in the background. A transaction is not complete until the product is This can already be observed in the retail sector, paid for. If businesses succeed in keeping the finan- for example. Many retailers now offer installment cial processing in their own hands and integrating it loans or (zero-percent) financing themselves, en- seamlessly, there are opportunities to strengthen the abled by a financial institution in the background. connection with the buyer beyond the mere payment This type of interaction drives the disintermediation process. Businesses can boost the customer value, of the banking sector in general and the customer‘s for example, by increasing the average shopping cart respective principal bank in particular. As a result, value through zero-percent financing, or by offering the distribution channels for financial products are a bonus program linked to the company‘s branded transforming. credit card. Simultaneously, the revenue streams of traditional For non-banks, embedded finance creates new banks are coming under increasing pressure.
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