Embedded finance: how any retailer can become a fintech

Thanks to fintech, any retailer could offer services such as loans at the point of sale. Given consumers’ craving for convenience, this seamless model is a potential winner for all concerned


woman holding phone and credit card

Department stores have been offering credit lines since JCPenney started to do so in the US in the late 1950s. And many supermarket chains have pegged a white-label banking service on to their back ends with varying degrees of success over the years. But now, with the aid of application programming interfaces, banking-as-a-service (BaaS) technology and so-called embedded-finance arrangements, everyone’s favourite flat-pack furniture store can potentially offer a whole host of financial services.

In February, the investment arm of Ingka – the Swedish holding company that owns Ikea – took a 49% stake in Ikano Bank, which already manages some of Ikea’s credit products, such as its store card. 

The furniture retailer has decided to offer “competitive and accessible financial services”, which will enable “even more people to have better homes and, thereby, better lives”, according to Ingka Investments’ MD, Krister Mattsson. “As customers and retailers increasingly seek banking solutions with a strong digital foundation, our commitment to work even more closely with Ikano Bank during its digital transformation is a great opportunity for us to serve new and existing customers alike.”

Ikano had actually started life as part of the Ingka group, but was spun off as an independent business in 1988. The bank has been operating in the UK since 1994, running other retailers’ store cards and offering its own-brand accounts. When the deal was announced, the bank’s CEO, Henrik Eklund said: “The closer partnership enables us to further accelerate our transformation to become a fully digitalised bank.” 

Ingka has since bought a stake in fintech firm Jifiti, with a view to rolling out the latter’s point-of-sale buy-now-pay-later platform in Ikea stores.

Matthew Williamson, vice-president of global financial services at digital consultancy Mobiquity, describes these developments as the formation of a “collaborative ecosystem”.

“In the past, you might have bought a sofa on credit from DFS, say, but the finance provider would be a third party. Ikea’s increasing move into financial services makes sense, because it’s about streamlining the customer’s journey,” he says.

Williamson explains that banks’ strengths lie in data management and regulatory compliance, while Ikea’s lie in its mass appeal. That, combined with consumers’ mindset when furniture shopping, could naturally see the offering extend into home improvement loans, for instance.

Embedded finance is harder to see, but that’s the way customers increasingly prefer it: so convenient that they don’t have to think about it

Zoopla Property Group is developing a collaborative ecosystem along similar lines. This summer, RVU, part of the Zoopla group of companies that owns Uswitch, Confused.com and Money.co.uk, added online mortgage broker Mojo to its portfolio.

Bringing together property searches, mortgage lending, removal services and utility comparisons supports the group’s plans to deliver an “end-to-end digital mortgage experience”.

Explaining the acquisition, RVU’s CEO, Tariq Syed, says: “Digitalisation has been sluggish in the mortgage sector, but we will have the teams and tools to supercharge the process and give consumers the experience they deserve.”

The logic behind the embedded-finance model is clear: it promises benefits for all concerned. The traditional finance house gains credibility by piggybacking on a more trusted brand, gaining access to that customer base in the process. The consumer brand can deliver a specific financial service to a captive audience without having to go through the pain of negotiating a banking licence. Each party plays to its strengths and the outcome is a slicker customer experience. 

One of Asia’s leading ecommerce businesses, Bukalapak is an Indonesian online marketplace through which 13.5 million merchants and 100 million users have been enjoying the benefits of savings accounts and digital debit cards since 2020 through Standard Chartered Bank’s BaaS platform. But the embedded-finance relationship can work both ways: Standard Chartered has also established an alliance with digital challenger bank Starling in opening its sustainable finance marketplace, Shoal, this month through innovation arm SC Ventures. This shows that even big banks can find BaaS a useful tool in certain circumstances.

Consumers are increasingly demanding the same high quality of digital experience from their financial service providers as they are accustomed to receiving elsewhere. Traditional banking institutions are not yet best equipped to deliver this, but they do at least bring regulatory rigour.

Joan Medland co-founded Shoal on behalf of SC Ventures. She notes that, while Standard Chartered is based in London, it has no branch presence or operational infrastructure in the UK. Starling’s technology, trusted relationship with the regulators and ability to attract skilled recruits meant that the venture could be up and running far more quickly than it would have been if built from scratch.

Apart from planned expansions into Europe and the Americas, the next steps for Shoal include adding selected “positive-impact partners” to offer other financial services, such as green investments and mortgages, Medland explains.

“We will demonstrate how we test their credentials and why they were chosen, making it simple for our users to understand. We would like to add products such as pensions in due course,” she says. “We’re also planning to build a retail space where customers can go into and save, invest or spend. We’ll be featuring sustainable brands there as well.”

In September, OpenPayd reported the results of a large-scale survey of firms’ attitudes to embedded finance. Nearly three-quarters (73%) of respondents said that they intended to start offering embedded financial services within the next two years. 

In a recent blog, OpenPayd’s founder, Dr Ozan Øzerk, described the finance element of these embedded services as “harder to see, but that’s the way consumers and B2B customers increasingly prefer it: so convenient that they don’t have to think about it.”

When Angela Strange, general partner at US venture capital firm Andreessen Horowitz, asserted in 2019 that “any company could become a fintech company”, Uber was one of the main examples that she cited. The business may have launched as a disruptor of the traditional taxi market, but the ride-hailing business is now also offering credit cards, a digital wallet and instant-payment service for its drivers.

“For Uber and Lyft, adding financial services has two benefits,” Strange said in a conference presentation that’s become highly influential in fintech circles. “These companies both spend hundreds of dollars acquiring drivers. Then they have to make up that cost through a margin on rides. It’s much faster to make up that cost if they also have a margin on banking services. Furthermore, if I’m a driver, I’m more likely to stay with a company that is also providing my financial services.”