The markers of the digital consumer revolution are evident: shifting expectations for quick and convenient access to services, the rise of online shopping, and the need for experience-driven interactions, to name a few. Moreover, shoppers desire innovative and seamless digital payment experiences with their favorite brands, an emerging trend poised to redefine how people perceive traditional banks.
Already, brands including Ikea, Starbucks and Lyft offer customers financial services via loyalty and mobile payments, interest-free credit, as well as and debit and savings accounts. The key enabler for these businesses is embedded finance, a software distribution model that allows nonfinancial companies to lend, accept payments, and even offer insurance without requiring a financial institution. Embedded finance will touch many industries, but none more so than retail.
What is Embedded Finance, and What are its Benefits?
Embedded finance describes non-banking businesses or brands integrating financial services into the everyday customer journey. Soon, businesses may no longer interact directly with a conventional bank. Instead, they would leverage e-commerce platforms and software companies that partner with financial institutions to embed financial products into the customer experience. Currently, payments are the primary use case of embedded finance, as they sit at the center of commerce, banking and business services.
This phenomenon presents many benefits to businesses—especially retailers actively searching for alternative sources of revenue and product growth. Today’s shoppers value the customer experience as much as or more than the product or service itself. In particular, modern shoppers value personalization, immediacy, greater trust, and simple offerings.
By implementing embedded finance processes, retailers can provide shoppers with a more streamlined, fast-tracked, and convenient customer experience. Additionally, because the nonfinancial company implementing these embedded finance models has greater control over the customer experience, they can reduce barriers to purchase and minimize friction to encourage shopper loyalty and boost revenue. Furthermore, embedded finance eliminates the headaches of dealing with multiple financial partners.
The Four Steps to Realizing Embedded Finance
Embedded finance’s market cap will reach $7.2 trillion globally by 2030, and retail use cases will account for almost half of this growth. As such, retailers need to capitalize on this lucrative market opportunity. However, before retailers can start embedding innovative and disruptive financial offerings into the shopper journey, they will need to achieve a clear vision of the future of customer service in their industry. Such a vision will necessitate a robust grasp of current and imminent possibilities, including available financial technologies and services.
Four steps can help retailers translate these objectives into tangible initiatives:
- A Value Proposition Design
- Commercial Outcomes
- Go-To-Market Strategy
- Operating Model Designs
First, retailers must determine who they are creating value for and how. As part of the value proposition design step, retailers can identify and categorize their various stakeholder groups, pinpoint their challenges, and outline which relevant financial service use cases will address those pain points.
The next step focuses on commercial outcomes or business strategies and objectives that support the embedded finance approach. Common business goals might include customer loyalty and acquisition, growth or the creation of new revenue streams. Retailers can establish a commercially viable proposition and secure buy-in within the enterprise by having these clear strategies, goals and outcomes in place.
Then, retail brands must create a go-to-market strategy to ensure the products reach the ideal audience through appropriate channels. In this stage, retailers must find the best partners to help distribute and market while building a progressive and controlled product release plan. Likewise, they should ascertain the key metrics to measure success.
The final step is to build an operating model to convert the specific business strategies outlined in previous steps into operational capabilities and enablers. In addition to implementing a flexible technology stack to facilitate the rollout of new products, retailers should identify their risk appetite. Retailers should also determine if they require new talent or teams and if they possess the ability to build embedded solutions in-house or if the help of a trusted third party is necessary.
The Digital Consumer Revolution Waits for No Retailer
The rapid evolution of shopper expectations and preferences is going toward personalized and seamless digital experiences, and it isn’t slowing down. To adapt accordingly, retailers must invest in embedded finance models, lest they arrive late to the next era of the digital consumer revolution and miss out on this emerging revenue opportunity.