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Highlights
- Early movers in the investment and advisory industry are seamlessly embedding investment services into the customer journey.
- Incumbent firms must foray into this space to cater to a mass-market customer base and unlock new revenue streams.
- They must evaluate strategic partnership models, target client segments, and digital channels to identify new or extended capabilities and quantify their impact on the cost structure and revenue streams.
In this article
Abstract
With the proliferation of digital technologies, the financial services industry is witnessing a gradual shift in the way clients consume services.
They are demanding more holistic banking and financial services that are seamlessly integrated into their existing digital ecosystems such as ecommerce, social, travel, and entertainment apps. This change in market demand has prompted firms to aggressively adopt embedded finance strategies in the past decade, especially for payments, credit, and insurance products. Early movers in the investment and advisory space are now exploring embedded investments. We analyze the market trend of companies pioneering the use of embedded investment and advisory services, including a review of current providers. Further, we offer recommendations for traditional investment and advisory firms to aid them in their embedded investment journey.
Embedded finance
In simple terms, embedded finance is the ability of non-financial firms to seamlessly integrate financial products into existing business models.
They do so in partnership with financial services firms. Alternatively, embedded finance can be viewed as the ability of financial firms to seamlessly offer their products and services leveraging non-financial service entities within the customer ecosystem. The benefits from embedded finance accrue to customers, financial services firms, and ecosystem partners. A few examples of companies leveraging the embedded finance strategy include the social network platform WeChat embedding payments services, Expedia travel embedding insurance from AIG, and Amazon offering co-branded credit cards in partnership with JP Morgan.
Early mover strategy
Investment and advisory services players span a wide spectrum.
They include retail brokerage firms, wealth management firms, investment management firms, pension firms, broker-dealer firms, independent financial advisors, and fintech firms. These players offer services to clients directly or through a financial services intermediary. In recent years, we have seen a few early movers disrupting the distribution model leveraging embedded investments as part of their business strategy. These firms have seamlessly embedded investment services into the customer journey. For example, they offer goal-based investing services drawing on existing automated or micro-investing service capabilities and full-fledged brokerage services. They also provide wealth management in partnership with big tech companies, super app providers, retailers, social network platform providers, and other non-financial services firms. Figure 1 illustrates the product-market fitment of a representative list of current players in the industry based on our observation of the current landscape.
Figure 1- The product-market fitment of a representative list of current players in the industry
Early movers include China’s Alipay, which offers goal-based fund recommendations in partnership with Vanguard and American online payments firm Paypal, which provides crypto trading and plans to offer a stock trading platform in the future. Industry pioneers also include Singapore’s Grab Invest, which has a micro-investing offering in partnership with Fullerton and UOB asset management and Indian digital payments firm Paytm, which offers retail brokerage services. These super apps provide a frictionless digital journey and superior customer experience at affordable prices with the objective of minimizing clients’ need to switch to a different platform. As super apps continue to rise in popularity globally, we anticipate that investment offerings will be seamlessly integrated into these platforms.
Other noteworthy examples include Chinese social media platform WeChat partnering with Blackrock to offer fund execution services and US short-term home rental company Airbnb offering hosts an investment of $50 in their Acorns accounts on the first booking. Amazon (IN) and Walmart (IN) have acquired wealth management platforms and plan to offer investment or wealth management services in the future.
Through their embedded investment and advisory offerings, these firms are primarily targeting mass-market clients by providing affordable investment advisory services. In our view, incumbent firms must foray into this space and cater to the mass market, particularly millennials. The immediate benefit for financial services firm is in terms of access to a new market beyond traditional channels for selling their existing or enhanced products. This new channel will enable firms to tap a new revenue stream. More importantly, as the client relationship matures, firms can explore opportunities to cross-sell and upsell other investment products and services directly or through partnerships. However, capitalizing on the embedded investment opportunity will require firms to embrace new ecosystem business models and the associated risks. Having said that, the main advantage to firms is the opportunity to democratize the investment and advisory services space and make it accessible to the mass market, in turn, creating a new customer base and driving growth and revenue.
Implications for firms
The current trend in the embedded investment and advisory space favors some industry players.
It indicates a higher degree of support for financial services firms offering robo advisory, micro-investing, retail brokerage, and asset management services. The primary target market for these firms is the mass market, with the possibility of also targeting a lower segment of mass affluent clients depending on the partnership value proposition.
As firms offering these investment advisory services explore the implications of embracing an embedded investment and advisory strategy, it is important for them to first define their business strategy and assess implications to the existing business model. It would be wise for them to adopt a design thinking-led approach in defining their strategy and considering the implications for their business model. A high-level impact of adopting an embedded investment and advisory strategy on the business model is depicted in Figure 2. Firms must evaluate multiple business aspects such as the strategic partnership model, target client segments, and digital channels to identify a set of new or extended capabilities and quantify their impact on the cost structure and revenue streams.
Figure 2 - The high-level impact of adopting an embedded investment and advisory strategy
We would like to highlight a few considerations within two key impacted areas in the business model: key partners and key resources (restricted to technology or platform capabilities).
Building the right partner ecosystem: To be successful in the embedded investments journey, selecting the right partner will be critical given that the partner could be any non-traditional firm such as an ecommerce, social, travel, or entertainment app. Firms need to embrace a partner ecosystem model that will enable identification, incubation, and expansion into a long-term relationship. When identifying potential partners, firms must conduct due diligence, including evaluating the partner profile (financials, brand, and the like), customer base (size, segment, growth, among others), business model (products, channels, and so forth), operating model (locations, data privacy, and others), platform (integration, security, resiliency, and so on), and strategic fitment (integrated product value, channel, and the like).
Building the right technological capabilities: Financial firms must also possess a strong technology platform. The platform should be able to offer investment advisory services in a modular way based on a partner’s specific needs. For example, a retail partner will interface with the firm for providing stock trading capabilities, while a super app will integrate with the firm to offer robo advisory. Also, an agile, secure, and resilient technology platform with strong API capabilities is crucial for enabling successful integration with a partner ecosystem. Firms must adopt an API-first strategy as it will enable seamless integration throughout the investment journey: onboarding, trading, generating digital client statements, tax and compliance reporting and so on.
Conclusion
The embedded finance industry is estimated to grow in double digits for the next decade in the payments, insurance, and credit area.
With a few early players exploring embedded investment and advisory services, there exists a space for innovative companies. As more and more super apps are launched, there is a lot of untapped potential in this space for investment and advisory firms. Firms need to evaluate opportunities and threats that a non-traditional ecosystem brings into the traditional financial services ecosystem and develop strategies to make the most of this trend. Firms willing to embrace this change and capitalize opportunities now will realize significant upside in terms of increasing market penetration, especially within the mass-market customer segment, leading to improved business growth.
