The rise of embedded finance, and what it means for online retailers

By Tom Bentley, Chief Commercial Officer, Vodeno

The past few years have been transformative for eCommerce. Not long ago, embedded financial solutions were a virtual non-entity in the world of online retail, with very few experimenting in the space. Today, consumer digital expectations, accelerated by the pandemic, require brands to ensure a seamless, convenient checkout experience.

Brands are beginning to offer more and more embedded financial solutions directly to their customers at the point of sale, providing credit options, insurance, personalised credit and debit cards and even bank accounts. These novel services might have seemed out of reach for a non-financial business like an online retailer, but they are quickly becoming table stakes in the eCommerce space.

The role of retail

As embedded banking becomes the norm in the eyes of consumers and FS institutions worldwide, online retailers must ensure that they are doing enough to stay ahead of this trend and continue to meet rising expectations.

Vodeno’s own research, which surveyed more than 750 retail decision-makers across the UK, Germany and Belgium, found that almost 75% of retailers are already offering embedded finance products on their platforms, such as credit cards, ‘Buy Now, Pay Later’ (BNPL) schemes and loyalty incentives, while 56% are planning to introduce even more schemes over the coming months.

These figures belie the trend towards embedded finance within retail, although we are just scratching the surface of what is possible. With this in mind, what should be the top priorities for online retailers today? Why does this transformation matter? And what does the future hold for embedded finance within retail?

Why embedded finance?

In order to understand why online retailers are embracing embedded finance solutions at such an astonishing rate, Vodeno’s research asked business leaders to rate the key motivators behind this transformation. The most common response was the prospect of creating new revenue streams, which 41% of respondents listed as a motivating factor, followed by the potential for growing the customer basket (40%).

While leveraging embedded finance to increase revenue streams and profitability is an enticing prospect, fewer than half of respondents listed either of these as key motivators, reflecting the variety of benefits that embedded finance can offer retailers. Embedded finance is more than just a money-maker – it also allows retailers to improve customers’ satisfaction with the brand (38%) and increase customer loyalty (40%).

We are already seeing real-life examples of embedded finance being deployed in innovative ways to strengthen consumers’ relationships with brands. Kohl’s, a US-based department store chain, recently partnered with Capital One to produce a branded credit card that provides rewards and bonuses to consumers, encouraging increased customer loyalty. As embedded finance develops further, we will see more and more of these use cases taking hold.

To succeed in the eCommerce space today, it is essential to understand a customer’s desires and ensure that their shopping experience is as smooth and seamless as possible. To this end, 39% of respondents listed improved customer insights as a key motivator, while 37% view embedded finance as an opportunity to utilise data in elevating their customer journey.

It presents a virtuous cycle – as the introduction of embedded finance products has raised expectations for customer experience, those increased expectations will drive the further introduction of new and innovative embedded finance solutions. The retailers with the best customer experience will end up on top, which is why retail decision-makers need to have their priorities in order.

The ins and outs of embedded finance

Seamlessness is the watchword of superior customer journeys, where embedded financial products are not just present – they are smoothly integrated into the experience without hindering or disrupting it. This is why white-labelled solutions should be a priority for retailers – a third-party product does not just dilute branding and muddle potential insight, but being redirected to an external platform creates unnecessary friction for the customer.

Retailers are primarily non-financial entities, and the technological capabilities and regulatory experience necessary to build financial products are beyond the remit of most. This is where Banking-as-a-Service (BaaS) fits in, allowing retailers to offer their own white-labelled products that fit seamlessly within their ecosystem.

38% of respondents stated that a key factor in selecting their chosen technology vendor was that the comprehensive solution they offered required little to no development on the part of the retailer. Regulatory and compliance standards were also a priority for 31%, and a localised banking licence was a key factor for 34%. Again, the variety of priorities in this decision underlines the range of considerations retailers must undertake, particularly when selecting a BaaS partner.

What’s next for retail

The motivations behind the ongoing embedded finance transformation within the retail sector may be varied, but Vodeno’s research has presented some clear through lines – embedded finance is not just a means to boost revenues, but to improve every element of the purchasing journey and customer experience.

The requirements for building and maintaining value-adding products may seem unattainable to retailers who have no experience in finance and banking, but the rewards are too great to overlook.

The next phase of retail is inexorably linked to the promise of embedded finance, and the retailers who stay at the forefront of this shift will reap the greatest benefits, while those who don’t will be left behind..

Tom Bentley is the Chief Commercial Officer of VODENO. Tom is an expert in the banking and financial services sector with more than 12 years of experience. Tom joined VODENO from Thought Machine where he was responsible for growing its business across Europe. Prior to Thought Machine, he held executive roles at banking software company, Temenos, across Asia and Australia, working with some of the most disruptive fintechs in the world.