Aperture, a Geneva-based strategy consultancy focused on financial services, has just launched a report on embedded finance which includes a market map of 45 providers.
Embedded finance differs from Banking as a Service (BaaS) because it is offered through consumer-facing businesses which offer the access to financial services with their primary business, the consultancy explained in its announcement.
For instance, Assure Hedge works with partner firms to provide foreign exchange (FX) hedging for small businesses.
Ben Robinson, co-founder, aperture
Courtesy, aperture
“A lot of companies do FX payments as a service,” said Ben Robinson, co-founder of Aperture. “That’s not new. However, the area of hedging as a service has not been explored by anyone else.”
Barry McCarthy, founder and CEO of Assure Hedge, says he started it to address the problem small and medium enterprises (SMEs) have in hedging their FX risk. Banks don’t want to offer a price for anything less than one million, he said, and the process would be too complicated for most SMEs to bother with.
Yacht builders and brokers want to hedge their currency risk.
Photo by Tom Groenfeldt
Still, many of them need it. Yacht builders tend to price in USD; a buyer could use Assure Hedge to make the payments in his local currency. Yacht brokers might want to hedge their commissions, since it can take six months to a year to get paid. A B2C company selling through Amazon might want to hedge their currency risk for a payment they won’t receive for two weeks.
“We are already looking at relocation companies which want to embed this in their own platform,” McCarthy added. An agency can be up and running on the service in two hours, he said. “It took a long time to build seamless onboarding but we now have 26 microservices on the platform.”
Assure Hedge presents hedges in plain English, rather than offering customers non-deliverable forwards, a banking term which might not mean anything to a retail merchant.
“The products have been digitized and they’re presented to the customer when they need them, in a form of the job they need done. I think that’s the bit that people sometimes miss with banking products — changing forms from being like off-the-shelf banking products to being much closer to a customer’s job to be done.”
Not the 50 pages of paperwork one bank handed him when he asked about FX hedging.
HUBUC, another company on the market map, specializes in providing embedded finance to companies offering Software as a Service (SaaS). It takes away compliance headaches, said Hasan Nawaz.
“From a single API and with just one contract, HUBUC covers compliance and provides access to fintech and banking services for brands to create new revenue streams, increase customer loyalty and enhance user experience” the company says on its web site. “The customer in this case gets one contract, one commercial relationship with us and does not have to become regulated in any way.”
All they want is a nice looking debit card or credit card and the famous interchange fee, added Hasan, and how can that increase their revenue. They can also get transactional data to improve retention rates.
Wix.com, the online web site building firm, has 2.5 million merchants. By using HUBUC it can offer its merchants Visa or Mastercard consumer and corporate credit cards, plus debit and prepaid cards across 19 nationalities in Europe.
“Wix gets one percent on transactions while their customers want monetization, retention and easy embedding.”
Several of the companies on the market map are very early stage — Assure Hedge and HUBUC are just raising Series A, for example. In a fast moving market like embedded finance, Aperture thinks it can provide value by finding the innovators before other fintech analysts do. That means asking around, checking web sites and talking to customers.
“By the time a company reaches the Magic Quadrant, they’re legacy,” said Robinson. He thinks embedded finance is a huge market opportunity.
“Since embedded – or contextual — banking promises to give consumers banking services when and where they need, it will increase conversion and the overall size of the market. According to estimates from Simon Torrance, the embedded banking opportunity could add USD3.7 trillion to the market capitalization of the companies able to exploit it.” the Aperture Report says.
“The Market Map is not meant to separate good from bad, but to help those charged with system selection to understand which platforms can help them to achieve their strategic goals.”
Pitchbook said embedded finance companies drew $22 billion in funding during 2020.
“These are often small and young companies that either can’t afford to be included, or don’t meet the criteria to be included, in most industry analyst evaluations,” said Robinson. “But, despite being small, they are Transformers, capable of radically changing the business model and the technology capabilities of the companies they partner with.”
The Aperture evaluations favor modular models because they allow for more specialization and flexibility. The report maps the companies as Disruptors/ Transformers, Enhancers and Accelerators. It says “an Enhancer helped challenger banks launch faster but without radically innovating end-customer experience or altering the business model, beyond sourcing from a third party.”
Stripe is classified as an accelerator rather than an enhancer because it “offers strong intelligence, low code integration, and a microservices architecture.” Accelerators “are typically newer with modern architecture and clean UX.”
The use of APIs and microservices means that modern embedded finance firms offer a degree of portability.
“There is still a lot of lock-in once you start developing on top of a BaaS platform, and use it for aggregating other services,” said Robinson. “However, the level of lock-in is much lower than it would have been in the past when your options for providing banking services as a non-bank were either to white-label a monolithic technology stack or to buy a bank.”
Aperture’s far right quadrant is for solutions that “provide best in class technology solutions alongside strong business model enablement.” Several offer strong contextual intelligence and data sharing across tenants, so they can identify fraud as it appears at more than one company.
“The Market Map assesses providers according to their ability to enable business model innovation and technology innovation,” Aperture said in its announcement.
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