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From FinTech to Embedded Finance

Any business can incorporate FinTech services and gain additional profits by capitalizing on the loyalty of its customer base. Think of the installment payments that many clothing stores have begun to offer using ScalaPay technology. In 2020, the triggers for the evolution towards embedded finance were, first and foremost, PSD2, the European directive on digital payments



The Italian FinTech sector has officially entered its phase two. An expected evolution, partly accelerated by the containment measures of the Covid-19 pandemic and the side effect it had in terms of the spread of digitalization: the pandemic facilitated the large-scale adoption of digital services by institutions, individuals, and companies. Currently, it is precisely corporations and financial institutions that want to integrate digital technologies into their offerings to their customers. An inevitable hybridization: after 6 years of growth and refinement, even some Italian FinTech companies now have technological assets that are difficult to replicate, a considerable amount of data, and are ready to reach new market segments thanks to the flexibility, rapidity, and originality of their commercial and operational processes.

An evolution made possible by a convergence of events that have transformed the world of financial services, just as when the “perfect storm” occurred in 2008, leading to the creation of alternative finance. At that time, the causes of the Big Bang were the financial crisis, which generated demand for different financial assets and operators; the spread of cloud technology, which made it extremely economical to create a start-up; and the introduction of new devices on the market, starting with smartphones (the first i-phone was launched on the market in 2007).

In 2020, the triggers for the evolution towards embedded finance were, first and foremost, PSD2, the European directive on digital payments, which allows bank customers to truly be the holders of their own data and to decide to whom they give access to their current account information; the introduction of compulsory electronic invoicing and, finally, open banking, a banking model open to operators outside the system who occupy segments of the financial services “value chain”, both in production and distribution.

Covid-19 has certainly given a boost, both in the digitization of the offer of institutions and in the habits of consumers and SMEs. But beyond the emergency there is an ecosystem that is moving decisively, between agreements and collaborations, with the aim of guaranteeing the customer a quality experience on the road to Embedded Finance. As with 2008, we believe this year is a real caesura point. Let’s see why.

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There are essentially three characteristics underlying this evolution of FinTech

The first is pervasiveness: thanks to flexible technology, financial services can now be integrated into any other business activity, flowing in the background without substantially modifying the primary business, but enhancing it and facilitating the payment or financing phase. Any business can, in other words, incorporate FinTech services and gain additional profits by capitalizing on the loyalty of its customer base. Think of the installment payments that many clothing stores have begun to offer using ScalaPay technology, or the virtual payments without POS offered to small merchants with Satispay or SumUp, or the insurance and financial products associated with the purchase of electronics.

The mechanism can also be replicated by banks which, by integrating FinTech services, can increase their clients’ total profitability with new services and meet the increasingly insistent customer demand to operate through digital channels. This trend has also been espoused by large corporations that have understood the enormous potential of their vast customer base and distribution system: in fact, it is in this direction that a player such as Enel X – the Enel Group’s global business line – is going, which has just launched a project together with several FinTechs, including Workinvoice, to give its customers fast access to liquidity through a digital invoice advance service. The rationale is that companies and banks will increasingly want to deliver services that are natively digital: because digitizing an existing service is not nearly as effective as adopting one that is already born digital.

Triangular: towards a hybrid business model

The second characteristic is hybridization: it is the model around which these new businesses are built. This model has three poles: the brand, whether it’s the bank or the big corp that has the customer base; the developers of processes and technologies, i.e. FinTech; and those with licenses to operate in the payments circuit, which are not reserved for the banking system. It goes without saying that if all of this is possible today (and not yesterday) it is because at the core is always technology, which allows a business to be founded in the absence of physical assets, for example through the cloud, delivering financial services to potentially anyone, via APIs and through simple platforms offered on smartphone apps.

The essence of this model is the triangulation between the three poles. For example, a case that concerns us closely is the one related to Cribis Cash: a service launched in October 2018 that offers the possibility for businesses not only to access data on collections and payments of 1.7 million companies but also to assess the assignability of an invoice, and then move digitally without barriers and proceed to immediate collection with digital invoice trading on our marketplace. In this case, Crif is the brand, Workinvoice the FinTech provider and international funds specialized in trade finance provide the capital, while Lemon Way is the supervised payment institution that operates safely in the payment circuit.

This is the model by which FinTech changes focus and becomes embedded finance. This is the new way of FinTech in the world and also in our country someone is already evolving in this direction.

The marketplace is the meeting point

The third characteristic, the one that closes the circle, is synthesized in the concept of marketplace, in which the new business model is realized. Basically, any process characterized by a bilateral exchange can become a digital marketplace, i.e. an online market where two or more parties buy and sell something. For example, the first marketplace created by Workinvoice, in 2015, concerns trade receivables: a virtual marketplace where individual companies can sell their trade receivables to selected counterparties. A format that is replicable and scalable: not by chance, today we are rebuilding it for the exchange of tax credits – the first online marketplace of this kind in the world – that accrue with the famous 110% Superbonus for energy efficiency in condominium buildings.

Embedded finance works: Covid has proven it (but not only)

This model has shown its efficiency in a moment of crisis like the one after the lockdown: they have experienced it even overseas. In fact, not only Italian banks have struggled to receive and process remotely the requests for loans guaranteed, in our case, by the Decreto Rilancio. Also in the USA, credit institutions have been literally overwhelmed by the Paycheck Protection Program (PPP), created to help companies face the emergency. American banks “were not prepared to accept the applications or were overwhelmed by an unimaginable volume of them”, writes Pitchbook, reporting how even giants of the calibre of Bank of America, JP Morgan and Wells Fargo had to limit themselves to serving only their clients, whose data they possessed. Because that’s what the problem was: the lack of technology that could analyze data quickly and accurately. Until FinTech Kabbage made its creditworthiness analysis software available to the system, which made applicant assessment and anti-money laundering checks automatic, for example, speeding up all the processes required for credit disbursement.

However, many other international examples of hybridization could be cited. OakNorth, a British digital challenger bank that initially developed a business of lending to SMEs, disbursing more than £4 billion since September 2015; and later tacked on underlying processes and models, which were extrapolated and are now sold as banking as a service – white labeled as OakNorth AI – outside of Britain.

A final case is that of Plaid, the San Francisco-based company that landed in Europe to take advantage of the regulatory innovation introduced by PSD2, whose greatest added value lies in its ability to have expanded the openness of banking data to different use cases. It has developed models, processes, and products that leverage the ability to aggregate data from various banking sources, which banks then resell to their customers, with great benefit in terms of profits. In January 2020, Visa announced the acquisition of Plaid for $5.4 billion, on the heels of 2019 revenues of between $100 million and $200 million, according to Forbes.

Italy is part of this evolution

All these examples are nothing more than signs of the added value that the underlying technology embodies, a value that even Italian FinTech companies can bring to the table, offering opportunities that until yesterday were unthinkable.

Tomorrow, if we wanted to foresee a not too distant future, success will be on the side of those FinTech companies ready to offer a turnkey solution, from infrastructure, to processes, to skills, to risk management. An open model based on the “plug and play” concept that can be immediately integrated into the pre-existing structure and is tailor-made and white labeled for the brand that requires it. The months following the outbreak of the pandemic show a strong acceleration, also in Italy, of the phenomenon we have described. It will be interesting to verify on the field the various developments of Embedded Finance in one of the markets historically most locked around the monopoly of the banking system – in which, however, 3 months of lockdown have drastically increased awareness of customer needs.


(Featured image by Preis_King via Pixabay)

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First published in LMF, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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Desmond O’Flynn believes in minimalism and the power of beer. As a young reporter for some of the largest national publications, he has lived in the world of finance and investing for nearly three decades. He has since included world politics and the global economy in his portfolio. He also writes about entrepreneurs and small businesses, as well as innovation in fintech, gambling, and cannabis industries.