Embedded finance: How fintech can democratise opportunity in the pandemic era and beyond
This informative book provides a range of examples of fintech startups in action, and shows how business leaders need to embrace a sense of purpose beyond just profits.
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The business case for fintech innovation and broader financial inclusion is clearly made in the book Beyond Good: How Technology is Leading a Purpose-driven Business Revolution by Theodora Lau and Bradley Leimer.
Spread across 10 chapters, it makes for an informative read for startups, financial services players, and business leaders. There are 22 pages of references and sources as well.
Here are my key clusters of takeaways from the 240-page book. See also my reviews of the related books Fintech Future, Do Good, Out-Innovate, In The Business of Change, Lean Impact, The Next Billion Users, Social Entrepreneurship in India, and Machine, Platform, Crowd.
“One of the most essential elements of being human is the feeling of hope. We like to think that the future will be better, that what we do during our lifetime matters, that we are part of something bigger than ourselves,” the authors begin, calling for a new social contract between businesses and their ecosystems.
Large companies should look beyond just profitability as a measure of success, and becoming a unicorn should not be the only aim of a startup. All stakeholders matter, not just shareholders. ‘Business for good’ is the philosophy that profits can be pursued whilst also delivering on sustainable and societal development goals.
The need of the hour is personal responsibility towards others, shifts in business models, and finding solutions to overcome challenges like the digital divide and economic exclusion.
The authors are co-founders of Unconventional Ventures, a consultancy in financial services innovation. Theodora lives in Washington DC, while Bradley, former Head of Innovation and Fintech Strategy at Santander US, lives in California.
“The past decade has been the most revolutionary period in financial services’ history,” the authors observe.
“The purposeful application of technology can be the catalyst for greater social inclusion and equity,” Aspen Institute VP Ida Rademacher writes in the foreword. Financial inequality undermines social cohesion and increases political polarisation.
Digital technologies have helped interconnection during the pandemic era, and can enhance financial security, dignity, and resilience on the path to economic recovery, she adds.
The pandemic crisis
“Nothing reveals the inequality in the world more vividly than a crisis,” the authors lament.
“Humanity is being tested like never before,” they add, describing the grim challenges of the COVID-19 pandemic. A sense of urgency and optimism are called for to tide over the “biggest global shock since the Second World War.”
The lack of a financial cushion has been devastating for small businesses and especially gig workers, affecting their financial, physical, and mental health. Food and grocery delivery have provided convenience and safety, but also increased environmental waste.
Work from home is redefining the workforce with flexibility and savings in time and travel, but also increasing burnout and creating more workload for mothers. The digital divide leaves out large sections of society from the push into online services for education, health, and commerce.
At the same time, payment platforms also played an important role in raising and distributing relief funds, as shown in GSMA studies.
“As a society, we are long overdue in reimagining the social contract in light of contemporary realities and megatrends. The events of 2020 have laid bare how damaging it is to continue to allow antiquated systems and business models to persist,” according to Ramsey Alwin, CEO, NCOA.
Megatrends
The authors identify a number of global megatrends, such as increasing longevity and digital transformation. Japan is tackling issues like loneliness among elders, and Spain is investing in age-friendly city planning.
“The future of ageing should not be a story of survival – but one of living and thriving,” the authors write. Financial planning services for multiple generations together should be a business focus for the industry, spanning caregiving and education.
The Singapore government has launched the SkillsFuture initiative for upskilling its workforce, and technology partnerships with wearables firms for encouraging a healthy lifestyle.
There is a large diversity gap in the entrepreneurship and tech movement across the world. Digital platforms are accelerating the gig economy, but large gaps remain with respect to insurance, healthcare, and pension for gig workers.
Wealth disparity is increasing, as seen in the concentration of wealth by billionaires and proportionately much higher salaries of CEOs as compared to employees. Technology is making the world more connected and smaller, but more divides need to be overcome to make it more inclusive.
Business purpose
Business should focus on not just doing well, but on doing good. Leaders should focus not just on profits and quarterly cycles but long-term social impacts and delivering actual value to customers. Empathy provides “the moral compass to look beyond ourselves,” and go beyond mere CSR.
“As business leaders, we must become more aware of the injustices in the communities that our businesses serve,” the authors emphasise.
The “tale of two economies” includes lack of access to clean water and sanitation in many homes and schools, particularly in emerging economies. “Inequality is a human-created problem that can be solved,” the authors affirm.
B Corporations balance profit and purpose through verified social and environmental performance, public transparency, and legal accountability. Examples include Patagonia (recycling, environmental restoration), Ben & Jerry’s (fair trade), Lego (sustainable manufacturing), and CNote (community development support).
Lego Ventures has invested in educational startups like Thrively (digital lesson plans), Homer (apps to teach literacy), PeppyPals (pet-based toys), and Klang (media-based futures). They fall into four categories: edtech, skills, playspaces, and creative making.
The vast majority of entrepreneurship opportunities and job growth are concentrated in only a few locations like the startup hubs of the world. Even states like California, with some of the world’s most valuable tech firms, have high homelessness rates, the authors show.
Entrepreneurship should be diverse and inclusive at the level of founders, investors, and customer base.
The fintech opportunity
Lack of access to money translates to a loss of control and security, and less opportunity. “Talent is equally distributed, opportunity is not,” the authors observe.
“Concerns are growing that the people are increasingly being left behind in the new digital era, with financial services retreating behind the glass screens of mobile phones and the black boxes of algorithms,” the authors caution.
They urge the banking and financial services sector to serve the unbanked and under-banked, not just via basic access but better optimised services to improve long-term financial security.
This includes the ability to move money, store money, access credit, save, invest, and get insurance. According to a World Bank study, lack of money, bank access, documentation, awareness, and trust are typical reasons why many don’t have bank accounts.
Lending should also be carried out in a responsible manner, guarding against excessive debt. While lending may be easy, responsible lending is much harder, the authors caution. A financially healthy society is good for business and increases resilience.
Financial health gaps should not be allowed to lead to financial vulnerabilities. “Financial inclusion should not be the end goal – it is a means to an end,” the authors affirm. Unfortunately, fintech digital divides still exist at the level of devices and broadband internet.
Examples
In addition to data on megatrends, the book is full of stories, profiles, and quotes of fintech changemakers and progressive companies (see the table below). “The past decade has simply ushered in the greatest amount of innovation the financial services industry has ever seen,” the authors observe.
The year 2007 was pivotal in this regard, with the launch of M-Pesa and the iPhone. Smartphones have helped demystify, simplify, and democratise personal finance, launched a range of innovative business models, and given customers much more choice.
“Technology is driving the biggest change to the financial services model in its history,” the authors observe.
Traditional banks are being disrupted by neo-banks, fintech startups, and the GAFA tech giants. Incumbents are responding through their own transformations in architecture and analytics, investments in startups, and ecosystem partnerships.
For example, Goldman Sachs has launched a consumer bank (Marcus), a credit card (Apple Card), and an industry cloud platform (model similar to AWS). It has also acquired fintech startups like United Capital and Clarity Money.
Based in Spain, BBVA has engaged with the startup ecosystem through partnerships (Anthemis venture builder), Propel Ventures (independent venture arm), and an API platform.
“Banking needs to find its soul again,” the authors implore, urging banks to become more inclusive and fair. Older brands remain nimble through “investing in, digesting, or copying the competition.”
“Sometimes, the most important lesson in business isn’t trying to win, it’s in ensuring everyone wins,” the authors evocatively explain.
They point to examples of open business models and APIs in action, such as acquisitions by Mastercard (Finicity), Visa (Plaid), Lending Club (Radius Bank) and Intuit (Credit Karma).
Fintech business models are emerging around the world, as seen in super apps (Tencent, Ant Group, Gojek, Grab), money movement (M-Pesa, PayPal, TransferWise, Remitly), robo-advisors (Betterment, WealthFront), P2P lending (Lending Club, Kabbage, Prosper, Affirm, SoFi), financial services ‘plumbing’ (Square, Stripe, Klarna), and capability support (Marqeta, MX, Yodlee, Paid).
Other notable startups are Chime (digital-only bank with no monthly fees or minimum balance), Even (emergency savings), Qapital (goal-based saving and investment), Stash (nudges for finance habits), and Truebill (managing subscription bills).
The authors also cite Pefin (AI-based financial advice), Stoovo (work opportunities for gig workers), EverSafe (security solutions), and Pula (microinsurance for farmers in Africa). Hello Tractor, set up in partnership with John Deere, lets farmers rent tractors.
In China, banks have been launched by the super app groups Alipay (MYbank) and Tencent (WeBank). They give loans to first-time borrowers, many of whom are blue-collared workers or women entrepreneurs. In Southeast Asia, Gojek and Grab financially support millions of micro-entrepreneurs who never had a bank account before.
Players and platforms to watch in India include Paytm, Zest Money, UPI and Aadhaar. Zest Money uses AI-based algorithms to provide affordable and transparent solutions to those who are not part of the formal credit system and have an insufficient credit history.
Unbundled financial services are also creeping into other industries, such as blockchain-based smart contracts in the shipping industry. Startups in this space include Voltron, Skuchain, and Marco Polo.
“Embedded finance has been gaining traction around the world as financial technology is increasingly being integrated across non-banking sectors,” the authors observe. The move begins with adjacent services and sectors, and spreads beyond.
Fintechs that support environmental activities of members include Aspiration (supporting tree-planting charities), Ant Forest (incentivising low-carbon activities, plant trees), and GCash (contributing to reforestation).
The road ahead
“Future success will come to those companies that build the most trust with their customers, gain access to the most relevant data, and deliver the most value from it,” the authors predict. The model will be less extractive and more of delivering genuine value.
Ethical principles like transparency and fairness should be incorporated to ensure operation with “a glass box instead of a black box.” In the future of embedded finance, every aspect of traditional banking is an invisible feature of another industry’s product or service experience, the authors describe.
Real-time connectivity and data offer “personalisation and optimisation on a scale never seen before.” Super apps and the tech-enabled “perpetual learning machine” are ushering in the “dawn of ambient banking,” the authors explain.
Analysing the daily spend of billions of users can enable services like a just-in-time infusion of credit, and create a “flywheel of impact” to improve the human condition. The long-term financial well-being of citizens and businesses improves society as a whole.
This calls for a mission-driven institution with a servant leader and an “abundance mindset,” according to David Reiling, CEO, Sunrise Banks.
Purpose and community should come above scale and profits, the authors affirm, calling on all leaders to empathise and act. In the long run, principles of inclusion, empathy and fairness should be taught in schools as well.
Metrics like GDP are not enough if the majority of growth benefits flow only to a few; measures like the WEF’s Inclusive Development Index could be more appropriate. “To be critical is not to be cynical,” the authors add.
Leaders should think in terms of systems and ecosystems, with skills in listening, catalysing and facilitation of symbiotic relationships. Broader spatial (big picture) and temporal (long-term thinking) perspectives are called for.
While the “glow of always-on smartphones” and the “prescient ding of notifications” seem to be all around us, we should still be sensitised to exclusion, bias and blind spots, the authors caution.
“We need new and different stories to build a new future,” the authors sign off.
The book is packed with inspiring and practical quotes, and it would be fitting to end this review with the sample below.
Transparency is the core governing principle to make platforms more balanced and inclusive. – Paolo Sironi
Every company will be a fintech company. – Angela Strange
The moral test of any society is how it treats its most vulnerable members. – Paul Irving
It is dreams that drive the world, not just the technology. – Jack Ma
We are only strong together. – Spiros Margaris
A shared vision is not an idea... it is rather, a force in people's hearts. – Peter Senge
YourStory has also published the pocketbook ‘Proverbs and Quotes for Entrepreneurs: A World of Inspiration for Startups’ as a creative and motivational guide for innovators (downloadable as apps here: Apple, Android).
Edited by Saheli Sen Gupta