Sankaet Pathak, our co-founder and CEO, shared his insights on the panel “Embedded Finance: Bringing Personalized Banking to the Masses”, an onstage discussion at Fintech Nexus LatAm. Here are the highlights from Sankaet’s comments.
Question: Where does (financial) infrastructure stand today across the (LatAm) region?
Sankaet: The infrastructure is fine, but the bigger issue is who the infrastructure serves. The infrastructure is unable to service people if the desired experience is mostly digital. So if you want a digital-only experience or a global experience, it’s very hard with the current infrastructure. The status quo of financial services is not sufficient for the majority of people. So that creates an opportunity. If the current banks are not going to do a great job of serving everybody, who would? It turns out, companies who hire software engineers are usually better suited to serve this need, and thus you have fintech and fintech adjacent platforms. Banks are not really good at extending their capabilities to interfaces that they don’t own, which makes it exceptionally hard to embed banking services if you go directly to a bank. That creates a need for BaaS (Banking-as-a-Service).
A good way to describe BaaS is it’s like a pro tool for hobbyists and professionals. It requires some level of expertise to leverage the tools properly. So if you already know compliance and you already understand how financial services work, you can get APIs into a very complicated set of banking functionality where you can just plug in and build risk, fraud and everything on top of it. That’s the first phase of unbundling where you go from banks servicing users to technology platforms servicing users. Now the important part is, if you’re using BaaS, you’re more likely not an expert in compliance and financial services. You understand how banking works, and you just want to deploy an app that delivers great, financial service experiences.
Now embedded finance is the next big leap that no one has made and everyone is trying to advertise. There’s a lot of innovation that hasn’t happened yet. Let’s presume that the app developer knows nothing about financial services. They’ve never done financial services, they don’t know how compliance works, they don’t know how fraud works, they don’t know any of this. Can you still embed a financial product into an existing application and serve the needs of the masses? Doing this is kind of like re-bundling everything a bank does: fraud, compliance, payment processing, deposit taking, everything, and putting them into a new interface that is malleable and can embed itself into anything. That’s the more widespread, mass-adopted product that does not exist today. But the bet is that the BaaS provider, with enough R&D, will be able to build a truly embeddable finance platform that can be embedded into anything, from grocery stores, all the way to video games. But we’re not close.
Question: How do you know when you’re in an embedded finance phase?
Sankaet: A good business test is, you are in the embedded finance phase if the customer of a BaaS provider does not need compliance and fraud. If you use Synapse, you have to have your own compliance team and fraud staffing. If you use Dock, for example, you have to have these basic ingredients to be able to manage a program. You are into the embedded finance phase when all fraud is managed, and you never have to worry about it. No fraud loss is yours to cover. No compliance risk belongs to you as a fintech. We’re a little ways away from that. At least a few years, but it’s coming.
Question: How do you best drive adoption for your customers?
Sankaet: In my experience so far, customer adoption is broken down into very straightforward generalizable principles. The first big thing still ends up being onboarding. How quickly can you onboard a customer and how frictionless that process be? The second big piece ends up being contextual user interfaces. When using your product, are end-users feeling like this is a general product they can get anywhere, or have you, with intentionality, built a very nuanced solution for that customer for their specific need? And the third big thing is trust. Do they actually trust your product and service with their money? I’ve seen fintechs that have been able to do those things really well, scale quite rapidly because they have smooth onboarding, contextual relevance, and a high amount of trust.
Question: How can providers like us not just provide technology but actually build solutions so that people can embed these products much more easily?
Sankaet: You want to build the business you want to build. You don’t want to have to start learning about compliance and fraud to be able to deploy your application and drive your operations. I do think regulatory compliance and fraud mitigation are big pieces that sit outside the core technology today that we have to really improve. I do think a lot of those solutions will come with technology, but the problem is a little different than card issuance and account opening. The problem is much more contextual because compliance and fraud management haven’t been executed at scale as well, yet.
Question: What does the next year look like?
Sankaet: Depending on what fintech segments you are serving, the next 12 months are going to be okay or terrible. If you serve the early-stage fintech market today, the next 12 months might be fine but months 24 through 36 will look much worse. This is because investors are still actively funding seed and series A rounds, they have pulled back on investments in series B and C rounds. So, products are going to be built, but the contraction in later-stage fintech funding will cause many startups to either consolidate or cease to exist. If you’re serving later-stage fintechs, it really depends on if these companies are doing well financially. If you’re serving late, late-stage fintechs, you work with public companies that have enough cash flow to endure on the merits of their offerings.