541 Get in the Game with Embedded Banking

Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King. And I’m Jason Henricks.

Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns and from cutting edge technology to the people using it to help create a more innovative, inclusive, and healthy financial future. I’m J.P. Nichols, and this is Breaking Banks.

Welcome. We’re going to get into this subject of embedded banking. It’s definitely an area that’s very hot right now.

Certainly, when we look at the world of fintech and indeed what is happening in the space, there’s a lot of talk about how we adapt to this sort of AI world as well, which is going to really be heavily involved in this sort of ability to execute on embedded banking. But it’s more than that. It also is about your ability to extend the core.

We’re going to talk about sidecar cores, and we’re going to talk about how banking as a service in the embedded world will work. This is a topic that I’ve been writing on, obviously, for a number of years. But let me introduce Bhushan to you.

Bhushan Renjichari, I hope that’s how I’m pronouncing it correctly. Bhushan? Yes. Yes.

Yes, Brent. You’re right. So you’re the founder and CEO of Finsley.

You pioneered this money movement system, so you founded, obviously, Finsley in 2012. But for those that aren’t familiar with your work, obviously, you’ve won numerous industry innovation awards. You’re a board member of the Faster Payments Council, which is really critical for the way we see embedded banking developing around wallet positions.

And prior to your foundation of Finsley, you served in a leadership position at Wells Fargo, where you managed international banking. So, Bhushan, we will talk about Finsley, obviously, as we go through. But before we get into the main discussion around the embedded banking piece, maybe just give us a few comments in terms of Finsley and the work that you guys are doing and how you’re helping your clients today, and then we can jump into the topic.

Sure. Thank you, Brent. And really great being here in your podcast, Breaking Banks.

And this is one of the podcasts I really love, and it’s a lot of futuristic information about banking. So, and I’m a big fan of your work as well, Brent. So good to be partnering here.

So Finsley is primarily a money movement platform. So if you look at the bankings today, they are really behind in terms of innovation, really struggling to compete with the modern fintech players and larger banks in terms of the capabilities. And we help banks in terms of overcoming those limitations with a parallel core platform.

So what we are doing is we have a complete money movement platform that is built for the future, real-time connected, embedded, for the embedded economy. So they can totally bypass their legacy platform. And we have a direct connection with the Federal Reserve Clearinghouse and SWIFT.

So that means end-to-end, Finsley is the money movement platform for the bank. In addition to that, we recently launched Account Galaxy for virtual accounts and banking as a service and other additional capabilities. So, you know, we can be seen as a next generation bank modernization platform.

So we primarily focused on money movement, everything related to money movement capabilities. I’m going to get you to define this sidecar core piece in a little while. And I definitely want to talk about the virtual account stuff, because that’s a very important component of not only is it important for embedded banking, the way we think about it, the ability to spin up accounts in real time, but it’s also very important for what we think of as the agency model, which is where this is going to lead to.

So for those that are joining us, maybe we can start with a definition of what embedded banking or embedded finance is. So if someone asks you to define that, Bhushan, how would you define embedded banking? So I would say embedded banking is a lifestyle banking. You know, as you always say, banking is not going to happen in the branches.

It’s not going to happen in the online channels. So if you look at the evolution of the banking, it started with the ATM machines that the very first time people, you know, did not go to have to…doesn’t have to go to a counter to take their cash out. Next, you know, you started having the checks, right? Further, you have online banking and then mobile banking.

But every time you go to a bank to do a banking transaction, but embedded banking is banking comes to you to the place where you need banking. A great example is Uber. You know, you finish the ride, you don’t even have to take your card to make complete that payment.

It’s part of your journey. How do you take your banking services and embed as part of the lifestyle that people are living, right? So that’s all about embedded banking. So there are so many use cases, like, you know, basically, banking is totally invisible.

It is part of your lifestyle instead of banking happening on the online channels and in the branches. So that’s how I define embedded banking. All right.

So I think that’s a good definition as a pacesetter, as a placeholder. I would say that in terms of tactical examples for embedded banking, I think it is stripping the core utility of the bank. So in retail, well, it works for corporate as well, but, you know, let’s take retail banking.

You know, the ability to safely store value, right, is a core function. The ability to safely move money is a core function. And the ability to access credit.

And so that’s really how we think about providing banking utility today. The difference in the embedded banking world is that those three core pieces of utility are extended to the customer when and where they need it. So instead of walking to a grocery store, finding out you don’t have enough cash to complete your grocery shopping, when you’re at the checkout and you’ve presented your debit card and it’s declined because your mortgage payment has come out or your salary hasn’t hit the account, in an embedded financing world, when you walked into that grocery store, you’re given options to access credit to allow you to buy your groceries.

Instead of you saying, ah, no, well, you need a credit card, come down the bank and apply for that. And maybe if you’re not too risky, we can solve that problem for you with a piece of plastic, which we can send you in the mail. Instead, in the embedded banking world, we’re looking to solve that problem in the moment where you need it, need the solution in real time.

And so this is why real-time money movement, real-time virtual account opening and all of those sorts of things are material for it. Right. So let’s ask, we’re going to ask you guys to give us your thoughts on where you think embedded banking fits in.

And let’s use this as a bit of a baseline for our conversation today. But I’d also like to compare how you think we’ve gone in this discussion with the initial polling question we’re going to present to you guys now. So let’s throw up our first polling question.

And the question goes like this. What amount of influence will embedded banking have on financial services over the next three to five years? Very big influence, some influence, little or no influence. Embedded banking is right now, it is happening not through the banks.

It is happening outside the banks through fintechs. Well, we’re going to talk about that just in a moment. You’re absolutely right.

So how did we go? Let’s see the results. Ah, good. Very big influence, some influence.

It will change parts of the industry. All right. So let’s see if we can convince you that it’s probably going to be in the former category, very big influence rather than some influence.

But I’m positive that the results are pretty good for that poll. I think it shows people are thinking about embedded banking at least. So thank you for participating in that.

Now, let me just set the baseline here, Bhushan. You made a comment about this is where it’s happening. It’s happening in the fintechs.

And we’ve got some fairly strong evidence to suggest that’s the case. So let me give you some of the highlight numbers at the moment. So what we know, for example, is Revolut just topped 40 million customers.

And they’re often getting compared with HSBC at the moment. HSBC has 39 million customers for the retail practice. So that’s something that you wouldn’t have thought that, you know, a top 20 bank in the world in terms of side by side comparison could be comparable to someone like Revolut.

But in terms of customer numbers and growth, that’s something we can see in the UK market. There’s arguments that the UK, in terms of the UK market with the challenges there, that the big four banks in the UK have given up around 25% market share to these challenges as primary bank accounts over the last 10 years. That’s a big deal.

But when we look at the top 20 fintechs in the world today versus the top 20 banks, we see that the top 20 fintechs, which include mobile operators like Alipay and Paytm in India, represent about 3.8, 3.9 billion consumers. And the top 20 banks, retail banks in the world, represent about 2.7 billion customers. So it’s not even close.

Even if we’re looking just at purely customer numbers, you know, the fintechs now garner significantly more, significant more influence on a day-to-day basis. And a lot of this is because of the embedded nature. When we look at Paytm, we look at Alipay, WeChat Pay, and so forth.

We’re really talking about the fact that the bank account in function in many of these jurisdictions has moved from a debit card to a wallet now. And we’re starting to see the wallet is a primary vehicle for this embedded banking experience now. And we’re seeing that play out with these fintechs.

So, Bhushan, let me ask you a question. You know, we don’t hear Nick from Revolut. We don’t hear Ann Boden.

Well, Ann Boden stepped aside as CEO, but when she was CEO, you know, we don’t hear David Valles, who’s the CEO of NewBank out of Latin America, which is the largest bank in Latin America by pretty much any metric now. We don’t hear them typically talk about their core banking system. They will often talk about their tech stack.

So how does a fintech handle the technology requirements of embedded banking differently from a traditional bank? Yeah, I think, you know, you talked about a very important aspect of where fintechs are and where banks are. You know, if you ask all of these people, all of us, we all have bank accounts, but we still have so many fintech options in our mobile app. You know, if you ask why we are having those apps, mainly because we don’t have those solutions from our banks.

If my bank provides all those capabilities, absolutely, I have no need to go and take any other applications from, you know, any other providers, right? Why is Revolut being more successful than HSBC? I believe it’s mainly because they are able to connect with the customers. They’re able to meet their needs the way the customers are looking for. Whereas the traditional banks, they continue to operate the same way.

Here is their deposit account. Here is a loan if you want to apply. Here is a payment.

Here is how you want to make a payment. So I have a lot of conversations with bank executives. If I ask them, hey, what is your top priority? Where do you need help? They will say, hey, you need to change the system from, you know, from this to something else.

Like, you know, they don’t talk about what kind of value they need to bring to their customers. Here is this use case that we want to solve. How can we do that one? So, you know, I think I won’t blame them.

That’s mainly because they spend 80% of their budget in just keeping up their outdated legacy payment systems or core systems. And that leaves them very little time to focus on the next generation technologies, next generation capabilities. If you see why we have so much of innovation happening in the emerging markets like Brazil, India and Philippines and other countries, but not in the U.S., it is the same problem.

We have totally outdated systems that have been being used for the last 30 years. And it is very difficult to dismantle and move to a new platform. Protection of those legacy relationships and legacy infrastructure, you know, look at look at FedNow adoption in the United States compared with UPI adoption or PIXPAY adoption in Brazil or UPI in India.

And the U.S. is really lagging on things like real time payments. But you could argue a lot of that comes from sort of the fact that we don’t have a fintech charter in the United States. I think I would agree to some extent, but I think it’s also mainly because U.S. has a very sophisticated, integrated, pre-integrated systems, right? Almost all the banks, the corporates, there was some lot of automation built from the ERP systems to the banks.

And there are a lot of legacy processes built in. Whereas if you look at India, Brazil, it’s a totally new emerging economy. It is easier for them to start with something new rather than changing something.

So, you know, while that is the case, it is important for the established economies to move to a real time payments, which is happening slowly and steadily. But the speed is not, you know, it’s not something the way it should be. I think that’s where the concept of the real time embedded economy comes into picture, because, you know, if let’s say I’m a bank, I’m banking an insurance company, and the insurance company wants to pay the insurance clients in real time.

So I have an automated process because, you know, you’re filing a claim. I want to have some AI or whatever, some automated machine that, you know, makes the decisions of is the claim valid or not. And then I want to make an approval decision.

And then I want the payment to be out in real time. So you apply for an insurance claim in the morning. Probably by afternoon, you have that money in your account if that insurance claim is approved.

You know, it is not possible today. And it could be approved by AI, right? Yeah. Right.

And as soon as I approve. So, you know, what and essentially what we do is we help the banks to start thinking about the future. Like we don’t we don’t try to displace any of the system.

Of course, you know, we displace them by, you know, by helping the banks towards the future. But our goal is to, you know, prepare the banks to embrace the future with this real time banking platform. So which means an API given to the insurance company that they can connect to the bank and I want to disburse the payment, boom, it’s out instantly.

Right. So that’s the future. All right.

So I want to talk about how to become a digital first bank, because when we look at when we look at the future of banking as it stands and some of the things you’re describing, then it really does take quite a different approach culturally, you know, to being a bank now. And when we look at the data, I mentioned the 3.8 billion fintech users versus, you know, the 2.7 for the mainstream banks. But there’s some other data I didn’t share as yet, which is and this has come from my new book, The Branch They Gone Tomorrow, where when we look at the data, we’ve seen we see over the last five years that these fintech banks and fintech wallets have grown at 200% in terms of customer growth.

And that’s really down to their ability to acquire customers digitally at scale. That’s a really important thing. For the biggest banks in the world, they’ve grown at 3%, their customer basis, so it’s not even close.

And then from a revenue perspective, the last five years, compound annual growth rate for the big banks has been about 15% revenue growth year on year. And it’s 45% for the fintech challenges and the wallet ecosystems. So these are very important hard numbers to look at.

When we look at the trend, all of the fastest growing financial institutions are digital direct players. And so if you want to be digital first, you have to play by the rules of these new players, not of the rules of a traditional bank, which is where it gets a bit tricky, right? Because, you know, how do we not be a bank and convert to being a technology company like these digital players? So talk about the leadership of these digital first organizations, you know, these fintech players, what do they do differently? How would you identify them as a digital first organization versus, say, someone like JPMorgan Chase or HSBC? Sure. So the fintech players, most of the fintech technology leadership is coming from the technology companies like Google, Amazon, and modern technology players, because when they come and look at the technology stack, they don’t, you know, they don’t look at just like, hey, you know, where do we start from? For example, as you have written in your own book, right, where Elon Musk, when he started the SpaceX, he wanted to launch a rocket, and he said, hey, you know, I’m not going to take what NASA has built and then just add incremental capabilities, but I’m going to look at as a very fresh mind, I want to use the latest technologies available today, and then build a rocket launcher, right? And because of that, he was able to do that at one tenth of the cost.

So the fintechs, they’re exactly doing the same thing. And we did the same thing at Finsley as well. When we started looking at payment modernization, we didn’t look at what is available today and how can we improve that.

But instead, we looked at the payments, hey, this is how payment should be. Let me give you an example. You know, today, in the payment world, you send a payment out, let’s say an insurance company sends a payment out, or they want to cancel the payment, it is two separate records.

You want to, you know, you want to return that again, it’s three different records. So there are, you know, every payment action is a different, different historical transaction. It is like, you know, you are buying something from Amazon, and then you want to return it, it is going to be like, you know, you’re selling it back to Amazon, right? So you’re just like having two different entries.

But instead, you know, what Amazon gives is, you have the product, you return it, just that product says it’s returned. So we wanted to bring that experience in the payment. It is only one record all the time throughout the journey, whether it is returned or contested, no matter what, it is the same payment record.

So that’s the first principles, right? Most of the fintechs, they think from that perspective, hey, how do I make my customer journey simple and easier? So they start from there. And then, hey, what do I need to do to make that happen? You know, can any of the legacy players meet that one? The answer is no. So then they look for who can solve that problem.

And then, you know, that’s how they if nobody can solve that problem, they start building it themselves. So that’s why in a couple of fintechs, the banks in the UK, they have built their own core platform, which is amazing, right? Yeah. So I think, well, yeah, you’ve got, I mean, famously, you know, Starling does actually now have their own core that they sell to others.

I can’t remember the name of it. If anyone can remember it in the chat, it’s like source or machine or something. Something just sounds fairly generic like that, but I don’t have it in front of me.

But to that point that you’re talking about, in terms of sort of the technology layer, when you talk to these, you know, technology and fintech players, and you ask them about something, well, what if you need to see a human? And this is digital first thinking in sort of a nutshell here, is when I spoke with Henry Ma, who’s the CIO at WeBank, which is the largest challenger bank in the world, for example. And I said, what do you say to people when they say, but sometimes you really need to speak to a human? And he was like, if you need to speak to a human at WeBank, it’s a design failure. Right? Because we should have worked out how to fix that problem for you in an automated fashion without you speaking to a human.

So it’s a very interesting different mindset, isn’t it, in the digital first embedded world. You’re looking at solving the problem when it presents itself for a customer in real time without a human involved autonomously, automagically, if you want, you know, like just in the moment solving that problem. And that, you know, when you start thinking about that, it requires you to think about your bank as a service embedded in the customer’s life, being able to be turned on at any point to solve a problem compared with, well, stop what you’re doing, stop looking at buying that house.

And when you come and see whether you can afford a mortgage, then we’ll let you go back and buy the house instead of just saying, you know, it’s going to be, it’s an experience design problem of how to deliver home financing in real time. Right? That’s a very different example. I mean, that’s the, you know, that’s the design thinking and, you know, it’s not the bank thinking, right? You know, we are not thinking in terms of the products and how I want to go to the customers, but instead looking from customer’s perspective, what do they want, what challenges they have and what kind of problems I want to solve.

Will they ever have to call me for anything? If yes, then how am I going to solve that problem? So that is, that is absolutely the way the future is. It should be. Let’s talk about, in terms of a bed in banking services and, you know, especially what we’re seeing globally, PixPay and, and, and this to some extent gets to some of the comments I’m seeing here.

PixPay is the fastest growing payments network in the world today with almost a hundred percent adult adoption in, in Brazil. We look like exporting that to other countries in Latin America. And UPI is obviously now one of the largest payments networks in the world.

By 2027, it’s estimated that 80% of all retail commerce will go across the UPI rails. So this is what’s happening offshore. So talk about the trend for real time payments and what you’re seeing outside of the United States right now with real time payments.

Yeah, so real time payments is, has been a great success in markets like India, Brazil, the emerging economies, right? But if you look at the UK, UK launched the real time payment in a much earlier than US, but the adoption rate has been still slow. And that’s a developed market. So the primary reason is that, you know, the banks and the commerce, I would say the commerce is kind of very established.

And there has been a lot of investment have been made in, you know, in doing those payments, even though it’s not real time. I can still make the payment in my ERP system and have my ERP system send a payment file to my bank, and then bank can still process that in bulk, and then send another file back to the ERP system, saying that out of like 7,000 payments that you sent, this 70 payments failed. So and then ERP systems takes that out, and then, you know, fixes it, and then makes that presentation to the decision makers in the treasury, and then they do whatever is needed to be done.

So the important thing here is the corporate systems in the developed economies and the banking system, the developed economies, they are very tightly integrated, and a huge investment have been already made. Right. So now, okay, now the banks say, I have a new real time payment system.

So like ACH payroll systems, all of those things are sort of locked in. Right. So now, everybody in this ecosystem have to think about, hey, now it’s not efficient for me to send a file.

And then I have too many people in my treasury department and finance department dealing with this reconciliation issues, dealing with the missed payments or returns. How can I all automate that one automatically through the APIs? Because, you know, one of the biggest challenge the finance controllers and the banks have is reconciliation, because, hey, I sent 7,000 payments, but I don’t see 7,000 payments posted in here, which one did miss? And then I have to deploy people to go through that one. But, you know, the concept of virtual accounts solves that problem, right? For example, you know, in today, the corporate has a bank account with the bank, and one account that like all the transactions goes and hits the same account.

All those 7,000 payments I made, you will see that posted here. OK, so with virtual accounts, what it does is it allows the corporate to create a virtual account for every one of their customers or every one of their providers. OK, now, if I’m a customer, hey, I want you to make the payment to this virtual account so that I know who is making the payment.

You know, I don’t have to deal with any reconciliation issues. And when you bundle it up with the real-time payments, now I can receive the payments in real time and I can make the payment in real time. So with the more of a real-time connected economy, as I say, right, what becomes more obvious is the commerce becomes more interconnected in real time with no friction of this, you know, the limitations that we have today, which is reconciliation issues and a missing payment and all that stuff, because we end up deploying so many human resources and this becomes more and more automated.

So that is the path, you know, it’s this kind of, you know, you need to have the roads set built first to have a good infrastructure, good transportation system. Now we have the roads, which is, you can say, RTP fed now. Now we need other ecosystems built.

We need the gas stations. We need the convenience stores. We need the, you know, all the areas.

So that is being built. And now I think I would say in the next two, three years will be very critical. And the bank should start taking action today to be ready for that capabilities.

Because if you tell… But I mean, I joke about Fed now that it should be called Fed later in the United States because of adoptions. And, you know, I don’t want to upset anyone on the call. But, you know, we talk about the technology legacy, you know, that we have to sort of get over with payments like ACH networks and the checks and, you know, check floats and all of those sort of things.

And, you know, it’s crazy because like it’s over 75% of all the world’s checks are written in the United States today. So it’s not necessarily a healthy thing if you want to change. But to look at adoption of real-time payments, the costs of implementing, as a few of the commenters have said, the costs of implementing Fed now are very expensive.

Comparative to what we see for the costs of implementing UPI in India, for example. Or PIXPE in Brazil. So why is it that it’s so much more expensive to do Fed now real-time payments in the U.S. than we’re seeing in these other examples offshore? I mean, that’s primarily the cost of living, right? I mean, like, you know, the cost of building a platform in the U.S. is much higher than building a platform in India or other developing countries because of the labor costs of living.

And also, like, you know… But is it an engineering issue? Like, is Fed now over-engineered compared with UPI? I don’t think so. I don’t think so. But I think when Fed now is launched, right, it is very important that we launch it with no failures, right? Because, you know, if UPI goes down, how many people in the world knows UPI is down? But if Fed now goes down or FedWare goes down, it’s a big news in the whole world, right? It’s everybody… So that gives an extra responsibility for Fed to make sure the stem is rock-solid and stable and there’s absolutely no failure.

So, you know, I think I would say I’m very, very happily surprised that they met those goals. They met those dates. And, you know, they delivered as promised.

In fact, they delivered earlier than they promised. But I think, you know, I agree with that, you know, when they should have started, maybe they should have started like 10, 15 years ago. But whenever they did, they did.

I think… I mean, that is also… But, you know, I mean, I look at Brazil and Brazil has made incredible progress with PIXPE very quickly. You know, I’d be interested. I don’t think… I don’t think the complexity of integration of PIXPE into banking systems in Brazil is any less or more complicated than what it is in the US.

I do accept that the labor costs and the capital costs for doing that might be cheaper. But there also needs to be incentives for shifting to this real-time payments infrastructure. So one of the things we’ve seen in India and in Brazil is the central bank’s willingness to say, we’re going to move to this and you have to adopt it, just as you would with Basel 3 standards and so forth.

There’s a reluctance to do that in the United States because, you know, of the state versus federal situations and things like that. So maybe that’s part of it. Maybe it’s just banks feel like, you know, if there was enough banks doing it, maybe the costs of implementing FedNow might come down.

But I mean, this is a really interesting question about with what’s happening in India and Brazil, what does that mean for the interchange business? Because a lot of fintechs are relying on interchange. I think that’s, you know, I’m very disappointed with the way the whole, you know, money innovation has happened, right? You know, coming back to, let me come back to this one. But if you look at the adoption of speed at India, Brazil, two reasons it accelerated.

One is the mandate from the government, because there’s only one agency that was running their entire show and they mandated people listen to that. And another one is COVID. Because of COVID, people migrated to wallets, digital payments, because nobody wanted to touch the cash, because like, you know, people got COVID, taking money from somebody else, right? Nobody wanted.

It was a transmission vector. Yes. In fact, my dad got COVID because of taking money from, for a donation that he was, you know, for a charity he was running, right? So people were really didn’t want to touch any money.

They wanted to, you know, do everything real time, right? So I’m coming to the interchange and all that thing that’s going on. So if you look at the innovation, right? What we have done was, you know, card is the biggest innovation that happened like 20 plus years ago. That was a, that’s a really, really good one because as a merchant, I have been offering credit.

So 1960s, 1960s technology, like the mag stripe was, I mean, the chip is a little later, but it’s like, even if you like, I often say this to bankers, I’ll say, you’re still issuing debit cards to your customers. And they’re like, of course. And I was like, 1970s tech in a 21st century world, all of the fastest growing payments tech is wallets now, right? Like we expect that next year, 55% of all retail commerce transactions globally will be done by mobile wallet and 30% by plastic.

So this is the thing is like, if you say to a bank where you should be, you should be migrating off plastic cards to wallet. Most bankers would say, Hey, we’re not ready for that. We’re not even close, but you can’t do embedded banking in a plastic card.

So you’re going to have to at some point shift to wallet ecosystem. Now you can share in Apple’s wallet ecosystem or Google’s wallet ecosystem or Alipay or WeChat if you’re in, in, in China, in Paytm if you’re in India. So there are, there are existing things available, but this really comes back to what’s the motivation in doing this? Because we talked about the cost side of embedded banking with FedNow and the payment side, but what is the revenue opportunity for banks in terms of finance? What would you say in the short term? Is it just deposit capture? Is it credit access? I think it is the, you know, there are different, different aspects of it, right? So I want to kind of touch upon that card scenarios where, you know, when you look at the cards, like in a card, the interchange fees is the biggest reason why innovation has not happened in the bank beyond those cards, right? Because there’s not enough incentive and for the banks to do anything outside of that one.

And a great, there was a great opportunity for Apple to disrupt that one. And, but what they did was they just stuck that same card again within that wallet, right? You know, if, if Apple has created a wallet network, that would have been a phenomenal, you know, transformation, you know, but, but that’s still like, you know, I lose my card. That’s a fraud that, that is lost and anybody can use it.

And the card network, what they were actually doing is, you know, you go to Walmart, you pay the card, you pay by card. And the responsibility of the fraud is with the Walmart, because Walmart has to check. This is Brett King.

Hey, do I see your name? And then it is my responsibility to make sure. In a real time payment scenario, you’re not doing that because you’re, you’re instead like borrowing the KYC from other infrastructure, right? Like in this case, the payments rails, right? Right. So I think with respect to the money, revenue opportunities for the banks, it is all about convenience, right? Hey, you know, I’m going to work with this.

For example, this let’s take this insurance company. I’m going to give them virtual account capabilities. I’m going to give them ability for them to send real time payments, ability for them to accept real time payments.

Then I’m going to generate revenue because I’m making it easier for them to do reconciliation, to receive the payments, to make the payments, because it’s a, it’s a lot of convenience factor. So, you know, I make money by, by the number of virtual accounts. I allow them to create, I make money by the number of payments.

I allow them to create, you know, every business needs a virtual account capabilities, maybe, right? Because every business has customers and they have their reconciliation needs. So, you know, you need to have connection with NetSuite. You need to have connection with QuickBooks and every other capabilities.

Now you take your bank and plug it into those, into those ERP systems. So that way, you know, if I’m a business, I want to launch, I can open an account directly from my ERP system to my bank and I can start transacting. I can start doing every business treasury operations from my system through, with the bank, through the API.

So that’s the way, right? That’s where they make money. So putting on a new merchant, a new vendor, putting on a new employee, all of that you could generate. Yeah, you don’t have to do application forms, things like that could happen in real time.

Well, that’s a, you know, like in, in the instances of payroll and things like that, that’s fairly obvious. But let’s, let’s, let’s ask this next poll question for the audience. And so this is our second poll question.

We’ll get your thoughts on this. Particularly, we’re talking about embedded banking and whether it’s a revenue opportunity for the banks. So do you think embedded banking is a revenue opportunity? Answer that and then we’re going to talk about some examples of revenue opportunity in embedded finance today that we’re seeing that’s out there.

So we’re going to answer this poll with some, some use cases, hopefully. When we’re talking about this, this opportunity for embedded banking, a revenue, one of the obvious opportunities is a deposit taking or deposit acquisition. There you go.

So 44% says large and others say it’s incremental. So 60, 72% say yes, you know, basically. So let’s take a couple of quick examples.

So on the deposit side, we have a really good example of very seamless deposit acquisition, which was Alipay’s Yui Bao product, which was their savings feature in the wallet. Now, in the US, the closest equivalent we have is the Apple Card and Apple Savings, where Apple was able to raise a billion dollars in deposits in just four days. And in China with Yui Bao, similar thing in the wallet, they were able to raise over 300 billion dollars of deposits in Yui Bao, which made it the largest deposit pool in the world.

And so that’s on the deposit side. And on the credit side, of course, we have the example, a great embedded example of Buy Now, Pay Later, which got, you know, got a lot of traction early on in the pandemic, then got panned as being out of control with debt. And now we have the flip side.

We’ve come out of that and Klarna is about to IPO in the EU later this year. And they’ve done that off the back of very healthy growth on the Buy Now, Pay Later side, which is taking revenue away from credit card programs. So there’s a few examples of early embedded banking revenue as it plays out.

So I think the opportunity is very robust there. On the savings side of it, I do have to, you do have to realize that what is the difference between Apple, Apple savings, you know, and, you know, Yui Bao compared with traditional savings accounts. One of the things is very low friction onboarding for the customer for the savings.

Making it really easy to save money, you know, is one of those ways that we think of the differentiation of embedded banking and embedded finance opportunities. There’s a really good study coming out of India about this, actually. The RBI did some research on this and the CEO of Federal Bank, I think it was, he talked about the fact that if you spend a million dollars on branches versus a million dollars on digital deposit acquisition in India today, you’re going to get 300 times the response using digital acquisition of deposits than you will opening a branch.

So I want the listeners who are with us to think about that as a statistic. It’s a really interesting statistic. If I told you you had a 300 times better chance of acquiring deposit digitally than getting someone to walk into your branch to give you a deposit, would you argue that that’s good revenue for the bank? I think we would, right? So yeah, that’s amazing stats.

Yeah, great stats. Let’s talk about the virtual account a little bit more, Bhushan, if we can, because the other element of this is, you know, being able to set up an account in real time for something like credit access or for a savings account, you know, or for a new wallet account, sort of move money offshore, for example, with remittances. You know, all of these are potential examples of a virtual account.

But why are virtual accounts so critical for the embedded banking piece? Yeah, I think there are several, several examples. For example, you know, I talked a little bit about accounts payables, accounts receivables departments where they want to have the ability to track the payments at every individual customer level or supplier level, right? So today, all those payments or collections are happening in one account. And then it’s a lot of manual processing for every finance department to make sure, hey, you know, did they receive the payments from this customer? And then I have to go back and mark my ledger that, hey, I have received this payment.

Is this payment that is returned? Then I have to go back and send another follow up letter and do whatever is needed. But the feature is not batch based. It’s all real time.

It’s connected. So, you know, when you do that part, OK, even if you do that payment real time, if you have the same accounting structure to process accounts payables and receivables, that is still the same inefficiency that you dealt with before, right? So instead, you can go ahead and create virtual accounts for every one of your, you know, customers and every one of your supplier. And here is this account.

I want to start paying and receiving through those virtual accounts, right? And if I want to do that, I need to be able to create those virtual accounts in real time, you know, with a simple API. I don’t have to go to the branch or I don’t have to call the bank. Can I open a virtual account? It should be done in a simple way through those APIs.

And those virtual accounts can be just one time use or it could be, you know, used continuously throughout that life cycle of that customer. And there are uses of one time use where I want to send him money and I want to part that fund in a virtual account and let him pick up however he wants. Let him pick up that funds either through RTP or ACH or card.

However he wants, he can do that part, right? So there are various use cases. Basically, we are making that money transfer. You know, for example, you have an escrow account.

Escrow is, I want to take, you know, some Mr. Bob’s service and I want to keep that fund in a virtual account, in an escrow account. And then let, whenever Bob completes his job, I say approve that job is approved. The payment can be initially immediately moved away from the virtual account back to his account, right? So, you know, these are just like a few examples.

But it’s the ability to sort of do this on the fly, which incorporates sort of the KYC, but it’s, it’s, you’re just extending that. You’re having another account, but not going through separate KYC for this account because we’re just essentially opening up some new capabilities on the ledger. I do think there are some really good examples that come out of the corporate world as well.

Like we know, for example, in China, that Alibaba and Alipay combined are very serious lenders for corporate accounts, SMEs in particular. In 2022, my bank, which is the digital bank, working obviously in conjunction with Alibaba and Alipay, they were, they accounted for 40% of the total loan volume in China for SMEs, which is a phenomenal, a phenomenal achievement. But they had this approval process for a loan from SME, which was 3-1-0, they call it, right? Three minutes to apply, one second approval, zero humans involved.

But the one advantage, you know, first of all, they have a sort of a significant data advantage at this point, and this is, for banks listening to this, this is a really interesting example. Oh, and their NPL ratio for my bank, for their lending portfolio for these 54 million SMEs or whatever in 2022, their NPL ratio was half that of the big banks in China. So how is it they’re so good at managing risk? Well, you could say it’s technology, but actually a lot of it is the fact that they see the cash flow of the merchants because the merchants are using Alibaba to run their business.

So once you have cash flow, merchant cash flow, you have an excellent way to assess risk, far better than asking for two or three years financial statements. So we talked about API, but let’s talk about data acquisition in terms of embedded banking for things like buy now, pay later. Yeah, you can build the credit function into a purchase experience.

But if you’re doing sort of a general lending capability, or let’s say you’re doing housing, you know, you’re doing mortgage lending, you know, well, I’m not going to know you’re interested in buying a home unless you come and ask for a mortgage on the bank’s website. But someone knows, you know, Google knows because you’ve been doing Google searches. Apple knows because you’ve downloaded real estate app on your phone.

You know, Facebook knows because you joined a property investment group or something like that. These are all leading indicators of your intent to buy a home, which could lead to an embedded finance experience. So on the data acquisition side, how would you advise banks to deal with that problem so they can be better at the embedded banking? Yeah, I think, you know, all the banks know they need to do a better job in this one, but they’re just not, you know, enough tools and enough data, enough stuff that is available.

For example, you know, my bank today, you know, the bank that we are working for working, you know, for Finsley banking provider, they don’t know the health of Finsley, right? Because they really don’t know all the cash flows, everything that’s happening, because that’s all happening in my accounting system. And, you know, if I have to take a line of credit… So why don’t we offer, you know, like corporate accounting systems behind the log? Exactly, because, you know, I don’t have those services. So since I don’t have those services, I have to look outside the bank to do all of those things.

Now, let’s bring those services back in the banking, because unless the banks connects with the customers the way they want to do their finances, there is absolutely no way banks will know where the customer is, right? How they are operating. So we should have those facilities, have the solutions available for the customer. So I know, you know, okay, here are the cash flow, here are the receivables.

Okay, now I can make a, you know, here is… Bhushan Finsley is going to receive $3 million next month. And, you know, and there is only, I have only $2 million this month, and I need an extra million dollars to run my operations. Let me offer a million dollar loan for Bhushan, just a month loan, right? I think that’s something should automatically come because of the data that banks can collect, right? But we need a system.

So if I go to my, you know, if I go to a car dealership, and bank, it’s my bank, I can geofence and I can even find out, hey, Bhushan is going to a car dealer, that means he’s going to buy a car. That’s an intent. I can use the data, I can send them follow up email, hey, you know, here’s a great deal that I can, I’m going to give you better than what you get from the dealership.

Or you’ve walked into a Tesla dealership, and I give you GPS directions to Toyota, because you really can’t afford a Tesla. All right, let’s, let’s ask our final poll question. And then we’re going to get into the Q&A, you get some great questions from you guys.

The final poll question is, do you think offering embedded banking services can create greater stickiness with your corporate customers? All right, while we’re doing that, let’s answer the first question that we got from the crowd, which was, how can you attribute deposit numbers to a bank’s embedded banking program? Well, I think this is a good question. The, the easiest way is obviously with customer acquisition, where they fund the initial account. And if that is done in an embedded nature, I think you could, you know, easily say that the account opening and the initial deposit for that is digitally acquired.

We do know that for players like Revolut and NewBank, 100% of their deposit numbers are digital. Are 100% of their deposit numbers embedded? Not necessarily. But, you know, we are seeing, for example, with Revolut, with their remittance business, with their crypto business, and so forth, we do see, you know, embedded deposit numbers there.

And certainly we’ve seen a lot of traction of that with the wallet programs as well. So, you know, I guess my bigger answer to that question is, can you acquire deposits at digital scale? Because this was probably an issue in the collapse of First Republic in the United States, that they weren’t able to acquire digital deposits quickly enough because of their outgoing lending program. And, you know, you could argue, what’s the most successful deposit acquisition program we’ve seen in the US in the last few years? And you’d have to say Apple, with the Apple savings product, right? And that’s embedded.

It’s embedded in Apple Pay. But yeah, you know, I don’t know if that answered your question, Enrique. I’m mindful of the time.

We’ve got a few more minutes. Let me throw this one at you for Bhushan. This is one for you to take in terms of Q&A.

In terms of KYC in embedded banking, which will be fastest and the most fast and secure process for customer validation in KYC? Who should be ultimately responsible for KYC in the embedded banking world? Is it the job of the banks or is it the technology platforms you’re embedded in? How will KYC work in this future of embedded finance? Yeah, I think that’s a great question. The identity is the government’s responsibility, right? It is nobody else’s responsibility. The identity must be digital.

Once it is digital, then KYC becomes much easier, right? Because that’s how I see the future. But today, identity KYC is all broken. We are just, you know, we are just trying to do all we can to know the customers better, to prevent the fraud.

But that cannot be done without having a centralized, decentralized, you know, government-provided identity service. That means that if I’m applying an account, I use my identity, and then government authority says it is in fact Bhushan and here’s his picture, here’s his details, and then it goes from there. And then you use that identity at your bank, and you manage that data with whatever you have.

No, I think that’s fair. I mean, you know, if you look at UPI in India, it’s definitely built off the Aadhaar card. The success of embedded deposits in China is much simpler because of facial recognition and so forth.

We had a good suggestion as well that Robinhood is a good example of growing deposits in the embedded finance world. So I like that example. One final question before we wrap up.

How do banks get revenue from Apple, Google, and other wallet partnerships? I think, you know, that’s a great question again. Those are the distribution channels, right? Banks should have a channel strategy, how I’m going to distribute, and banks should also have a direct to go-to-market strategy. Because whenever you have a layer, whenever you have a channel, you’re sharing that revenue with other providers.

And, you know, that channel strategy is great. You know, hey, just use the API, because for me, I don’t have to spend marketing and anything else. You know, Apple and Google, they are going to do all the marketing needed for me, and I’m just the backend for them.

So give them the API, and I get those deposits. I get those transactions. You know, it’s kind of a wholesale business, right? And then direct to market.

So banks should also think about direct to market, because I don’t need a middleman that we have to use to provide those services. So I think banks should have both these strategies. Yeah.

All right, well, let’s wrap. We do have a, you know, a final link for you guys, if you want to find out more about the virtual account capability, which is really your ability to, in real time, spin up either that deposit account or that credit facility in real time, without having to do exhaustive KYC, as we typically do it. That low friction embedded nature, then the virtual account set up at Finsley, you can get some more information from that.

Obviously, you can go to finsley.com as well. Bhushan, how can people that have been attending the session today find out more about Finsley and more about what you’re doing personally in the space? Yeah, sure. Like, you know, anybody who wants to know more about what our product is there, you can submit the form in the Finsley website.

If anybody wants to connect with me, I’m in LinkedIn profile, Bhushan Rangachar. You can find me there. Happy to connect and chat more.

And it’s just really great conversations, Brett. You know, I think you brought in a lot of details from international perspective, really enjoyed having this conversation. I’m sure the listeners learned a lot from this, from your experience and all that, you know, FinTech experience that you have gathered.

And I really enjoyed this one. Thanks so much. I would say this is, I do think no matter which jurisdiction or market you’re in, you are going to have to figure out how to work with wallets in the future if you want to do embedded revenue for sure.

So I’ll leave you with that thought. Bhushan, thanks for joining us. Thanks all of you for joining us on our discussion today.

We hope to do a few more of these in the future. Let us know what you’d like us to talk about next. We’d really enjoy your input into what could have made this discussion better as well.

And thanks for being a part of the Breaking Banks extended family. And thank you, Finsley, for sponsoring this show today. That’s it for another week of the world’s number one FinTech podcast and radio show, Breaking Banks.

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