Understanding embedded finance and its role in today’s financial ecosystem

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Embedded finance is disrupting a market long dominated by traditional financial institutions such as banks and insurance companies. When new entrants like non-banks are providing better, faster and cheaper services, how can traditional financial institutions reposition themselves? What kind of strategies and partnerships create synergy? How is embedded finance beneficial to consumers? Find out in this podcast.

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Guest
Transcript

Guest

Vilaporn Taweelappontong
Consulting Leader, PwC Thailand and
Financial Services Strategy and Operations Leader,
PwC South East Asia Consulting
Email | LinkedIn

Transcript

Piyanat
PwC Thailand Spotlight, insights on business and industry trends in Thailand and beyond.

Hello, I’m Piyanat Suanapai, your podcast host.

Embedded finance is becoming more prevalent and is impacting the finance sector. Today we’re joined by Vilaiporn Taweelappontong, Consulting Leader, PwC Thailand and Financial Services Strategy and Operations Leader, PwC South East Asia Consulting. She’ll share her insights on the significance of embedded finance and how it has been disrupting the financial sector, including banks and insurance businesses. How should businesses reposition themselves and their strategies to compete with new entrants? What are the benefits of embedded finance to society and consumers? We’ll find out in today’s podcast.

Hello Vilaiporn.

Vilaiporn
Hello.

Piyanat
Some listeners may have heard of embedded finance, but can you explain briefly what it is?

Vilaiporn
Sure.

Embedded finance, actually, isn’t a new concept. It already exists in Thailand, but we’re seeing more of it globally and locally. Embedded finance is when a financial service is embedded in a process, platform or financial ecosystem. In the past, banks and insurance companies only provided services to consumers directly. Now that’s not the case. They’re providing financial services as a feature, rather than directly to consumers. These features – whether they’re for payments, deposits, loans or insurance – are embedded in platforms. For example, super apps have services that go beyond simple food delivery or messenger services. In a super app there could be an insurance feature where if the messenger doesn’t arrive by the stated time, you get points or a cash refund. This is an example of selling an insurance service as a feature. If you think about it, financial institutions offer many services – and these services can be embedded to increase distribution channels.

This is embedded finance: selling financial services as a feature.

Piyanat
In embedded finance’s value chain, how many models are there and how is each model different?

Vilaiporn
That’s a great question. Embedded finance relies mainly on business ecosystems in which another entity does the selling. There are three models for these types of ecosystem.

The first is the participant model in which financial institutions are only a part of someone else’s ecosystem. This model is the easiest because products and financial services are embedded in the business ecosystem of other companies’ platforms.

The second is the orchestrator model in which financial institutions are not only embedding their products and services, but also assisting in influencing the ecosystem’s strategy. Who should be a partner in the ecosystem? What kind of products and services should be offered? This differs from the first model which just embeds standard features. There’s limited influence on other people’s ecosystems. In the second model, the orchestrator can express opinions, make comments and act as a business partner to the ecosystem’s creator.

The third is the creator model in which financial institutions are the sole creator of the system, so they have full control. They can dictate who can be a part of the ecosystem, what kind of products and services to sell, and what kind of technology to employ. As the sole creator with full control, investment in terms of technology, funding and resources is needed. So the third model is suitable for innovative, novel products or services. A think-do process is needed for novelty, so full ownership works best to shape ecosystems.

The three models are used both abroad and in Thailand. Each has its pros and cons, so it depends on which direction the financial institutions want to pursue.

Piyanat
Out of the three models, which one is the most popular among financial institutions in the market?

Vilaiporn
This can be answered from two points of view. The first depends on which stage financial institutions find themselves in. In the nascent stage, the participant model is preferred as it’s the easiest. It can be done as a partnership to offer products through apps, platforms or ecosystems. After a while, if there’s the opportunity, I’ve seen many companies start to move beyond being just participants.

The second depends on what type of products you’re pushing. If the product hasn’t captured a big slice of the market share and it’s a basic product, then driving volume is the focus. The products can be distributed through platforms in collaboration with more partners, often signified now with an ‘x’, by embedding standard features. If you want to market a basic product more, the participant model is suitable.

If you want to be a creator, you must have funding and resources, as well as a portfolio or pipeline of innovative products. New products require a think-do process to test the market and you need to have the ability to tweak features along the way, which is difficult to do if you’re not the ecosystem’s owner. Having to ask permission from the ecosystem’s owner may cause delays. In today’s business world, you need to move fast because whoever launches first has control of the market, so gets more customers.

So, your question can be answered in different ways. Which model to employ depends on the product you want to launch, where you want to distribute it, and the size of the investment or your budget.

Piyanat
From what you’ve said, embedded finance sounds like a great opportunity for financial service providers. So why are financial institutions, especially banks and insurance businesses, worried about it?

Vilaiporn
Operating costs are continuing to increase, which is why digital technology is commonly used. It’s the reason we’re seeing more providers entering the market that aren’t traditional financial institutions, banks or insurers. Non-banks, especially, are gaining ground in the banking sector. What they can do better, faster and cheaper is disconcerting because they’re reinventing how things are done. They can launch products faster and capture the market, though maybe not on the same scale as banks. This is what we’re seeing more of and it’s putting pressure on banks. The banking industry today is facing a lot of challenges – a large number of competitors, high operating costs and general pressure on operations following disruption. These factors are putting pressure on banks, insurance and financial institutions and forcing them to operate differently.

Embedded finance is an approach many financial institutions pursue to generate revenue and increase channels to reach consumers. We’ve seen financial institutions branch out into new channels.

Mobility platforms, such as car riding or sharing platforms, with embedded finance features.

Travel is flourishing again now that the pandemic is over, so we’re seeing features such as BNPL (buy now, pay later) where you can fly now and pay later. Or in-flight services with features to purchase products or services.

The health and wellness sector, for more health-conscious consumers, has various on-demand services available. You see financial services embedded in different ecosystems, which is convenient for consumers. Whatever services consumers need, they no longer have to look to banks or insurance companies anymore. They can get these services through platforms. It’s both convenient to consumers and beneficial to financial institutions.

Piyanat
So traditional finance businesses like banks and insurance companies should reposition themselves and rethink their strategies by partnering with ecosystems or fintechs, or by creating ecosystems that enable embedded finance. Is that correct?

Vilaiporn
That’s correct.

In terms of partnerships, ecosystems and new models such as embedded finance, financial institutions that aren’t exploring them haven’t really incorporated them into their strategies. For embedded finance, you don’t have to employ just one model. Some businesses employ all three models, depending on which model best serves each ecosystem. This is a new way of doing business we’re seeing more of.

Partnering is a must to stay afloat. You need ‘x’ or collaborative activities. Both who you’re collaborating with and how are important, but who is the most important. Did you pick the right partner? How are the selected partners complementing your business? What services are you partnering with? For example, BNPL may be suitable with certain partners, while payment services are best with another.

In terms of digital lending, there are so many of these businesses in Thailand you can get loans almost anywhere because the feature pops up in so many places. There are specific loans for specific needs: travel, education and SMEs. Going back over what I’ve already said, financial institutions must select who they’re partnering with, for what and which model. In the news you hear about partnerships that sometimes develop further depending on the synergy and working culture of the partners. There must be areas that complement each partner.

If you have a good strategy, you’ll have a clearer picture and better information, such as about the synergy you’ll get from a partnership or the consumers you’ll gain, which may be a group you couldn’t reach previously, or data that was unavailable to you before.

Partner selection and strategy for the partnerships and ecosystems are essential. Technology will follow. Sometimes you see a partnership gain access to technology you don’t have or is new to the market. You could acquire the business or partner with them to gain access to their resources, platforms, and new or next-gen technology to complement your business.

Partnering to gain data is also popular, but it’s important that it’s a two-way, win-win relationship. Financial institutions must be able to see what they can offer from the partner’s point of view. Relationships are complicated, so you’ll have to wait and see if it’ll last in the long term. Will both partners gain revenue? Will both acquire new data or customers previously unavailable to them? You should follow the news of these partnerships in the market to see how they develop. There are many partnerships in Thailand. To stay relevant, some have gone beyond our borders, some have gained super apps and some have even partnered with businesses in the same industry.

Partnership is important. I’d like to emphasise that partnership is a very important part of business strategy now.

Piyanat
What do businesses have to do or what criteria must they set to find the right embedded finance model?

Vilaiporn
First you need to assess the situation. If you’re partnering, it means you can’t do it alone, perhaps because you’re not as experienced in the sector. It could be you’re still in the developing stage, so you need a partner who can fill the gap.

For example, let’s imagine you’re competent in the retail sector, but you haven’t captured the new graduate segment yet. You’ll want to find partners who can help you reach that customer segment. There are different ways you could do this: before or after they graduate. We’re seeing ecosystems for university students that target students even before they graduate, with some as early as their first year successfully maintaining their loyalty after they graduate. The customer life cycle continues on to marriage, starting families and retirement. Usually, the life cycle is segmented into stages because different age groups have different needs. During the university years, there’s one need. After graduating, when they’re buying the first house or car, they have a different need. Having children and increasing income will lead to different needs.

You’ll need to identify which areas you can strengthen. You might have an amazing service or platform, but you haven’t developed your market well enough, so you can find a partner who can help distribute your product. Which ecosystem can help distribute your superb product to the right target? You have to assess your own position first. Other institutions’ strategies can’t be copied because each financial institution has its own strengths and weaknesses, as well as different focuses. So you need to determine what your focus is and what your expectations are. Do you want to monetise or increase revenue, obtain data to support other purposes or acquire technology? It all depends, but assess your position first to know what your needs are, then create a map of your partnerships and ecosystems. If none exist, create one yourself. Maybe what you’re doing is so unique there’s no existing ecosystem to support you.

Piyanat
Our listeners now have a clearer picture of the service providers in embedded finance. Going back to consumers, Vilaiporn, how has embedded finance benefited us or improved our daily lives?

Vilaiporn
As consumers, we’re probably noticing how accessible banking and insurance services are. It’s not just easier, but also cheaper and faster in many cases. As you tap through different super apps, you can see the embedded financial services. There are also various ecosystems, such as those I mentioned earlier: mobility, travel and health. Pets is another popular category. Many people think of their pets as family members, so there are a lot of features and platforms for pets. Financial services will follow, for example pet insurance for health, life and critical illnesses.

Embedded finance has made processes more convenient, cheaper and faster. At the same time, it’s forcing financial institutions to consider how to benefit consumers more. As consumers, it’s given us more access to these services and more options. We can pick and choose which services we want to use based on which can provide the best service, which is the most innovative and which is the least expensive. Consumers are really benefiting from embedded finance.

Piyanat
As our final topic, can you tell us what the outlook is for Thailand’s embedded finance market? Where is it headed? Based on PwC’s latest report, the embedded finance market in the US is valued at USD22.5bn and is expected to grow ten times to USD230bn by 2025¹.

Vilaiporn
I think we’ll continue to see more and more embedded finance. There are two groups to watch: banks and non-banks. Banks will keep expanding partnerships, ecosystems – of whichever model – and innovative products that they’re already offering and will continue to offer. What we’ll see more of is non-banks as new entrants. We’ll see more new banking formats like digital-only or virtual banks, which are trending at the moment. Non-banks will become more prevalent in banking services, whether for lending, payment, investment or insurance. They may form partnerships or do it themselves, but the non-banks move fast as they’re reinventing how things are done. It’s now necessary to launch products fast and partner more aggressively. And we’re already seeing this in the market.

Other players beyond banks, incumbent banks and digital-only banks are entering the market. It’s a dynamic market with technology playing an important role in innovating the market. We may see more models – we’ll have to see. I think we’ll see more growth in embedded finance this year and next year.

Piyanat
We hope our listeners will take away some of the key points about embedded finance, a financial trend that brings both opportunities and risks to businesses in the financial sector. Businesses need to reposition and differentiate themselves to make sure they provide a good customer experience and to strengthen their competitive edge.

Thank you Vilaiporn for joining me today and helping us understand embedded finance trends.

For listeners who are interested in learning more about embedded finance, visit www.pwc.com/th or follow PwC Thailand on LinkedIn, Twitter and Facebook.

Don’t forget to like and follow our podcast so you don’t miss the next PwC Thailand Spotlight podcast.

That’s it for today. Goodbye!

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