The New Financial Landscape: Brands Embark on a Banking Revolution

The financial industry is undergoing a dramatic transformation, as everyday brands step into the realm of banking and financial services. This shift, known as "embedded finance," is reshaping the way consumers interact with their finances, empowering brands to offer seamless financial solutions tailored to their customers' needs. From buy-now-pay-later (BNPL) options at retail outlets to integrated payment systems on social media platforms, the lines between commerce and banking are blurring, presenting both challenges and opportunities for traditional banks and consumer brands alike.

Unlocking New Revenue Streams and Fostering Customer Loyalty

Brands Capture the Attention of Younger Generations

Younger consumers, particularly Gen Zers and millennials, are driving the shift towards embedded finance. These digitally-savvy demographics have shown a remarkable openness to the idea of receiving financial services from their favorite brands. In the United States, 63% of consumers aged 18 to 34 would consider using financial products offered by non-financial brands. This sentiment is echoed across the Atlantic, with 52% of European consumers aged 25 to 34 believing that using financial services through familiar brands is more convenient than traditional banking. The alignment of brand loyalty with an interest in financial products presents a significant opportunity for companies to deepen their relationships with these value-driven, digitally fluent generations.

Embedded Finance Fuels Retail Growth

The potential of embedded finance to drive growth is particularly evident in the retail sector. In the U.S., 78% of consumers are willing to pay premium prices for brands they are loyal to, up from 72% the previous year. By offering embedded finance solutions, such as BNPL options or co-branded debit cards, brands across various industries can significantly boost customer retention and loyalty. According to a recent whitepaper co-authored by the Boston Consulting Group, retailers leveraging banking-as-a-service (BaaS) and embedded finance have reported a 5% to 12% increase in conversion rates, a 15% to 30% rise in average order values, and overall revenue growth of 4% to 7%. These benefits have been especially pronounced in the fashion segment, where BaaS has been shown to increase conversions by 10% to 15% and order values by up to 30%.

Debit Co-Brands: A Powerful Embedded Finance Strategy

Co-branded debit cards, jointly offered by banks and brands, can be a particularly rewarding embedded finance strategy. Debit co-brands can appeal to a wider audience than credit co-brands, including consumers who may not qualify for or desire credit products. By offering branded debit cards and associated checking accounts, brands can create a stronger connection with their users, leading to more frequent interactions, higher customer retention rates, and opportunities for personalized rewards and offers. Compared to credit products, debit co-brands also carry less risk for brands and their financial partners, as transactions are based on available funds, minimizing the risk of default or unpaid balances.

The Embedded Finance Opportunity: Substantial Revenue Potential

The embedded finance market presents a significant economic opportunity for both brands and banks. Projections estimate the overall embedded finance market to generate $230 billion in revenues by 2025. For brands, this means tapping into new revenue streams through transaction fees, interchange fees, and other financial services-related income. For banks, the embedded finance market in Europe alone is expected to jump from €20 billion to €30 billion realized in 2023 to a potential €100 billion bonanza by 2030.

Traditional Banks: Leveraging Trust in the Embedded Finance Landscape

Traditional banks have a distinct advantage in the embedded finance market: trust. With more than 70% of consumers ranking traditional banks among their top three most trusted financial services providers, banks can leverage this reputation to mitigate any hesitation towards novel embedded finance products. However, the vast potential of the embedded finance market also signals an urgent need for banks to develop robust embedded finance ecosystems, both to drive growth in an increasingly fragmented financial landscape and to remain competitive.

Collaboration: The Key to Unlocking Embedded Finance Success

As competition intensifies, collaboration between banks and technology platforms can be a winning formula for success in the embedded finance space. Several major brands and tech platforms have already strategically partnered with banks to maximize the value propositions of their embedded finance offerings. For example, Uber has partnered with Evolve Bank & Trust and FinTech Branch to launch a debit Mastercard that allows drivers to get paid faster and earn rewards on fuel purchases. Similarly, airlines have collaborated with BNPL FinTech Uplift and CBW Bank to offer customers installment loans on flight tickets. These success stories showcase how banks can blend their own expertise with partners' industry know-how to innovate financial offerings that go well beyond traditional banking.

A Roadmap for Brands and Banks in Embedded Partnerships

To capitalize on the embedded finance revolution, brands and banks should consider the following strategies:1. Tap into Gen Z's brand affinity by offering embedded financial services aligned with their lifestyle and purchasing habits, such as seamless in-app BNPL options or cash-back rewards on everyday purchases.2. Utilize a modular, API-driven embedded finance platform that integrates seamlessly with popular eCommerce sites, accounting tools, and business operations software, prioritizing scalable solutions that alleviate financial headaches across consumers' most common digital journeys.3. Incentivize adoption with a debit co-branded card or tiered rewards program, rewarding consumers for increasing their engagement with the brand and its embedded finance solutions.4. Accelerate time to market through tech collaborations, with banks partnering with FinTech firms specializing in embedded finance to leverage their expertise, technology, and agility.The embedded finance revolution is here, and brands and banks must act decisively to secure their competitive edge. By tapping into the power of brand loyalty, leveraging trusted reputations, and forging strategic collaborations, both parties can unlock new revenue streams and transform the financial landscape for the benefit of consumers.