Embedded finance track
From left Phin Upham, Charley Ma, Somrat Niyogi, Amanda Swoverland and Charlie Deutsch.

Fintech Nexus USA 2022: Factors to consider with embedded finance

While there is plenty of opportunity for companies considering embedded finance, there are a host of factors they must consider before taking the leap.

That was the consensus from panelists during Fintech Nexus USA 2022.

What makes a successfully embedded finance offering?

Begin by understanding the characteristics of successful embedded financial services, several advised.

Lendflow’s Jon Fry described it as adding something into the user workflow that improves it.

Nick Chandi at ForwardAI, wants to introduce customers to powerful and unique personalized experiences.

Ahon Sarkar at Helix advised companies to consider how they plug a new service into the existing expertise.

Ask yourself how you can combine this new feature with your current offering to build a unique experience that is hard to replicate.

“Starting with experience and impact and working your way back to revenue is the way to go,” Sarkar said.

Consider your existing business model and look for ways to deliver value to your users and employees, Synctera’s Peter Hazlehurst suggested.

Uber created a banking system for its customers and drivers that let drivers handle cash and get paid faster with digital transfers. Riders could get their change added to their account.

Consider factors beyond revenue generation. What are your development costs? What percentage of customers do you expect to use it? If the margins are thin, it may not be worth the considerable effort it takes to get the project up and running.

The importance of leveraging existing customer base

Charlie Deutsch at Homebase said that if you offer a service to people you already have a connection with, you have data that can be leveraged to provide unique opportunities.

Existing customers trust you, and that is a robust foundation.

“I think that trust is one of the most important areas where you can create more value,” Chandi added.

Security considerations abound

Ensure security isn’t an afterthought because embedded finance brings unique fraud entry points, Unit’s Amanda Swoverland said.

Many embedded finance initiatives are promoted through referral programs, where folks are offered money or benefits to sign up or introduce their friends to the service.

She added that fraud rings would take advantage of these strategies to siphon money away. Some rings scour press releases for funding rounds and target those companies.

Security has long been an afterthought for many startups, especially in the current environment. There’s a rush to market and a focus on delivering an MVP. What can get pushed down the road often does.

That can be a costly mistake. Companies introducing an embedded financial product should conduct a heavy security push before they go live and continue to test throughout, Swoverland suggested.

Some potentially fraudulent behaviors to watch out for are the speed forms are filled out and whether the applicant’s IP address moves on to other loan sectors. Mobile emulators have grown in sophistication and are vital to fraud prevention strategies.

The outsourcing/in-house ratio

How much of the problem are you solving yourself, and how much are you outsourcing to an outside company? Your answer will help determine how much control and presence you’ll have over the service.

AWS doesn’t take on all of the responsibility, for example. PayPal takes on more of the problem, and that willingness helped it take off in the marketplace. The tradeoff is that PayPal has a strong brand within the offering.

Communicate with all departments during development

Communication with all company areas must be another crucial component of your product design and implementation strategy.

Ensure your risk and fraud departments are part of the discussions from the beginning so they can contribute to the design and identify key risk factors. These departments can best determine what is happening at the data layer. They must also plan for any accelerated use and its impacts.

Swoverland has her compliance teams on sales calls.

There may also be regulatory concerns, so keep those in mind. If you are considering opting for a regtech solution, look for easily customized solutions for your business needs. Investigate the company’s customer service capability and how long it takes them to customize solutions.

Consider the benefits beyond direct revenue

Several speakers advised that when considering an embedded product, take a holistic view of the benefits. Yes, it will bring in revenue, but it can also introduce customers to the rest of your ecosystem. These customers could increase revenue in areas not directly associated with the original embedded product.

Remember that the bar for issuing credit is higher than for opening an account. Carefully consider your customer base before offering credit. What if you have to reject applications from existing customers?

  • Tony Zerucha

    Tony Zerucha is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.