Retailers worldwide are becoming increasingly aware of the immense potential of embedded finance to grow their businesses and enhance customer experiences. Embedded finance involves integrating financial services into non-financial platforms, offering retailers a seamless way to provide a wide range of financial solutions to their customers, helping to finance purchases and maximise their buying power.
According to a recent report, embedded finance sales revenues in Europe are expected to reach approximately US $94.1 billion by 2033. The same report estimates that Europe is likely to hold a 25% share of the global embedded finance market.
Tapping Into Retailer’s Customer Base
One key advantage that retailers possess is their existing customer base and the trust they have built over time. By leveraging this trust and customer loyalty, retailers can position themselves as reliable providers of financial services. Additionally, retailers have access to valuable customer data, enabling them to gain insights into their customers' financial needs and behaviours. For example, according to the IKEA UK Annual Report, customer data helped them to improve their financial services offerings by:
- Launching a new digital application process for interest-free loans, which made it easy for customers of all financial situations to apply online or in store.
- Offering personalised and tailored finance solutions to customers based on their needs and preferences.
- Enhancing their loyalty programme, IKEA Family, and rewarding customers with benefits and discounts when they use the company’s financial services offering.
Strategies for Embedded Finance
To effectively capitalise on embedded finance, retailers have two primary strategies available. The first is forming strategic partnerships with fintech companies specialising in providing embedded finance solutions. By carefully selecting the right fintech partner, retailers can collaborate to offer customised financial solutions that meet the specific needs of their customer base.
The second strategy is developing in-house financial capabilities. This involves assessing the feasibility of providing financial services themselves and investing in the necessary infrastructure and expertise. While this approach requires greater investment and commitment, it provides retailers with greater control over the financial offerings they provide. For example, MRP is a retailer that sells various products and offers in-house financing to its customers, which tends to be a demographic that faces challenges in accessing traditional financing options. To address this, MRP invested in technology, infrastructure, and expertise to manage the financing process and provide personalised and flexible solutions that enhanced customer satisfaction and loyalty.
Improving the Customer Journey
An essential aspect of embedded finance is enhancing the customer experience. Retailers must seamlessly integrate financial services into their existing platforms, ensuring that payments and checkout processes are frictionless. Furthermore, by using customer data, retailers can offer personalised financial recommendations, fostering engagement and satisfaction among their customers. Key to offering embedded finance, merchants will need to partner with a bank or fintech in order to take advantage of next-generation technologies to create applications that engage customers. These solutions can understand what's in a customer’s shopping carts, then offer access to payment options, including split-tender. These applications maximise customer purchasing power, improve cash flow and reward customers for their loyalty. Embedded finance holds the potential to improve conversion rates, increase basket size and raise wallet share.
A Better Experience Creates Greater Customer Loyalty
Retailers can also capitalise on embedded finance by tailoring their loyalty and rewards programmes to incorporate financial incentives. By leveraging their understanding of customers' financial behaviours, retailers can offer targeted rewards and exclusive financial benefits, further strengthening customer loyalty. For example, a retailer can offer a low-income customer a coupon for a discount on a product they frequently buy, or a high-income customer a free trial of a premium service they might be interested in.
Embedded finance also opens up new revenue streams for retailers. For instance, retailers can monetise customer data and insights by partnering with financial institutions to deliver personalised financial offers and services. Additionally, retailers can earn income through transactional fees and commissions by facilitating payments and providing value-added financial services such as insurance or instalment plans.
It's important to note that offering embedded finance does come with challenges and risk that must be considered and mitigated through due diligence. Data privacy and security are paramount concerns, necessitating the implementation of robust security measures and compliance with relevant regulations. Maintaining transparency and managing conflicts of interest is also crucial, as retailers should clearly communicate terms and keep financial services separate from core retail operations.
A Business Opportunity That’s Hard to Ignore
Embedded finance offers retailers a unique opportunity to expand their businesses and enhance customer experiences. By forming partnerships, leveraging customer data, optimising the customer journey, and creating new revenue streams, retailers can successfully capitalise on embedded finance. Embracing this opportunity will not only drive growth but also establish retailers as trusted financial service providers in the evolving retail landscape.
