"A new generation of consumers is embracing embedded services, creating a huge sales opportunity for banks."
A new generation of customers is emerging – and how they shop and access services doesn’t fit with banks’ current approach to selling their services. Whereas Gen X (born before 1982) would visit branches, and Gen Z prefers kiosks and internet banking, Gen Alpha (those born after 2000) prefer to access financial services as part of another activity – also known as embedded finance.
Just as we’ve seen the switch from bank branches to internet banking and kiosks, so e-commerce has moved from issuing email invoices through to card-based payments, then account-to-account payments and wallets – and now, embedded finance. In e-commerce, embedded finance maximizes the convenience and efficiency of the checkout process by linking ordering with payment, for example. But more than this, it’s normalizing the delivery of services via mobile device and PC – the preferred channels of those under 35.
Research from McKinsey & Company demonstrates1 just how quickly this new generation is going mobile. According to their recent study, bank branch interactions dropped by 60% over the last four years, with ATM withdrawals down 28% and engagement by laptop or PC down 33%. By contrast, mobile engagements rocketed by 127% as Generation Alpha joined the customer base.
The implications of this switch to mobile transactions that combine (for instance) payment with a warranty option are twofold: firstly, banks should seek to embed their products and services at the point where Gen Z and Gen Alpha want them – that is, in digital channels and especially mobile. Secondly, banks should seek to shorten the customer journey, bringing the point of sale as close to the checkout process as possible. Live examples of this include merchants that offer BNPL or product insurance options as part of the checkout process.
Merchants: at the heart of embedded finance
Selling online is all about optimizing the user experience – merchants and banks who get this right will see a huge uptake in demand over the next five years. By extension, those banks that move fastest to equip their merchant partners with embedded options will see the greatest benefit to their business in terms of revenue growth and stronger relationships with merchants.
“To win the merchant opportunity, banks should focus on easy integrations with flexible APIs that enable multiple services from a single provider.”
The downside risk is that merchants could start to partner with specialist fintechs and non-bank financial institutions (NBFIs) – something we’ve already seen in the BNPL space with the rise of specialists such as Klarna and Afterpay. Business models, the likes of these two, have been challenged with the rise of cost of capital, opening a window of opportunity for banks in a battle, which banks seemed to be late otherwise. The scale of the opportunity is massive: according to new research from ResearchandMarkets.com2, European embedded finance will grow by 24.6% year on year out to 2029, reaching US$105.82 billion by the end of the decade.
To win this merchant opportunity, banks should focus on easy integrations with flexible APIs that enable multiple services from a single provider. The great news is that banks hold a huge competitive advantage in this space, as in most cases they already own acquiring relationships with merchants and have the checkout technologies in place. This enables them to cross-sell e-comm related products related to the merchant, including overdrafts, supplier invoicing, and cash management solutions.
However, the massive opportunity for both banks and merchants rests in capturing new revenue streams from young, mobile- and digital-first consumers who do not currently have established banking relationships. These could include managing savings and deposit accounts through checkout, issuing credit cards to shoppers at checkout, and considering the offer of car leasing or financing other large purchases at checkout – something Tesla has already successfully practised through its website.
Critical success factors for banks
When it comes to success in embedded finance, flexibility is key. Specifically, this means banks should have both a flexible, wide-ranging product offering for merchants to choose from – as well as flexible, easy integration processes with API integrations that can handle both bank services and third-party integrations. In part, this is attractive to merchants in itself; however, as embedded finance volumes soar over the next five years, flexible, simple integrations will be a deciding factor between winners and losers: those with faster, easier integrations will win huge volume advantage in areas such as marketplaces.
Finally, banks need to take a hard look at their current product sales channels and ask themselves if their approach is optimal to reach both Gen Z merchants and Gen Z consumers. Creating flexible, uncomplicated API integrations should be at the heart of this review – as should your approach to sales. Sales strategies need to address the requirements of Gen Z customers and merchants: and that means optimizing your products for digital and mobile channels, as well as making those products available as close to checkout as possible.
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1 McKinsey & Co, 15 July 2024: “ Embedded finance: How banks and customer platforms are converging.” https://www.mckinsey.com/industries/financial-services/our-insights/embedded-finance-how-banks-and-customer-platforms-are-converging
2 Business Newswire, 15 November 2024: “European Embedded Finance set to grow out to 2029“ https://www.businesswire.com/news/home/20241115225706/en/
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