Partner at CapitalG, Alphabet's independent growth fund
Embedded finance has the potential to add considerable consumer value and convenience across a range of sectors, but the most compelling opportunity lies in insurance.
As the consumer insurance market has shifted from shopping via brokers to digital exploration, consumer experiences have grown increasingly frustrating. Researching and purchasing policies online is often onerous and time-consuming. Meanwhile, many insurance carriers are saddled with expensive advertising costs to promote commoditized products. Embedded finance provides the consumer insurance sector with a new approach that offers opportunities for innovation and differentiation by providers as well as dramatically improved experiences for consumers.
Consider auto insurance. Imagine purchasing insurance via a single click when buying a new vehicle. The data provided when buying the car could be leveraged to conduct background checks and assess risk. Pricing could be generated in real time and periodically updated based on real-world driving data. The resulting experience is better for users who get insurance faster and easier and — for good drivers — at a reduced cost. It's better for insurers who drive down their customer acquisition costs and price their risk more accurately. It's also better for automakers who get to build ongoing financial relationships with customers.
The biggest winners in embedded finance, whether they're in insurance or other sectors, will create new attachment points for financial products through superior user experiences and value. It isn't enough for either startups or legacy players to simply build integrations between checkout flows and financial products. To win, embedded tools must be so convenient and compelling that users actually feel excited to try them.
At Amex Ventures, we are excited about embedded lending integration opportunities, specifically for small and midsize businesses (SMBs). Vertical software platforms and their embedded fintech partners have a unique opportunity to offer the right type of financing, at the right time, in the right context, to their small business customers. Software startups have led the way with this verticalization theme and over time, vertical software platforms will capture every imaginable data point about a business. If a startup can capture the data at scale, with the help of AI they can eventually underwrite against it.
We believe we'll see a migration away from conventional types of loans. Quite frankly, what small business owner understands the benefit of a working capital loan versus a term loan, anyway? Instead, we'll see the financial structuring of traditional loan products underpinning de novo financial products for segments that were previously not well served by one-size-fits-all financial products.
So far, we've seen startups just scratching the surface within the ecommerce seller financing and SaaS contract financing spaces. We believe there is massive opportunity to turn every vertical platform into a bespoke lending machine, custom-fit for its audience: think capital for content creators to grow their audiences, coffee shop inventory financings. The possibilities are endless.
Data integration. Because when money moves so should information. One of the most powerful advantages fintech has over incumbents is the ability to access, organize and analyze data. A value-add of epic proportions for merchants.
But receiving real-time and granular insights from fintech partners remains an aspiration for too many businesses. Our research with Oxford Economics tells us the opportunity for merchants to boost the bottom line is huge if only they could receive access to better data from their fintech partners. For example, 67% of merchants are yet to receive actionable insights from their partners regarding the fraud they suffer. Similarly 65% are not yet benefiting from data which tells them why a payment has failed.
That's quite some collective blind spot and a huge opportunity for improved performance at scale. It requires top-class data integration. And that means fintechs building the right technology for every business. It's complex and requires brilliant engineering, but the upside for merchants is vast. One example of the cumulative power of data for businesses:
Understand why your payments are wrongly failing and you can adjust your online checkout — driving up revenue. Understand your fraud landscape and you can take control of chargebacks — slashing significant losses. Understand both data sets in context and you can take control of your risk appetite for optimum financial performance. When we get this right as an industry, and see the majority of businesses well-served by their fintechs, they'll be seeing revenue many never knew was there to be had.
The past year has been very exciting in terms of acquisitions in the fintech space. We have seen several large firms acquiring fintech products/companies who have already achieved scale — the interesting part would be to see how they manage the integration process.
A lot of the conversation around integration has been focused on APIs, but we need to remember that there is still a lot of legacy, non-API compliant technology that exists in older firms. There will be a need to build temporary digital platforms and layers to bridge the gap — I am looking forward to seeing these approaches in 2021!
Kevin McAllister ( @k__mcallister) is a Research Editor at Protocol, leading the development of Braintrust. Prior to joining the team, he was a rankings data reporter at The Wall Street Journal, where he oversaw structured data projects for the Journal's strategy team.