Venture capitalists like Angela Strange at Andreessen Horowitz and Matt Harris at Bain Capital Ventures, have frequently encouraged companies to consider embedded finance as a key monetization strategy, by “making every company a fintech company.” Embedded finance isn’t just another industry buzzword – examples are everywhere, and continually trending upward. Today, globally, companies of all categories and sectors – including retailers, big tech companies (Google, Apple), and car manufacturers (Ford) are generating significant revenue from their existing customers through embedded financial services. For customers, the appeal is its ease of use, affinity with the brand, convenience and personalized banking experience with a number of incentives.
The Nigerian financial services industry has experienced a significant transformation in recent times. A dominant youth population, increasing smartphone penetration, surge in the digital banking services and a focused regulatory drive to increase financial inclusion and cashless payments, are combining to create the perfect blueprint for a thriving embedded finance sector. Nigerian consumers are embracing Digital Financial Services en-masse making it a viable enterprise – According to African Tech Startups Funding Report, Disrupt Africa, in 2019 alone, the sector (in Nigeria) received $122M in funding and is estimated to continue growing. In Q1 2020, Nigerian startups raised $55.37m, higher than they did in Q1 2018 and Q1 2019 combined. The influx of funds itself is indicative of the trend of innovation the landscape is currently witnessing. Like many groundbreaking changes, initially, acceptance is slow and incremental, with a dramatic shift within a short time – We are at such a moment and the seeds of it are already sprouting in a number of different areas. In the not-too-distant future, Nigerian companies (even those that have nothing to do with financial services), but have captive audiences, just like their global counterparts, will derive a significant portion of their revenue from financial services.
What is embedded finance?
Embedded finance is a new field of play evolving in the Nigerian financial services industry. It enables organizations to add a financial service or technology to their offerings easily. These integrations allow financial services providers to expand customer relationships, increase revenue and profitability and deliver new and innovative offerings without the time and cost of traditional customer acquisition.
In spite of the novelty that characterises embedded finance in Nigeria, some innovators are championing the concept; One of them is Onepipe.io – a two-year old Fintech startup that believes that ‘’The world needs a new type of financial services ecosystem. One where everyone has a role to play, and everyone has some value to capture. And while there’s a need for some gatekeepers, their influence needs to be minimal’’.
As such, the rise of embedded finance is only just beginning in Nigeria. Non-financial brands have started to embed financial products and services into their ecosystems and over the next couple of years, we are going to witness an explosion that will forever change perceptions about fintech, innovation, and the future of finance. OnePipe’s goal is to enable these types of companies launch “best in class financial products” while retaining complete control over the customer experience. Essentially, a financial institution (FI) distributes its products through a nonfinancial company.
So what does this mean in practical terms for Nigerian businesses, banks and other incumbents?
Startups will be able to launch companies faster, existing financial services institutions will be able to introduce new products quickly and spend less on IT maintenance. Most importantly, this means more choices, better products, and lower prices for users. Consumers and businesses will no longer see banking as a separate service to be consumed independently, but will instead come to expect that day-to-day financial activities will be carried out within their favourite brand ecosystems. For businesses, it will mean access to crucial new revenue streams, along with the opportunity to generate additional revenue from existing products. It will allow non-financial brands to leverage their expertise and the troves of data they hold on their customers to augment and future-proof their businesses. It will increase brand loyalty, and will boost customer lifetime value. By embedding finance, we are not signalling the end of fintech but rather a transformation which will ensure it permeates every aspect of our day to day lives. For the next generation of consumers, a banking relationship will be one with your favourite brands rather than your chosen bank. Across the board, there is a mindset shift where people desire to have a financial service at their fingertips, when and where they want to use it – Many of the tasks that currently require consumers to leave one ecosystem to another one (that of their bank) will be embedded into the products and services that they already use (so if you’re utilizing software to run your business, using that same software to get paid and make payments is logical and more natural than going to your financial institution to do so). We will see more industry or vertical-specific products, along with greater personalisation.
What are the opportunities for Embedded Finance in Nigeria?
The Central Bank of Nigeria, on 17th February 2021 issued the Regulatory Framework for Open Banking in Nigeria (‘the Framework’) which aims to promote the sharing and leveraging of customer-permissioned data by Banks in order to build solutions and services that provide efficiency, greater financial transparency, the ability to review all customers banking and financial information in a central location, options for account holders and to enhance access to financial services in Nigeria.
This means that at the regulatory forefront, the market is ripe. With the evolving nature of technologies, embedded finance will persist due to its customizable nature, it will give rise to new opportunities and reduce the gap between various industries and their interactions and ultimately drive financial inclusion. Embedded banking is likely to be the future of banking and finance in Nigeria. It offers benefits to traditional financial services companies, fintechs, and consumers who use the products. One notable benefit is the creation of a seamless experience – The less friction there is during a transaction, the more likely the consumer is to complete it. Any company should be able to compose a customized financial solution to meet the unique needs of its customers.
Speaking of opportunities, Adedeji Olowe, Trustee of Open Banking Nigeria opines that ‘’Open banking represents a seismic shift in how banking is done while the definition of ‘’A bank’’ itself would forever change. Just the same way WiFi makes embedding the internet into everything around, Open Banking will be the driver of embedded finance within everyday activities. When this happens, the opposite of what banks fear – losing control and becoming irrelevant would happen. Instead, banks would see their tentacles and influence reaching every corner of our lives with their APIs and fintechs would own the rails between banks and the last mile’’.
As embedded banking presents a growth opportunity, some industries in Nigeria seem particularly well-suited for it – from payroll management to farming to retail, consumer lending, insurance and FMCG, the opportunities are endless for any company that is willing to go the extra mile to extend its services or collaborate with other non-financial companies in mutually beneficial partnerships. It is a matter of expanding horizons and using the disruption caused by embedded finance to your company’s benefit, perhaps through collaboration with different industries. Here are a few other examples to understand how embedded finance can help businesses, banks and other incumbents:
- Lending as a service: With an embedded system, companies can provide non-collateralized credit to their customers; underwritten by them or other existing lending partners.
- Accounts provisioning: Rather than a closed scheme wallet that potentially exposes one to regulatory scrutiny, companies and businesses with captive audiences can issue actual bank accounts with value-added benefits.
- For new fintechs: cost and control; Cheap and faster go to market
- For all companies: A new revenue system: An ability to earn revenue from financial services and higher profits.
- For businesses: Improved customer experience, More sales; embedded credit at no risk, Customer retention, No compliance worries and driving financial inclusion. The direct connection between the customer and the company will help improve the customer experience significantly.
- For consumers: More convenience and personalized banking experience with a number of incentives.
What do banks need to do?
The groundwork is well and truly laid for Embedded Finance. But there are several things that need to happen in order for this new field to gain real traction and fulfil its promise. Amongst these, the most important is a shift in perceptions and behaviours within legacy banks. Banks have an opportunity to rethink their transformation strategies – the message that must be communicated is that Nigerian banks are changing their thinking, and understand their role as moving away from that of a gatekeeper and towards that of a facilitator. Banks must recognise that their new value proposition is as the utility layer in a more distributed banking stack. Banks shouldn’t focus all their digital transformation efforts on making their brand visible and present everywhere – The true power of a digital transformation initiative is when banks understand the power of invisibility. By partnering, leveraging customer trust, and building an embedded ecosystem centered around the customer, banks can find a way to be more relevant for their customers.
In addition to their traditional public facing roles, banks will be the ‘pipes’ on which embedded financial services run. They will open their technology to a vast new ecosystem of fintech players – in fact, we’ll come to think of banks as the ‘utility companies’ of finance. With access to the ‘pipes’ of finance more open than ever, a new generation of startups will be able to achieve stability and growth in much shorter order, and build delightful products in weeks, not years.
From competition to collaboration
The new paradigm brought about by the rise of embedded finance will require a completely different approach to innovation. Embedded finance will change the approach of ‘’fierce competition’’ because it demands that fintech players understand themselves as part of a broader ecosystem, rather than in a zero-sum race.
Because developers are at the heart of fintech innovation, for them, embedded finance will be transformative. Simple, elegant APIs, developer-first product approaches, and a focus on interoperability are all combining to massively reduce the resource burden associated with building financial services. Developers won’t have to worry about building the stack from scratch anymore, and this means they can spend more time innovating. Innovation in fintech will be significantly accelerated by the rise of embedded finance, and it will reshape multiple streams.
An embedded future
Embedded Finance will come to define the next stage in the fintech revolution in Nigeria. Over the coming years, we are going to witness a further fragmentation in finance. Consumers will no longer just bank with banks – they will bank with the brands of their choice, and they will conduct specific banking and payments tasks through white labeled systems integrated into their favourite existing apps. Embedded Finance is the future of fintech, and the future of financial services. The fintech revolution is now truly upon us.