How integrated finance links banking and commerce


An increasingly bright future for banks providing integrated finance will depend on more consumers completely ignoring the banks themselves and focusing on business relationships with their favorite brands.

Institutions that partner with non-bank brands to become the financial engine of their website and mobile sales – and even at the physical point of sale – will see increasing success, even anonymously.

The number of traditional institutions and fintechs that will engage and earn with this strategy will grow, but will remain a small part of the industry – perhaps only around 300 companies, in total, sharing $25 billion in annual revenue. Financial players and the brands they partner with could benefit from a “flywheel effect” – meaning the momentum of their deals will increase business for both. This is due to the removal of friction by mixing purchase and payment. Consumers will focus on what they buy and use rather than how to pay for it or finance it.

These conclusions come from a study on integrated financing Cornerstone Advisors has completed for Bond, “The Embedded Finance Flywheel”. Ron Shevlin, director of research for the consulting firm, notes in the report that in some ways the basic idea of ​​integrated finance is not a new concept at all. Indirect auto financing relied on a structure where the dealership is in the foreground for sales and financing, and the bank is in the background.

Integrated finance builds on longstanding practices like this. The report defines the term as: “The integration of financial services into the websites, mobile applications and business processes of non-financial companies”.

The objective of the study was to survey consumers to determine the degree of acceptance of integrated finance versus the preference to keep things separate.

To some extent, the use of merchant mobile apps, especially that of Starbucks, demonstrates that many consumers are ready to cross the line between banking and commerce.

According to Roy Ng, co-founder and CEO of Bond, integrated finance has the potential to spread to many other brands as larger retailers and other sellers try it. Indeed, a study by Accenture found that almost half of the companies surveyed planned to launch integrated financing offers. A key element, continues Ng in an interview with The financial brandis trust in the non-bank seller’s brand, since the embedded financial brand is essentially invisible.

According to Ng, what sets the future of integrated finance apart from the past is that to make it a bigger business, you have to go beyond the basics that have become table stakes.

Integrated finance requires expansion:

You can’t earn that much from interchange fees. Switching to integrated credit is one of the ways to increase income.

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Consumer favorite brands and their potential for integrated partnerships

“The potential value of integrated finance hinges on one very important assumption: consumers will get financial products from their favorite brands if the brands offer them,” the report said. “Surprisingly, despite all the hype surrounding embedded finance, this hypothesis has remained largely unexamined.”

The first part of the research looked at how deeply consumers valued their top brands.

Cornerstone surveyed people’s favorite brands by company, finding that Amazon is the top retailer for 44% of consumers, with Walmart second at 21% and Target third at 12%. The study also asked about preferences in pharmacies. CVS led the way at 25%, followed by Walgreens at 23%, Walmart at 12% and Amazon at 10%.

The study also asked about favorite spending categories and the brands that dominate them:

  • Technology/electronics: 58%, Samsung, Amazon
  • Home improvement: 42%, Lowes, Home Depot, Ace Hardware
  • Games/consoles: 39% PlayStation, Nintendo, Xbox
  • Fashion/luxury items: 34%, Coach, Chanel, Gucci
  • Home fitness: 25%, Fitbit, Peloton
  • Automotive: 19% Ford, Chevy

Beyond the data, the potential for integrated relationships clearly exists for a handful of competitors in each space in some cases. Ng points out that different lenders have different risk appetites and focus differently on consumer credit strata. Over time, multiple financial institutions could be integrated into a retailer’s sales stream, he suggests, with the retailer seamlessly routing a shopper to the appropriate credit provider. All of this would happen in the background of the purchase.

A staggering part of the study looked at how often consumers interact with brands in the six product areas described earlier.

As this table shows, in three categories, more than half of the sampled people interact Daily with gaming/console, home fitness, and tech/electronics companies. This suggests a potentially huge flow of credit and payment volumes for banks and fintechs that can secure the prime position of being the brand’s integrated finance provider.

How often consumers interact with businesses in preferred categories

Source: Cornerstone Advisors

Read more: The future of banking as a service and trends in integrated finance

Why consumers will – and won’t – accept non-bank financial products

The use of integrated finance is already in motion, so there is experience to explore. 35% of consumers had used integrated financial services with technology/electronics sellers, for example, most often in the form of a credit card or extended warranty.

Since an integrated relationship must pay off for both the non-bank brand and the financial service provider, Cornerstone also asked consumers how integrated finance impacts their relationship with non-bank brands. This produced a nuanced picture. While nearly a third of respondents said they were spending more money with sellers who offered in-app financings, for example, an almost identical number of people said nothing had changed.

How integrated finance influences or does not influence relationships with non-banks more money more loyal recommendation has not changed anything

Although spending more money with sellers was only cited about a third of the time, focusing on that alone ignores other important results seen in the chart. Choosing vendors over competitors also means more sales (and volume for the in-app vendor) and increased loyalty and referrals can also be beneficial.

The study then looked at willingness and unwillingness to use financial services provided by non-bank vendors.

The strongest reasoning seen among those who would use financial products came down to price – four in five assumed that getting the financial product from the seller would make it cheaper. This may be influenced by consumer observation of how most buy-it-now-pay-later programs have operated in the past – the seller is considered to be offering the BNPL offer on behalf of the supplier and there are no interest charges.

reasons why people will take financial products from Neobanks

However, barriers exist to moving forward with the integrated funding model. As seen below, 77% of consumers said they would not trust financial products obtained from a non-bank institution. It may be that the invisibility of banking or fintech in the mix is ​​a handicap for certain segments.

reasons why consumers would not accept financial products from difficult non-bank companies would not trust to shop

Incentives and innovation can help move those needles. The study provides a long list of variations on product themes. Of those that people were interested in, with the percentage of those indicating attraction:

  • A credit card that rewarded players for purchasing games and for in-game purchases: 75%
  • An in-game deposit account (real money) used to buy and sell in-game items and to store real rewards for progressing in the game: 74%
  • Health insurance with rates indexed to personal fitness habits: 68%
  • An investment account integrated with fashion and luxury brand apps, to invest in stocks, crypto and other brand assets: 65%
  • A savings account that sets aside extra money for a future car purchase, beyond current car payments: 52%
  • A home equity line of credit integrated with home improvement stores’ own apps to manage payments for large projects: 49%

Read more: Innovation and Inflation: Two Trends Changing Credit Card Marketing

Adjustments Financial Service Providers Must Make

Ng points out that integrated financing efforts are based on a balance between the seller and the financial company. The non-bank controls the customer experience in this case, not the financial actor, but the latter, as the financial service provider, controls what this service will be and its flexibility. Perceptions are also important. If a person thinks they are using mortgage from their favorite home center, for example, the sudden appearance of a bank or fintech logo will be a negative and shocking experience.

Making the transition to integrated finance also requires mindset shifts for the bank or fintech that will be moving into the background. The question of “who owns the customer” is a factor when a supplier is accustomed to a direct relationship. Ng says it’s helpful for banks and credit unions to consider embedded finance as an additional channel to bring products to prospects, something separate from their traditional channels and not a parallel route.

Additionally, the technology must be adapted from a direct relationship to an arm’s length approach. There has to be a big investment to ensure data is exchanged accurately and in a compliant manner, Ng says.


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