December 2, 2023

The hallmarks of the digital consumer revolution are clear: shifting expectations for quick and easy access to services, the rise of online shopping, and the need for experience-driven interactions, to name a few. Additionally, shoppers expect innovative and seamless digital payment experiences with their favorite brands, an emerging trend that promises to redefine how people think about traditional banks.

Brands such as IKEA, Starbucks and Lyft already offer financial services to customers through loyalty and mobile payments, interest-free credit, and debit cards and savings accounts.A key enabler for these businesses is embedded finance, a Software Distribution Model Allow non-financial companies Lending, accepting payments, and even providing insurance No financial institution is required. Embedded finance will touch many industries, but none more so than retail.

What is embedded finance and what are its benefits?

Embedded finance describes non-bank businesses or brands that integrate financial services into the everyday customer journey. Soon, businesses may no longer interact directly with traditional banks. Instead, they will leverage e-commerce platforms and software companies that work with financial institutions to embed financial products into the customer experience. Payments are currently the main use case for embedded finance as they are at the center of commerce, banking and business services.

This phenomenon has many benefits for businesses, especially retailers actively looking for alternative revenue streams and product growth. Today’s shoppers value the customer experience as much, if not more, than the product or service itself. Modern shoppers especially value personalization, immediacy, greater trust and product simplicity.

By implementing embedded financial processes, retailers can provide shoppers with a more streamlined, fast and convenient customer experience. Additionally, because non-financial companies implementing these embedded financial models have greater control over the customer experience, they can reduce barriers to purchase and minimize friction, thereby increasing shopper loyalty and increasing revenue. Additionally, embedded finance removes the hassle of dealing with multiple financial partners.

Four Steps to Embedded Finance

The market value of embedded finance will reach $7.2 trillion globally by 2030, retail use cases will account for nearly half of this growth. Hence, retailers need to capitalize on this lucrative market opportunity. However, before retailers can start embedding innovative and disruptive financial products into the shopper journey, they need to have a clear vision for the future of customer service in their industry. Realizing such a vision requires a firm grasp of current and impending possibilities, including available financial technologies and services.

Four steps can help retailers translate these goals into tangible action:

  1. Value Proposition Design
  2. business results
  3. listing strategy
  4. Operational Model Design

First, retailers must determine who they are creating value for and how. As part of the value proposition design step, retailers can identify and categorize their various stakeholder groups, pinpoint the challenges they face, and outline which relevant financial services use cases will address these pain points.

The next steps focus on supporting the business outcomes or business strategies and objectives of the embedded financial approach. Common business goals might include customer loyalty and acquisition, growth or the creation of new revenue streams. By developing these clear strategies, goals and outcomes, retailers can build a commercially viable proposition and gain support within the business.

Retail brands must then develop a go-to-market strategy to ensure products reach the ideal audience through the appropriate channels. At this stage, retailers must find the best partners to help with distribution and marketing, while developing a gradual and controlled product launch plan. Likewise, they should identify key metrics to measure success.

The final step is to build an operating model that translates the specific business strategies outlined in the previous steps into operational capabilities and enablers. In addition to implementing a flexible technology stack to facilitate new product launches, retailers should also determine their risk appetite. Retailers should also determine whether they need new talent or teams, and whether they have the capability to build embedded solutions in-house, or if they need the help of a trusted third party.

The digital consumer revolution doesn’t wait for retailers

The rapid evolution of shopper expectations and preferences is moving towards a personalized and seamless digital experience, and the trend isn’t slowing down. To adapt accordingly, retailers must invest in embedded financial models, lest they be late to the next era of digital consumer revolution and miss out on this emerging revenue opportunity.