We are gathering views on embedded finance, which is widely regarded as having enormous potential for financial services and wider industry sectors. So far, we have sat down with John Salter, chief customer officer at ClearBank, Alex Mifsud, co-founder and CEO of Weavr and Andrea Ramoino, managing director for electric money business, UK and EEA at Solaris.
In this fourth instalment, we sit down with Christoffer Malmer, head of SEB Embedded, an in-house startup dedicated to commercialising banking-as-a-service (BaaS). The platform was born and developed in the SEB innovation studio SEBx. In 2023, the team evolved out of SEBx to form the completely new business unit, SEB Embedded.
Tune in next week, when we meet Andrew Ellis, CEO, NatWest Boxed.
Q: What are the key differences between BaaS and embedded finance?
A: I think to some extent this phenomenon of embedding financial services into the interface and context and user journeys of non-banking distributors is still at a relatively novel stage.
There are a lot of interpretations of what actually encompasses the different definitions which, I think, stretch wider across open banking and how all this comes to fruition. But what I think we can conclude is sort of settling in a little bit. BaaS is what one provides; however, embedded finance is the concept of actually taking that bank service and embedding it into a product.
To give you an example, we provide BaaS to Axel Johnson (a Swedish company, with a history in the food industry, that provides products and services to industrial companies), our first external customer. They buy banking service from us and offer a service to their customer — a card where they have the first-line customer communication. They have the user journey there, the branding — that is an embedded finance product. They offer embedded finance to their customers. We offer BaaS.
I would argue BaaS is a B2B concept. Embedded finance could then be either business to customer, if that end customer is a consumer, or business to business — let’s say, in the case of an accounting firm that wants to offer banking services or a wholesaler that wants to offer to their distributors. So that’s how I would define the two.
Q: Which holds more potential for banks?
A: To provide BaaS, banks are very well equipped. That’s where we have our experience, knowledge and licence. We’ve been doing banking since 1856. We’ve been dealing with regulators all over the world. We’ve been working our way through understanding different changes in regulations and regulatory compliance, but also risk management and banking and financing and funding.
We’ve built a balance sheet over many, many years. We’re used to capital and liquidity management; we are funding ourselves as competitively as anyone can fund themselves being a strongly rated and highly rated bank. We have access to funding at the cheapest possible level, in the market, looking at our CDs [certificates of deposit], spreads or other things. A lot of other large banks are in a formidable position to leverage their strength, their balance sheet and capital liquidity licence experience to offer BaaS. So yes, I think banks are already well equipped, which I think we saw as a catalyst for this to happen.
There were more fintech and technology plays that actually started to put the spotlight on BaaS because they said: ‘Hey, do you really need to be a bank to offer banking? What if we connected you to payment rails and banking infrastructure?’ But this was almost without realising that this was happening. You had new players coming into the market, offering this to non-bank brands and then connecting them up to banking platforms. Since then, a lot of incumbent banks are realising what you really need here is a balance sheet of capital, liquidity and funding, and you need that technology piece that enables you to connect to the distributor or the brands.
It’s about making it readily available via APIs, so that anyone can come and connect to our platform
We have that kind of fundamental banking asset in place already. We’ve historically used that for our own distribution channels, our own branches, advisors and mobile apps. But what if we enable this to anyone who wants to build a banking product and deliver that to their end customer so that it’s no longer about building an app and a distribution platform? It’s about making it readily available via application programming interfaces, so that anyone can come and connect to our platform and embed those financial services.
Coming back to the embedded finance element, embedding those products into their user experience and offering them, I think banks are really well equipped to do this — and particularly incumbent established banks.
There are several hurdles that we have found in getting an offering out into the market and we can talk about those. But yes, I think the short answer is that banks are well equipped to offer that.
Q: What type of financial services are consumers and businesses looking for?
A: If I look at the distributors, so the wholesale customers, why do they turn to us and want to explore BaaS? There are a number of reasons.
First of all, we see that distributors or brands that offer embedded finance want to build stronger relationships with their customers. They want to build loyalty engagement; if you meet your customer once every second year, how do they keep a more regular contact with the end user? Loyalty and engagement are certainly important drivers.
The second one is access to data. Part of our offering is to tell the distributor that ‘all the data that you get from offering financial services that previously ended up with a payment provider or with a banking partner, now what ends up with you’. We empower that product, we make sure that it’s compliant, we do all that banking stuff — but you get to keep the insights and that’s one important driver we find among a lot of distributors getting access to that insight.
The third one is new revenue streams. A distributor may say: ‘Hey, I know that all my customers use financial services to purchase my product.’ They might be selling consumer goods like a car or a boat — something that most people will take some sort of financing to purchase. The distributor asks: ‘What if I could offer that to my customers without necessarily jumping through all the hoops of becoming a bank and running a balance sheet? What if I could offer that and then give them an opportunity to access that revenue stream?’
And the fourth and final driver we find is cost savings, [an ability you have] particularly if you’re in the retail space or one where you do a lot of payments. There are ways in which you can actually internalise those payment systems to provide your customers with the payment options. What if you can actually offer financial service where you’re the one that puts the payment options in the hands of your customers?
These four drivers are really strong from the ones that want to purchase BaaS, in our minds.
Q: Will demand for embedded finance decrease as the global economy recovers?
A: You’re absolutely right in saying that the pandemic acceleration is a shift towards digitalisation and consuming goods and services remotely. I think when it comes to financial services, a part of this accelerated a shift that otherwise would have taken longer to happen. It is probably more of a shift that has been accelerated rather than a cycle that is going to reverse.
From our experience, our conversations really started to pick up during the course of last year when we went public that this offering is in the market. We announced our first customer — it’s really been kind of at the tail end of the pandemic that we’ve had this value proposition in the market. The drivers among our prospective customers are more along the longer trends in terms of how to create value, how to get closer to customers, but I’m sure that the broader acceleration of digitalisation plays a role in this.
Q: What have been the barriers to embedded finance so far?
A: For us, being an incumbent bank, there are the strategic conversations to be had within the organisation on how we relate to BaaS. Are we offering banking products to somebody who, in theory, could be competing with our own banking proposition? That’s one conversation that’s been ongoing for a long time.
This is a conversation that really started with fintech emerging when we started to invest in fintech companies back in 2015. But our view is that if this is a phenomenon and we think it’s going to happen, we’d much rather be the provider into that ecosystem, rather than trying to hope that it won’t gain traction.
We have products and services that are offered through our channels, and we can offer them as a service. In our mind it is not either/or.
more banks will move into this and we’d be much better off sharing our experiences and comparing notes
That’s a conversation that is maturing. I talk to a lot of other banks and that’s the conversation that always comes up: ‘How are we dealing with a theoretical cannibalisation question?’ When it comes to the practical implementation, I think the challenge is designing the operating model because it is a fundamentally different operating model from what we have.
We have never sold BaaS in this shape and form previously — it is, technically speaking, forward outsourcing. We are outsourcing some of our activities to our distributors and it’s a new operating model. It’s a new model for the pricing. The commercial model is different; to some extent, we’re selling banking services, and to some extent, we’re selling tech. These are new areas for us. The operating model is also part legal compliance and part regulatory.
The third piece, which is really exciting, is how can these propositions come to fruition? This is still something that is emerging and growing — banks getting comfortable that this is something they want to do. Piecing it together and practically making it readily available, and then finding the broader adoption in the market. I think we’re somewhere along that curve of development for the industry at large.
Q: What is the growth potential of this market?
A: Our assessment is that this is something that has great potential and we’re very humbled that this is in its early days and it’s to be proven practically. We can actually deliver it — we have our first live customer in production, but of course that it can still scale, we can add more distributors and there’s an adoption in the market.
It’s at an early stage for the industry at large and for us, but very exciting prospects if we look at them.
I often get the question about what other banks are doing. We are seeing a couple of incumbent banks moving in this space; it seems like we’re relatively early for being an incumbent and leaning into this space. That’s something that we think is exciting as much as scary.
We’re talking about what we’re doing and we’re very happy to share even if it’s early days. It’s a big market. I think more banks will move into this and I think we’d be much better off sharing our experiences and comparing notes more than anything else.
