NAFCU Services Blog

By Paul Timm, Vice President. Marketing & Strategic Development | NAFCU Services

If it seems like the biggest news and boldest moves in financial services have come from everywhere but traditional banks and credit unions, you’ve spotted the tremendous growth in embedded finance. To help explain why non-financial companies seem to be running wild through industries including payments, credit, and insurance, we asked Karan Maini, Vice President of Banking, Financial Services and Insurance at Persistent Systems to join us on The CU Lab podcast.

He shared with us the many opportunities for credit unions to form valuable partnerships, particularly on the back-end where embedded finance entrants frequently lack the scale and structure to keep up with demand in the long term. I recommend listening to the entire podcast but collected some other highlights from the conversation below.

1. The embedded finance explosion is fueled by data. Customer data is the raw material that feeds the embedded finance flames. The recent entrants are doing more with alternative and long-overlooked data sources. And those first-mover advantages are helping them sew up market opportunities. For example, Maini points out that everyone had access to the same public homeownership data that Zillow harnessed, but it an aggressive startup to flip that data into a multi-billion dollar real estate enterprise. Non-financial services companies have seized the data advantage and are continuing to capitalize.
2. Embedded finance has become second-nature for young consumers. Digital wallets like the Starbucks app made ubiquitous are a niche convenience for older generations: a situation-specific supplement to the traditional choices of cash or charge. For younger generations, the idea that any financial transaction could be handled by any type of company (not just your bank or credit union) is commonplace and assumed. “The buy decision has become commodity, with the ability to pay with 20 different payment methods,” Maini said. “The Xennials, those born digital natives, they just see this [embedded finance] as table stakes, so anybody not offering it is actually missing out on that transaction.”
3. Think in terms of partnerships, not fighting over lost ground. Hugely disrupted markets (like the loss of credit card merchant accounts to Square), won’t become fertile ground again. Instead, Maini recommends that credit unions start looking at member problems through the same lens as the companies rolling out embedded financial services: focusing on reducing friction and helping make every transaction faster and better. Those partnerships may come on the “plumbing” side of the house where credit unions can offer risk scoring, fraud prevention, or know-your-customer assurances better than a non-financial company can. Or it could be by adding your member insights to the alternative data streams captured by these unconventional entrants.
4. Focus on opportunities with a future. Wading into embedded finance will seem overwhelming at first because of the superheated supply and demand for services. Maini recommends narrowing down your universe considerably by addressing questions of scale and longevity up front and focusing on opportunities with a realistic chance of lasting 24 months or longer.
5. Embedded finance will continue to grow at eye-popping rates. Statista estimated the embedded finance sector in the United States alone at over $22 billion in value in 2020, and a variety of analysts call for compound annual growth in the sector to exceed 30% over the next several years. A study from PYMNTS and FISPAN projects embedded finance will reach $7 trillion in global value by 2032, a projection Maini echoed on the podcast.

Opportunities and challenges abound; we have so much more to talk about on this issue. To hear the full conversation about the future of embedded finance with Karan Maini, listen to the episode.