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1、An Embedded Finance Future in Asia Payments have already become invisible,finance is soon to follow.A report from Kapronasia in collaboration with Thought MachineNovember,2022ContentsExecutive Summary 3Introduction 4Open Banking and Embedded Finance in Asia 5Creating Embedded Finance Solutions in As
2、ia 6The Business Case and Risks of Embedded Finance in Asia 9Conclusion 11MethodologyKapronasia conducted both primary and secondary research in Asia-Pacific to obtain the most relevant insights from the industry around embedded finance.Secondary research sources included but were not limited to,mar
3、ket intelligence reports and studies by industry experts and professional services networks,white papers,educational materials,media articles,and marketing collateral.Primary research interviews were secured from relevant players across the ecosystem,including financial institutions,Fintechs,and ind
4、ustry experts.An Embedded Finance Future in Asia3Executive SummaryThe inexorable march of new technology in everyday life is heavily impacting the nature of financial services in Asia.One area of particular interest is the degree to which financial services are increasingly being provided via non-fi
5、nancial platforms or apps embedded finance.Examples abound,from booking a taxi where payments are automated to simply clicking a box to add insurance for a product or service as a user is buying something from an e-commerce site.Open banking,essentially the sharing of financial data between banks an
6、d 3rd parties,has provided succor to platforms looking to embedded financial solutions in Asias ecosystem.Whilst the extent of open banking varies markedly across the region,several business models have arisen making use of the technical developments and more liberal information flows.Today,scores o
7、f market participants are deploying embedded finance.Naturally,traditional financial institutions are embedding solutions to enhance their current offerings.Meanwhile,smaller,and more nimble start-ups are looking to muscle in on the incumbents markets.More recently,non-financial organizations have s
8、tarted to develop the ability to deliver financial services on top of their existing products in order to join the fray and capture a slice of the market.These firms have various approaches to embedded finance.To begin with,many are including basic payments and FX services in their platforms.This ca
9、n lead to the offering of complementary services such as lending or insurance products at the point of sale.Finally,firms may cross-sell entirely new product lines,for example full-service bank accounts.The ramifications for market participants are substantial.On one hand,embedded finance can help f
10、irms acquire clients who are more engaged via platforms which customers are already using.This acquisition can be done cheaply as less physical infrastructure is required,particularly pertinent in rural parts of Asia where ticket sizes are smaller.On the other hand,clients may become more engaged wi
11、th the 3rd party app than with the financial firm,whose products can be simply commoditized.Nevertheless,profitable opportunities in Asia are myriad for those able to capitalize on these developments and create solutions which customers find appealing.Firms would do well to be cognizant of developme
12、nts as embedded finance is on the rise across Asia.The progress is likely to continue unabated into the foreseeable future and become an increasingly important element of financial services in Asia.An Embedded Finance Future in Asia4IntroductionFinancial services have evolved over time as banks and
13、other financial institutions have improved the customer experience using digital solutions to make services faster and more convenient.The benefit of these developments has been profound,to the point where banking and financial services have been dramatically simplified and the cost of making transa
14、ctions has been reduced substantially.That said,the opportunity exists for market participants to innovate further in order to capture additional value from existing processes or indeed,find ways to acquire clients more cheaply using digital means.These market participants typically consist of,on th
15、e supply-side,large incumbent financial institutions through to smaller fintech startups.On the demand-side,e-commerce platforms through to more traditional businesses such as airlines and telecommunications giants,many of which have begun embedding financial services into platforms which customers
16、use daily.Quite simply,embedded finance can be defined as financial services that are incorporated into non-financial platforms such as e-commerce or social media platforms.Embedded finance gives users access to financial products directly in a 3rd party platform without having to open a bank app or
17、 go to a bank branch.A good example of an embedded finance solution is the partnership between Standard Chartered(SC)nexus,a Banking-As-A-Service(BaaS)service,and Bukalapak,an Indonesian e-commerce operator.By leveraging Standard Chartereds retail banking licenses via SC nexus,Bukalapak is able to p
18、rovide their clients direct access to an array of Bukalapak branded,but SC nexus powered,financial services within their platform.In this report,we lift the cover on embedded finance in Asia and look at what makes it unique.Further,we develop a framework which both financial and non-financial entiti
19、es can consider when looking to deploy embedded finance solutions.Finally,we look ahead to developments which provide insight into how the embedded finance space might look in the future.An Embedded Finance Future in Asia5Open Banking and Embedded Finance in AsiaThe always-on nature of digital platf
20、orms such as social media sites,chat apps,and gaming has made customers,especially the younger generation,more demanding of financial services providers.Increasingly,customers are looking for that same fast and convenient service they get from their non-financial platforms at the click of a button f
21、rom their banks.In recent years,technology has evolved to such an extent that a substantial proportion of financial services can be offered digitally,and increasingly through 3rd party non-financial platforms.The advent of open banking has accelerated this process.Open banking Open banking allows cu
22、stomers financial data to be shared between financial institutions and 3rd parties.Typically,this is achieved using Application Programming Interfaces or APIs.An authorized 3rd party can then utilize this data and access to offer financial services on their platform or app.A good example of open ban
23、king in action is the Singapore Financial Data Exchange,or SGFinDex,a government led initiative which allows bank customers to view consolidated financial information even if various accounts and investments are held with different government agencies and financial institutions.Historically this cou
24、ld only have been accomplished through screen-scraping but can now be done simply through an API.Whilst open banking is being widely employed across the region,the extent to which it is adopted and the driver for adoption varies significantly by jurisdiction.For instance,the Australian Prudential Re
25、gulation Authority(APRA),Australias banking regulator,has required the countrys banks to comply with a number of open banking mandates.Conversely,Singapore and Korea have had a more market driven approach whereby banks are encouraged to create APIs under regulatory guidelines,but they are not obliga
26、ted to do so.Meanwhile,other countries in South-East Asia such as Vietnam and Thailand have focused less on developing open banking altogether.The advent of open banking enables new business models to develop by structurally separating the customer interface and back-end services.The spectrum of ope
27、n banking models ranges from a bank building a wholly-owned interface and distributing its own products,through to a 3rd party corporate branded platform,powered by a banks technology and license,selling financial products alongside or in combination with the corporate entitys products.There are,of
28、course,a number of hybrid forms of these arrangements in-between.Embedded financeEmbedded finance is one manifestation of the open banking evolution.Brankas is an open finance technology company providing services to financial institutions.According to its CEO and Co-founder Todd Schweitzer,embedded
29、 finance can be defined as“services which enable access to financial services via 3rd party platforms or applications.Simply put,embedded finance enables interaction with bank data or bank products without the need to use a banking application or physically visit a bank branch.”The key driver for de
30、veloping embedded finance solutions is ultimately for the product and service providers to increase revenues.Enabled by open banking,this new paradigm creates opportunities for market participants to profit on this technological progress and build new solutions which enhance customer journeys.Figure
31、 1 illustrates the various different open banking business models.Embedded finance is most accurately represented by Category 3,where the financial products are embedded in a 3rd party platform.Simply put,embedded finance enables interaction with bank data or bank products without the need to use a
32、banking application or physically visit a bank branch.”An Embedded Finance Future in Asia6Figure 1Open Banking Business ModelsCovered or ownedby bankAs-a-service supplierWhite-label platformOwnExternal third-partyPlatform owner/curatorTraditional full-serviceOwnExternal third-partyProducts/ServicesD
33、istributionAPIClients1234Bank connects to a third-party platform to provide liquidity or other treasury servicesBank owns the products and APIsProducts/ServicesDistributionAPIClientsCorporate-branded platform(powered by bank)distributes products to end clientsBank owns the APIsbut products are from
34、third-partiesProducts/ServicesDistributionAPIClientsBank-branded platform or marketplace distributes products to banks clientsBank owns the APIsbut products are from third-partiesProducts/ServicesDistributionAPIClientsBank provides services to clients via an owned distribution channelBank owns the p
35、roducts and APIsDistribution methodBanking-as-a-ServicePlatform bankingBank owned productThird party provided productThe desire to launch embedded finance products is a two-way street in that both finance and non-finance companies want such products to profitably serve customer needs.One one side,in
36、cumbents such as Westpac,an Australian bank,via its Banking-As-A-Service platform,are looking to use embedded solutions to increase customer acquisition,for example by helping their non-banking clients create savings accounts on their apps for the non-banks customers.On the other side,non-financial
37、companies are looking to add revenues from new product lines which cross into the financial realm.For example Tokopedia,an Indonesian e-commerce platform has embedded merchant lending products into its platform,seamlessly providing access to capital for merchants on their platform,many of which woul
38、d not have had access to traditional financial services providers.Naturally,Tokopedia benefits from a more engaged customer and a new revenue stream in the form of lending.Merchants benefit from never having to leave the platform to borrow.Meanwhile,a raft of fintechs have started developing API gat
39、eways designed to bridge the gap between financial and non-financial platforms and enable embedded finance,potentially encroaching on traditional incumbent providers.Approaches to embedded finance can be bucketed broadly into three buckets which we have detailed in Figure 2.Creating Embedded Finance
40、 Solutions in AsiaAn Embedded Finance Future in Asia7Capturing Value of Existing Services First,companies typically look to capture some part of the existing financial services value chain.Nearly three decades ago,Bill Gates was quoted as saying“banking is necessary,but banks are not.”Today,a myriad
41、 of companies are following that mantra by building solutions into their platforms aiming to muscle in on the banks markets and capture value from some more elementary financial services like payments or foreign exchange(FX).This first step is perfectly exemplified by ride hailing apps such as Grab
42、and Gojek who routinely process payments at the click of a phone button.Traditionally,these payments would have been the domain of banks and other large financial institutions as well as payment service providers(PSPs).Today,more platforms are bringing payments in-house,effectively becoming their ow
43、n PSP either through their own payments license or a partners.Similarly,embedded FX transactions have evolved such that they can be conducted with less friction yet more certainty on the exchange rate and time for the money to be transferred.Rohit Narang,Managing Director,APAC,at Currencycloud,a fin
44、ancial infrastructure provider,goes a step further commenting that“many of the traditional services can simply become a feature in a 3rd party app which allows a corporate to deliver a better customer experience and at the same time,increase revenue.”For example,Currencycloud provides infrastructure
45、 for fintechs that support e-commerce platforms by providing their sellers with multiple virtual currency accounts.This minimizes cost and complexity for sellers when consolidating cash from sales across different countries/currencies.Provision of Complementary Products The second step of embedded f
46、inance is providing financial products which are complementary to an existing non-financial offering.For example,the ability for a customer to borrow,or obtain insurance at the point of sale when purchasing a non-financial good or service.This allows the platform to provide a more seamless service t
47、o its customers while also capturing a portion of the financial product revenue.Rohit Khatri,Head of Insurance Exchange at bolttech,an international insurtech based in Singapore,elaborates the benefits further with respect to insurance“when a client is engaged at a particular time when buying a serv
48、ice or product,they are sensitized to the transaction,hence it is the right time to provide the additional service.”The Stages of Embedded Finance in Asia123Building additional functionality in a platform to be part of the financial value chain,often through payments.Example:an e-commerce platform s
49、uch as SEA Groups Shopee bringing payment processing in-house.Capture value of existingfinancial servicesLaunching new financial products or services that are complementary to the existing offerings.Example:Thai mobile operator dtac incorporating insurance offerings in its platform by leveraging bol
50、ttech,a Singapore insurtech.Provision ofcomplementary financialproducts and servicesThe sale of completely new,typically full-service,financial products and services through an existing platform.Example:Indonesian e-commerce platform Bukalapakallows users to open full-service bank accounts on the pl
51、atform leveraging Standard Chartered nexus.Launching full-servicebankingFigure 2An Embedded Finance Future in Asia8An example of this can be seen in the partnership between bolttech and dtac,a large Thai mobile operator.The partnership allows dtacs customers to access relevant insurance products and
52、 services more easily in a convenient manner directly on the dtac platform.By collapsing the need for multiple platforms or apps to complete tasks into a single touch point with which consumers are often more engaged,the user experience is enhanced.Further evidence of this is in the embedded lending
53、 space where lending products can give customers more flexibility and control in making immediate decisions on spending/borrowing.Matthew Little,VP of Product at Episode Six,a payments technology company,explained“if a customer can see more flexible borrowing options at the point of sale,the custome
54、r is not only empowered to make decisions immediately,but their shopping experience is further enhanced.”Asias Buy Now,Pay Later(BNPL)platforms such as Atome and Afterpay leverage this approach in their point of sale offerings.Lending can be further extended to the business space,where cashflow may
55、be an issue,especially for SMEs.Gus Poston,Founder of Netbank in the Philippines pointed out that“there is potential for supply chain financing to be embedded into 3rd party platforms,”as is the case in the aforementioned example of Tokopedias merchant financing service.Launching Full-Service Bankin
56、gThe third and final step for many participants is the sale of completely new financial products and services,often as part of a more comprehensive digital banking offering.In this case,clients are channeled to new services which may be different from the business current offering,thus creating a br
57、and-new revenue stream.For example,a platform offering a full-service bank account to customers where previously minimal or no financial services were on offer.In Asia,this approach can help platforms profitably acquire clients that might not have been possible using traditional banking channels,ess
58、entially those that are financially excluded.According to Bain Consulting,more than 70%of people in Southeast Asia remain unbanked or underbanked.Oftentimes,this is due to the relatively high cost and low revenue potential of serving these customers who are often in rural areas without significant t
59、raditional financial infrastructure.The ubiquity and low cost of mobile phones and on-line banking mean that many of these customers can be banked profitably on digital platforms even though the transactions sizes might be lower.Sachin Sharma,Chief Product and Commercial Officer at Standard Chartere
60、d nexus business highlighted this using Standard Chartereds partnership with Bukalapak,an Indonesian e-commerce platform,where a white labeled bank account is opened on Bukalapak using technology provided by Standard Chartereds nexus.The partnership allows a user on Bukalapak to open,via a sister ap
61、p,a full-service bank account which is equivalent to that offered by a traditional bank without the need for the usual physical banking infrastructure.Whilst Bukalapak manages the client interaction,client deposits are held on the balance sheet of Standard Chartered.This arrangement provides a win-w
62、in solution as it creates new revenue streams for both the bank and the e-commerce platform.Mr Sharma elucidates“we believe it creates a winning proposition,as it helps to create a brand for the e-commerce player,as opposed to a simple referral fee to a fintech.”Mr Schweitzer highlights a further ex
63、ample in which Brankas is building the technology to help customers purchase Wealth Management products directly from their e-wallets.Again,this cross sell offers a cheaper client acquisition strategy for the wealth manager and an additional revenue stream for e-wallets.Meanwhile,the customer experi
64、ence is enhanced as customers can get faster access to high-quality financial products from one place.“When a client is engaged at a particular time when buying a service or product,they are sensitized to the transaction,hence it is the right time to provide the additional service.”An Embedded Finan
65、ce Future in Asia9The Business Case and Risks of Embedded Finance in Asia The evolution of embedded finance provides an opportunity for businesses large and small to profit by making financial life simpler for their customers,however,the growth of embedded finance is not without challenges and risks
66、.The Bullish Case for Embedded Finance in Asia At a very basic level,embedded finance can create a more engaged customer as they are using an ecosystem in which they are typically more familiar with.Rather than needing to take multiple steps to complete a financial transaction,users are able to achi
67、eve the same outcome in a more seamless manner.In a similar vein,banks and financial institutions can access alternative data through 3rd party platforms which can help banks better serve or cross sell their products to individual clients,hopefully increasing revenue and creating a better customer r
68、elationship.On the tech side,banks can effectively delegate the heavy lifting of customer acquisition and tech development to the 3rd party and focus on up-selling their products.For example,if a BNPL product is deployed on an e-commerce platform,the platform already has a user base and will ensure
69、the smooth running of the platform,allowing the bank more time to focus on up-selling rather than maintenance.As embedded finance transactions often occur at a point of sale,they can also improve product development as they can be personalized to the user.Mr Khattri from bolttech,explained in the co
70、ntext of insurance products that“embedded products can be tailored exactly to the clients need at the point of transaction so that the client gets an appropriate product with the precise coverage for the exact term.”Further,he argues that embedded finance products can make the non-financial companys
71、 core product more attractive if it adds to the ease or confidence of doing business.For example,an e-commerce platform may embed insurance as an offering to its premium customers/sellers which may drive confidence in the underlying platform.The Bearish Case for Embedded Finance in Asia On the flip
72、side,embedded finance also has risks and challenges given that it is often reliant on new technology and there are a surfeit of new competitors entering the marketplace.A primary concern for incumbent financial institutions is the risk that a plethora of new entrants dis-intermediate their existing
73、business model.Whilst this threat of dis-intermediation is not limited to embedded finance products,it can be exacerbated given that clients may have a close association with a 3rd party app,so banks are concerned that their customer relationship may become marginalized,and their banking products be
74、come more commoditized.New distribution channels for financial products via 3rd party platforms can also make it tougher for banks to acquire clients in the traditional fashion.Particularly so as these services are often in places where customers are more engaged.It follows that the incumbent may re
75、quire a meaningful upgrade to their services and infrastructure to defend market share thereby squeezing their margins.Lastly,whilst developing new products and services is one thing,the traditional risks in lending or insurance operations should not be overlooked simply because a neobank or insurte
76、ch operation has an attractive and smoothly operating platform.These new players potentially lack experience in more traditional risk monitoring and compliance and could inadvertently suffer heavy losses if those elements are not treated with due care.This is exemplified in the BNPL market in Austra
77、lia where the share prices of several newly established operators have suffered during 2022 as substantial bad debts mounted.In light of these opportunities and risks,we have developed a embedded finance framework for companies to consider when they are looking to launch embedded finance services an
78、d products.Figure 3 encapsulates the current zeitgeist and gives market participants suggestions on which to ruminate when launching products.An Embedded Finance Future in Asia10Embedded Finance Development FrameworkFigure 3Client JourneyProduct AgilityPlatform ScalabilityRegulatory ComplianceEnhanc
79、e the Client Journey Map out client journey and identify points of friction.Define and focus on short-term goals to address and resolve issues Review current C/X and ensure any new solution is same or higher quality to maintain service level and brand loyalty.Be conscious of making large,rapid chang
80、es rather than incremental.Build Platform Scalability Build modular platforms to ensurestraightforward deployment in newmarkets.Assess internal processes toensure organizational capability fornew solutions.Ensure platforms can be scaled upon demand to POC new markets.Assess new customer profitabilit
81、yespecially in markets with lowaverage revenue per user.Develop Product Agility Ensure products are sufficientlydynamic to allow for personalization.Ensure platforms can assess andtrack user uptake of and feedbackon new products.Identify partners who understandproduct offering and can deploy bothsta
82、ndard products and personalizenew products.Ensure Regulatory Compliance Review potential regulatory issueswhen designing products from both the tech and product angle and ensure compliance.Engage with regulators at an earlystage of product development andcontinue regular dialogue asproducts/platform
83、s develop.Work with partners whounderstand and can ensureregulatory compliance.An Embedded Finance Future in Asia11ConclusionAs technology has improved over time,so have financial services.Embedded finance is another iteration of this journey,and it is playing out in real time throughout Asias finan
84、cial ecosystem.Both financial and non-financial players are looking for ways to innovate and claim or defend market share in Asias financial service markets.The embedded finance landscape is developing from the rather ubiquitous lending and payments services today and evolving as more complex financ
85、ial products are added.Whilst the potential product development is essentially limited only by the innovation of market forces,the reality of embedded finance today is that more simple products such as payments/FX,and retail lending predominate.This begs the question about what is next for embedded
86、finance and how products and platforms may evolve in the medium term.Mr Poston from Netbank said that“there has been a gap in ideation which banks have not addressed.”However,it appears there is ongoing dynamic change with further progress on the horizon.An obvious candidate for the next evolution i
87、s for companies to further embed the more mainstream financial services such as savings accounts and investment products into non-financial applications.Products which Standard Chartereds nexus and Westpac are today pushing hard to build out via 3rd party applications.Retail BNPL offerings are today
88、 relatively mainstream,however Mr Little from Episode Six suggested this can be developed further as clients want financing and flexible options on a wider array of products.A scenario can be envisaged where a provider sets up a BNPL program for an on-line car retailer that allows customers to buy a
89、nd finance a car through the manufacturers site as easily as a textbook is purchased from Amazon today.Mr Narang from Currencycloud noted a dearth of products serving the SME market“whilst it is difficult to predict the exact form of the industry,there is a huge opportunity to serve SMEs with embedd
90、ed products and it would be unsurprising to see a J-curve in this area in the next 5 years.”An example of this type of B2B offering might be the integration of financial services into Enterprise Resource Planning(ERP)systems.Mr Schweitzer from Brankas suggested further integrations of payments into
91、accounting platforms.“SMEs would be able to make payments to suppliers directly from an accounting system,rather than having to separately log into an additional bank portal just to make a payment.”As with any free market,precisely how embedded finance plays out remains to be seen,however what is cl
92、ear is that embedded finance is here to stay in some form.Market participants would do well to remain cognizant of these developments and the Framework detailed above provides a basis for consideration when designing such solutions.There is opportunity to cash in on these technological developments
93、for those putting in the effort to build new products.The corollary is that there is risk to existing business models for those remaining wedded to business models of the past.Thought Machine has developed the foundations of modern banking with its cloud-native core banking and payments technology.I
94、ts cloud-native core banking engine,Vault Core,is trusted by leading banks and financial institutions worldwide,including Intesa Sanpaolo,ING Bank lski,Lloyds Banking Group,Standard Chartered,SEB,Lunar,Atom bank,Curve,and more.Thought Machine is currently a team of more than 500 people spread across
95、 offices in London,New York,Singapore,Sydney,and Melbourne and has raised more than$500m in funding.For more information,visit https:/Kapronasia is a leading strategic consultancy covering fintech,banking,payments,and capital markets.From our offices and representation in Shanghai,Hong Kong,Taipei,Seoul,and Singapore,we provide clients across the region the insight they need to understand and take advantage of their highest-value opportunities in Asia and help them to achieve and sustain a competitive advantage in the market.Please visit https:/ 2022 Kapronasia Singapore Pte.Ltd.All rights