What the banking industry can learn from Big Steel

There’s an old story featured in Jim Collins’ popular book Good to Great. It’s about the US steel industry. Technology advanced so that relatively small steel mills could start making a profit, provided they made things like steel reinforcement for concrete. The big steel mills thought: let them have that part of the market; it’s not worth much anyway. Then the small mills started making nails. Again, the big steel mills graciously conceded the nail business to the small mills. You can see where this is going, right? There are no big steel mills anymore. The whole industry is now small steel mills.

A research report came across my desk recently that reminded me of that story. It’s about “embedded finance.” And I wondered if the banking industry sees itself as the big steel mills, graciously withdrawing from low-value, low-profit sectors of the market until all that’s left in the banking industry is fintechs; or if it’s different for banking because embedded finance is going after some of the highest margin parts of the business, which will be defended more aggressively than the big steel mills defended their nails business. Without a doubt, it begs the question: what will be left for banks to offer when the dust has settled, and how profitable will those services be?

The research paper points out that if you do an internet search for “home ownership” you’ll find plenty of pictures of happy couples moving into sun-dappled houses, often with glasses of champagne in hand. But there’s no equivalent image of 20 years of mortgage repayments. The hashtag #newhome is much more compelling than #20yearsofdebt.

Buying a house is a “life moment.” And the key idea behind embedded finance is that it’s trying to take the friction out of making these moments happen. The idea is that the finance part is “embedded” into the life moment so the act of paying is as frictionless as possible.

My colleagues in Accenture’s insurance practice talk about “The Age of Outcomes,” where the insight is that people don’t want car insurance payments, they want worry-free motoring. They don’t want health insurance, they want longer, better lives. They don’t want retirement annuities, they want a prosperous, care-free retirement. It’s the outcome they’re buying, not the product.

This is the same kind of thinking that is driving embedded finance. It’s the new name for banks trying to take the pain out of payment. And according to our research, it will be worth $230 billion by 2025.

So how is this different from airlines co-branding credit cards, or money market counters in your nearest chain supermarket, or getting car finance over the phone at the dealership instead of going into a bank? All of those are embedded finance, surely?

Yes they are, and embedded finance is more than that. When you use a ride-hailing service, the payment is essentially invisible. It’s embedded.

Another platform, Shopify, makes it easy for a small business to set up a shop. So easy, that hundreds of thousands of people use it to make sales. The downside of using independent shops is that you have to enter your payment information every time. Why not deal with a large online retailer which has everything anyway, and has your payment information already.

Shopify decided to save the customers’ payment information for use in all the shops across its platform. They surveyed the top 10,000 merchants and found a 1,7x increase in order-to-sales conversions and nearly double the mobile transactions.

What is driving the board-level discussions is the move of banking customers away from banks and into the appworld of their phones. People are using more apps than before the start of Covid to manage their money. Budgeting apps, tracking apps for their spending, apps that allow them a consolidated view of their balances across accounts at different banks — all this presents an opportunity for banks.

Even restaurant loyalty apps are in the banks’ sights: in the US, (according to our research), nearly half of people who regularly use restaurant loyalty apps are Starbucks customers. That’s a crazy statistic. It represents a huge payday for Starbucks, and another big payday for banks that can embed themselves into the customers’ experience.

I will be looking more at this interesting idea in future blogs. Please follow me here or on LinkedIn if you’re interested. You can find the research report here: Embedded Finance: Financial services whenever and wherever customers need them.