Post-COVID E-Commerce Embeds Banking
In the 2 years since the pandemic changed how we live, the retail sector is still being impacted. The in-store foot traffic for merchants dropped nearly 90% at the peak of COVID-19. Over $5T in ecommerce transactions posted in 2020 (up from $4T in 2019). With the majority of purchases transitioning online, retailers scrambled to offer a seamless digital experience.
The digital shift in ecommerce by retailers is evolving towards embedded banking and finance. Improving a merchant platform with fintech products and features helps expand their user base, simplify the user experience, deepen customer relationships, and earn revenue from multiple sources.
the future of retail is fintech
Providing payments online is no longer enough in the retail world. Today’s businesses are looking for the latest products that help reach users globally and stay relevant in a competitive landscape. Fintech platforms are providing the solutions fueling the future for merchants.
An enhanced marketplace from fintech can boost a retailer’s user experience with:
Wallet/account — retailers can allow users to hold balances for future purchases;
Card issuance — branded physical or virtual cards with a merchant’s branding;
Targeted offers — transaction data can help optimize rewards and features for customers;
New revenue streams — merchants can monetize off of interchange revenue (card swipes) and deposit revenue from user’s balances;
Traditional banks and banking service providers are capturing new growth through Embedded Banking — partnering with big name firms (outside of financial services) that have large user bases. Lyft, Uber, Doordash, IKEA, and even Walgreens offer financial products now through their app. Small and mid-sized merchants are starting to find similar success in working with Banking-as-a-Service partners, who manage the heavy lifting with program management and compliance in offering financial services. Embedding financial services is expected to drive $230B in revenue by 2025.
Beyond these depository-based products, retailers are exploring credit solutions at an increasing rate. The new frontier of Embedded Finance includes Buy-Now-Pay-Later, loans, and credit cards that improve user’s credit profiles.
EMBEDDED FINANCE FOR ECOMMERCE
Embedded banking and embedded finance are often used interchangeably. In the context for retailers, we’re focused on finance as it relates to lending solutions and not the general area of financial services (which includes deposit products and data aggregation). Credit products are more complex to build and launch due to state & federal regulatory guidelines AND higher capital requirements (to pay for program costs and fund loans or lines of credit).
Both embedded banking and embedded finance have the same core requirements:
Customer (user) experience is provided by the retailer (not the bank partner or service provider);
The tech infrastructure and enablement layer is provided by a technology vendor or other 3rd party (not the bank);
Licensing to provide financial services and confirm compliance guidelines are followed (provided by bank partner or other licensed entity);
The majority of entities licensed in allowing ecommerce companies to offer lending products are financial institutions. Banks are highly selective of platforms they would work with, typically requiring companies to be established leaders in their sector with user volumes above 100K. Small and mid-sized startups lack the traction to be an ideal platform for banks. Additionally, the approval and implementation process to launch these products through financial institutions can take 8+ months.
There are a few non-bank, tech-enabled firms with licensing focused on filling this gap through a faster onboarding timeline and market entry. Even though there’s improved speed and technology, it’s still early days for these Lending-as-a-Service (LaaS) providers who have worked with only a handful of startup platforms.
OTHER CONSIDERATIONS FOR THE RETAIL SECTOR
Putting aside the latest innovation in financial services and the growing trend of non-banking firm embedding products into their platform — there are still other considerations for retailers to be aware of:
Cybersecurity: More online activity increases the risk of data breach and fraud for merchants of all sizes — cybercrime at point of purchase is at an all-time high; AI-based solutions to help identify customers and patterns of suspicious activity are being deployed by fintechs globally. These services help reduce financial losses and reputational risk;
Cross-border payments: The emerging blockchain sector within fintech is driving this area of payments forward by removing intermediaries and providing rapid, secure, low-cost transfers;
Personalization thru data: creating custom user experiences is the next level of development for ecommerce — leveraging machine learning to compile customer insights helps drive a personalized customer journey from shopping to checkout.
Overall, financial technology is continuing to have a disruptive influence in the retail sector. From the creation of first payment card (over 60 years ago), the focus is still centered on a convenient, seamless experience. As the buyer journey shifted from in-person to digital, the same theme is true for retailers offering the most innovative process for consumers and businesses.
Fintech continues to play a critical role with merchants embedding banking and payments directly from their platforms. The lines are now blurred between retail and bank functions in benefit for users with more safety and security measures in place, without added costs or friction.
Join our community @FinTechtris for more industry content & insights (including deep dives & sector spotlights).
As a bonus, access our subscriber-only resources to evaluate bank partnership structures and stay ahead of the game in building FinTech programs. Signup today —>
