SAP Fioneer's Vishal Shah on the future of embedded finance

Embedded finance has the power to transform our industry, putting financial products directly at the forefront of transaction flows exactly when and where consumers need them. It could be a game-changer for the customer but it still requires a lot of work before we realise a fully embedded future – for a start, there is a culture shift that needs to happen, without even mentioning the technical challenges of transitioning to an embedded world.

We caught up with Vishal Shah, Head of Embedded Finance at SAP Fioneer, to discuss all things embedded finance and what the future is going to look like.

How far have we come on embedded finance and how far is still left to go?

Embedded finance currently focuses on the digitisation of models that are already prevalent in the real world. For instance, Buy Now Pay Later (BNPL) is the digital version of the instalment loan product offered to customers when they make a big purchase at a retailer. Embedded finance in the future will be hyper-personalised and context driven. Data and frictionless business processes are the key to delivering next-generation innovations. In the business-to-business (B2B) context, micro, small and medium enterprise (MSME) lending is an area that presents huge opportunities. Leveraging these data-driven innovations and improving end-user experience with frictionless business processes can address the unmet needs of this sector. For example, in developing countries, 65mn firms have an unmet financing need of US$5.2tn. Embedded payments and embedded insurance have a higher level of maturity than embedded credit or lending.

What barriers to adoption still exist?

Currently, there is a clear lack of awareness and understanding on the embedded finance model and how it is fundamentally different from the existing model of distributing and consuming financial services. The route to path-breaking innovations can often be disruptive to those already in the market and the scale of opportunity is unclear to the new entrants.

What application or use-case of embedded finance are you most excited by?

Being able to apply embedded finance that exists within the business-to-consumer (B2C) context to the business-to-business (B2B) context is an exciting development. We believe that B2B embedded finance use cases will emerge when digital and physical supply chains meet. As global trade becomes increasingly digitised, and as companies begin to operate through electronic trade networks, the financial industry will be able to truly unlock the power of “instant” payments and “just-in-time" credit. We are seeing use cases such as Buy Now Pay Later and Working Capital Financing, which allows businesses to borrow money to cover day-to-day operations rather than purchasing equipment, appear in the B2B context. In the B2C space, we are excited to be seeing the development of new use cases such as Virtual Rent-to-Own and Virtual Lease-to-Own, which enables consumers to make payments for items with the goal of eventually owning them.

Do you see power for embedded finance in the products and services you use personally?

As finance becomes deeply embedded over time, the financial service will become part of our everyday life and activities. As a futurist, it would be great to witness the evolution of embedded finance in travel and transportation systems. As an example, imagine a scenario where one simply completes a train journey and the right amount of travel fare is automatically deducted from your digital wallet, without having to pass through fare gates. Similarly, you could park your car without needing any parking tickets and instead get charged directly based on your entry and exit from the car park. In a B2B scenario, a payment request would be triggered automatically when goods are delivered by a lorry and the receipt is signed digitally by a warehouse clerk.

How should companies be adapting their businesses in order to exploit embedded finance?

Embedded finance will become integrated into the financial services ecosystem and over time will be beneficial for all those involved. Traditional financial institutions, such as banks, will be able to serve their existing clients efficiently and effectively, thereby increasing their share of wallet and reducing costs. Over time, this will also allow them to acquire new clients and enter new markets which will in turn drive new revenue streams. Fintechs can achieve global scale and accelerate their time to market by partnering with well-known global Software as a Service (SaaS) vendors to embed their propositions and deliver a frictionless experience. Further, micro, small and medium enterprises (MSMEs) will be able to grow their business profitably with ease of access to capital and have the ability to manage their cash flow during uncertain economic times. 

What does an embedded future look like? Will embedded banking be the end of banks, embedded lending the end of traditional lenders?

Embedded banking could potentially mean that banks will lose touch with the end user or client as digitisation continues to limit personalised interaction. Incumbent banks are protected by regulations and trusted by people due to their proven record of keeping up with rigorous compliance requirements. However, banks roles might be reduced to being a provider of compliance in the industry and their services might be seen as more utilitarian.

To stay relevant, traditional financial services organisations should focus not just on the breadth of their digital channels but also improve the depth of digital engagement with their clients. They can do so by embracing the ecosystem model and collaborating with innovators, fintechs, technology companies and truly focusing on delivering “experience innovation” rather than simply “product innovation”. Many incumbent banks are still organised internally by product siloes and innovation is still all about crafting a new product, such as BNPL, and launching in the market. That will have to change.

What does utopia look like in terms of embedded finance? What is the best-case scenario?

If you truly want to embed finance, then the prime focus should be to simplify the lifestyle and the work-style of the end user. People want to be able to get a ride home without worrying about how to pay for it or splitting the bill. People also want to buy homes, and getting a mortgage is consequential. Banks need to change their narrative from “Know Your Customer” to “Understand My Customer”.

Data and its applications have the power to do two things. Firstly, respond to changing consumer behaviour; and secondly, change consumer behaviour. Utilising data to drive contextual and hyper-personalised banking will benefit the end user immensely. Firstly, contextualisation will allow end users to quickly and efficiently search for the best financial product or service to meet their needs. Secondly, hyper-personalisation will enable financial product features to be tailored to the end user as there is never a one-size-fits-all.