18 Feb 2022 | 8 minutes

Embedded Finance: How will increased regulation affect the pace of adoption

Embedded Finance: How will increased regulation affect the pace of adoption

We recently held the third virtual event in our ‘Money 2030’ series on the future of fintech which featured expert panellists from across the technology and financial services. The theme for our most recent event was: Embedded finance – a bubble or a paradigm shift? The online event was co-chaired by our CEO Mike Peplow and Co-founder Ivo Gueorguiev, our expert panel of speakers included:

  • Andrea Notaro – Managing Director, Rothschild & Co
  • Alex Mifsud – Co-founder and CEO, Weavr
  • Alison Donnelly - Director, Fscom
  • Tony Craddock - Director General, The Payments Association

This is the second in our series of blog posts, diving more deeply into some of the issues and topics discussed during the event.

This week, we will look at ‘How significant is the customer demand for non-traditional banking businesses to offer financial services?’ and ‘What are some of the regulatory and data sharing concerns that could slow down the adoption of embedded finance?‘

Diving into the first question, Tony Craddock, Director General at The Payments Association argued that the driving force for embedded finance is not only the customer demand, but also the large profit incentive for businesses. Tony went on to explain that the demand we are currently seeing for embedded finance is not necessarily new. It is just that today we have the technology to offer these services and, in many instances, redefine the way the service is used and delivered.

Alison Donnelly, Director at Fscom added that when it comes to embedded finance, it is all about what the customer wants and whether what’s currently on offer meets their needs. Alison used mobile phone insurance as an example. This is typically bought as part of a contract with a provider. The question, in this case, becomes whether the customer actually needs that insurance alongside their new phone, or whether they were encouraged to buy the insurance at the point of purchase. Andrea Notaro, Managing Director at Rothschild & Co agreed. Andrea stated that customers are looking for simplicity when it comes to financial services and that many providers are now delivering this instead of pushing for more complicated bespoke products.

Alex Mifsud, Co-founder and CEO of Weavr took this point around the demand for simplicity in financial services a step further, using Uber as an example. He said that the best products are ones we didn't know we needed. Uber made the experience they offered so seamless that it shifted the customer expectation of what getting from one place to another should look like. Embedded finance is about not only giving the customers what they want but showing them what else can be done.

Alison then moved on to talk about regulation. She emphasized the importance of making it clear to the consumer what parts of embedded finance are regulated and which are not. Crypto, for example, isn’t a regulated space but for consumers to navigate it comfortably this needs to be clearer. Tony agreed. He expressed that there needs to be a high level of trust between the consumer and the provider of a service. The trust gives the consumer confidence to go through with a purchase decision. He acknowledged that there needs to be some regulation in the embedded finance space, suggesting an ‘embedded finance guarantee’.

Ivo echoed the sentiments expressed by both Alison and Tony, expressing that the driving force behind the embedded finance industry is the consumer relationship with the provider.

Alex continued the discussion and shared his thoughts on bigger brands getting involved in embedded finance. He argued that the bigger brands are slightly behind the curve and it takes a digital disrupter to re-set the bar in order for established companies to follow with their take on the offering. BNPL is a good example of how bigger brands have jumped on the bandwagon to provide this service in order to enhance their offering for consumers and to stop competitors stealing their market. He finished by pointing out that we’re in the very early stages of this trend and bigger shifts were almost certain to take place.

Mike then moved on to the second question around regulatory and data sharing concerns.

Alison started us off with Buy Now Pay Later (BNPL). She explained that although it is not regulated at the moment, the regulator was already in consultation with the industry and an increase in regulation was almost certain to occur. BNPL has now been quite widely adopted and appropriate regulations are coming in place to protect the consumer and, in the longer term, this will help make BNPL a mainstream market product.

Tony voiced his concerns about the regulation in this space. Stating that the cost and demand for compliance will be high. He felt that consumers will ultimately be protected in a space that no one wants to operate in as it becomes too costly. This risks investors not wanting to put their money into an industry that has huge costs around becoming compliant, or entrepreneurs not waiting to start these services in the first place. Alison agreed with Tony’s concerns and stated that further regulation will be introduced to make it clearer where obligations start and end and how these can be managed in a commercially viable way. She agreed that becoming compliant needed to have added value.

Alex proposed that consumers have always been taught how to protect themselves against fraud by not sharing their passwords. But now they are asked to share their passwords with apps that aren’t their traditional bank, making them more vulnerable to scammers. He went on to suggest that regulators should help consumers navigate their way into a world where they won't always be using a traditional banking app.

Mike finished this section by questioning our speakers about the impact of Brexit. Alison said that firms should have both a UK and EU presence and this hasn’t changed since Brexit. However, the UK leaving the EU has brought up some complications for firms wanting to operate in both spaces. Brexit meant more regulations, paperwork and ultimately additional burdens when operating in the EU from the UK and vice versa.

Tony expects that we still invest in the EU appropriately, but also go our own way. He used the recent GDPR regulations as an example, could we possibly get rid of some? He put this question to other speakers.

Alex went back to using Uber as an example here. Stating that Uber didn’t get their taxi licence around the world straight away, even within the UK, but they still created a global standardised experience. He went on to say that businesses should think of Europe and the UK as separate entities and expect to make adaptations for that market. He agreed this is a barrier but is also an opportunity to use Europe as a stepping stone for a global business

Our next and final post will dive into the last question: “Embedded finance – a bubble or a paradigm shift?” Where you’ll find out what each of our speakers had to say on the future of embedded finance.