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Take note of the term “embedded finance”. Dave Corbett, CEO of new fintech PowerFinance, is adamant it is the way of the future.
Corbett is an enthusiastic proponent of the concept – where businesses can offer finance to their customers to expand their offering, instead of having to buy a product or service and then have to go to a bank to secure finance to complete the deal.
PowerFinance says their “future of finance” platform is just that, New Zealand’s beginning of a secure and more community-based finance system as an alternative to mainstream lenders. It enables PowerFinance’s commercial and community customers to provide a full service to their customers – including finance “embedded” in the offering.
Corbett gives the example of a company which builds homes: “They might do a great job – they will take their customer through the whole business of building a home, right down to floor coverings and taps in the bathroom.
“But, at the end of the day, the customer has to go to a bank to get a loan,” he says. “Let’s say they have bought a $600,000 section and want to build a $300,000 house which will eventually be worth well over $1 million.
“But the bank won’t lend on that more than $1 million potential; they think that’s too risky. They will only lend on the $600,000 – so what you get at that stage is the customer compromising on what they build. So they are not really getting what they want.”
Embedded finance enables that building company to finance the project the customers want. The builders are best placed to identify and manage the risk, Corbett says, because they are the experts in the field. They can tailor loans to suit their clientele.
“The theory of embedded finance is that customers have an experience while they are trying to do a job. The entrepreneurial challenge is to figure out what job they are trying to do. So, to go back to the building example, the job is “I want a home to live in”.
“But if the experience they go through is just an 80 per cent experience – and they have to complete the last 20 per cent themselves [by going to the bank for finance]; you can see the shortcomings there. I call it personal admin; it’s not something people enjoy.”
Private equity firm Lightyear Capital has released a report that estimates embedded finance will grow from US$22.5 billion in 2020 to US$230 billion in 2025, generating more than US$1 trillion in value.
Goldman Sachs released software that enables clients to embed banking services into their own products late last year, an example of financial institutions evolving to meet the embedded finance trend.
Non-bank fintechs such as Treasury Prime, Synctera, Unit and Bond are also proliferating overseas. Customers are increasingly demanding direct experiences, seeing the likes of Walmart building a financial services offering with fintech partner Ribbit, and Ikea purchasing 49 per cent of its banking partner to move into the embedded finance space.
Corbett says the facility for increased and more satisfying offerings from PowerFinance customers is clear – as is the ability to have happier customers of their own. That’s true, he says, whether the objective is a house, a car, health or renovations.
Embedded finance has not really taken off before because of cost and regulatory barriers – with the prohibitive cost of building a mini-finance company and the technology required (plus meeting strict regulations) inside a company’s business. Only big operators like car companies, for example, could do it and created their own finance companies, says Corbett.
“But if you just want solar panels on your house, or to build a home, or to add a swimming pool or even to put in heat pumps – there’s no finance that is embedded in those offers.”
Becoming a bank is one way, but this generally requires about $50m in capital. PowerFinance has stepped up to take on the cost and governance requirements for its customers, creating technology which allows businesses to operate and embed finance in their offerings. Their pay-as-you-go model means no big upfront costs.
PowerFinance has more than six customers at present who are experimenting with adding new revenue streams or doing more for their own customers, including a healthcare company with community objectives, focusing on pay-later surgery and GP visits and the like. Current lending projects include everything from financing purchase of livestock to constructing horizontal infrastructure like roading.
Fintechs are also interested in PowerFinance’s platform, which enables them to plug in innovative financial products that offer more choice to consumers.
James Brown, General Manager of FinTechNZ, says: “Consumers want choice – and they want it when they want it. This will only continue to gain momentum.
“If we go back a few years, banks and fintechs saw each other as a threat, but over the last few years they have now come to recognise the advantages of working together – like ASB and TradeWindow, Westpac and CoGO, ANZ and Aider and many more.
“However dealing with a large complex organisation takes time and sometimes the fintech runs out of capital before they get an answer, so embedded financial services becomes an alternative route.”
Embedded finance is a little like Tesla, Corbett says: “How come a non-car company is leading the way when it comes to EVs and the car industry is struggling to keep up? They were restricted by their legacy systems.
“It’s the same with embedded financial services. Fintechs who can move at pace stand to change the game. When you have a customer base already in place, it’s easy to attach other products. Just look at supermarkets, especially in the UK, – they used to sell only groceries but now, instead of buying a chocolate bar at checkout, you can get a new credit card, loan, insurance or mortgage.”
Jeremy Muir, Partner, Financial Services at legal firm MinterEllisonRuddWatts, says greater accessibility is one of the key benefits of embedded finance: “Embedded finance using blockchain technology could be one way to improve access to capital or to better price capital. It is also consistent with some of our clients’ work to build “compliance as a service” and “white labelling” businesses. These can allow businesses to better serve their customers without taking on as much of the compliance burden they would otherwise require.”
PowerFinance is also focusing on community projects – partnering with an iwi on a community housing project, using the flexibility of their platform to lend to an iwi as opposed to an individual, which Corbett sees as a possible solution to Maori land lending issues.
“Community customers are an exciting prospect,” he says. “They tend to find mainstream finance a really averaged experience while we can offer something that suits their beliefs – whether they are ethnically-, faith- or environmentally-oriented.”
That flexibility also allows customers to tailor their products: “We could help a customer, for example, create a credit card which offsets purchases with carbon credits. In the end, things like that become a competitive advantage for businesses to sell to their customers.”