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The big picture of embedded finance and how it’s taking shape in Canada

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We’re going to go ahead and say it – 2023 is the year for embedded finance. This not-so-sneaky little trend has been gaining momentum not-so-quietly, and we’re quite enthusiastic about it. You’ve got brands from several sectors that you’d never associate with financial services, launching, well – you guessed it – financial services. 😮

But what is just so fascinating about this trend? Is it the actual financial offerings? Not really. Is it the way that they’re embedding these offerings? Yes, somewhat. Is it the reason why they’re embedding these products? Big yes.

Essentially, the integration of financial products into customer journeys on platforms, apps, and marketplaces that aren’t financially focused influences the way customers find, assess, and engage with these financial offerings. This is quite a transformation when you think of it. 

And this gives us a classical definition of embedded finance. 

Embedded finance primarily means offering seamless integration of financial services within non-financial platforms. It’s a game-changer, enabling these non-financial platforms to offer financial products directly to their customersretail consumers, small and medium businesses, as well as enterprise customers. Non-financial platforms across industries, such as e-commerce, airlines, ride-hailing, food delivery, etc., are hopping on the bandwagon, aiming to wow customers, and boost engagement and stickiness, while cutting costs and finding new ways to monetise their customer relationships.

Don’t just take our word for it go check out this hot trend in our previous embedded finance roundups for 2022 and the first quarter of 2023.

But how does a brand go about embedding these financial services? 

With this blog, we’re zooming into the embedded finance flurry in Canada, but first, let’s take a look at the big picture, shall we?

Embedded finance on the global stage

On the global stage, embedded finance comes in various shapes and forms:

    • In some regions, it’s the mighty super-apps seamlessly orchestrating a variety of cross-industry offerings for customers, including financial products and services. 
    • In others, it might be a brand teaming up with embedded finance enablers such as banking-as-a-service providers and licensed banks. 
    • It could even be a brand that has a licensed financial subsidiary to fuel its financial products.

What differentiates the embedded finance landscape across regions are three factors:

    1. Regulations around bank-nonbank partnerships, regulatory classification and license requirements for new age financial products such as revenue-based finance, buy now pay later, earned wage access, etc., data sharing arrangements among financial and non-financial entities, and licensing options available for new firms looking to launch financial products.
    2. Consumer behavior around financial and non-financial products – comfort and trust with brands, personal or cultural preferences.
    3. Industry landscape like incumbent bank concentration, presence of fintech startups, and the emergence of new business models and operating models through intermediaries.
WhiteSight-Global-Spectrum-of-Business-Models-in-Embedded-Finance

Regulatory reset in the US market
Due to the fragmented nature of financial regulators in North America (especially the US), compared to Europe and Asia Pacific, there is a variation in the types of embedded finance business models observed. Recent events in the United States and select countries in the European Union have brought banking-as-a-service business models and, as an extension, embedded finance under severe regulatory scrutiny. This scrutiny involves guidance on 3rd party risk management, cease and desist orders, revoking licenses, imposing restrictions on customer acquisition, restricting promotional campaigns, etc., on the embedded finance value chain participants. This paints a cautious background for embedded finance enablers in the region. Apple’s partnership with Goldman Sachs, despite having several contentious issues and concerns, has worked wonders enabling Apple to rake in over $10B in deposits within 3 months of the launch of its high-yield savings account. We’ve taken a good, hard look at Apple’s game plan in our Embedded Finance report.

Market and use-case expansion in the UK and Europe
The growing presence of numerous embedded finance enablers in Europe and the UK makes it a rich soil for embedded finance to flourish. Several embedded finance enablers in the region, such as Solaris, Adyen, Banking Circle, Clearbank, LHV, Aion Bank, etc., hold full banking licenses in the region. Several incumbent banks such as SEB, Natwest, Deutsche Bank, and HSBC have also thrown their hats in the embedded finance ring. Regulators in the region are also busy scrutinizing the operating models of embedded finance enablers. They’ve even started cracking down with some actions, like putting limits on getting new customers and yanking some licenses. But the market is still very much in growth-stage, and there is a pent-up demand for embedded finance propositions among both consumers and small businesses. There are also a variety of embedded finance use cases emerging for small-medium businesses and merchants that are powered by Metro in Germany and eBay in the UK. Metro offers a suite of embedded banking solutions for small businesses by partnering with Vodeno and Aion Bank. eBay’s giving sellers access to revenue-based financing on its platform as part of eBay’s programme “Capital for eBay Sellers”. Their embedded lending partner, YouLend, is making it happen by offering technology to assess and approve customers. YouLend is also bringing in financing through institutional investors like Allianz. 

Spectacular Superapps in Asia Pacific 
In the Asia Pacific, especially in China, Korea, and Southeast Asia, spectacular super-apps are revolutionizing embedded finance. Power players like Grab, GoTo, Webank, Ant Financial, and Kakao are leading the charge. Traditional banks are joining in, too, with Standard Chartered’s nexus enabling Bukalapak to launch BukaTabungan – a digital banking service that combines the reach of Bukalapak’s all-commerce platform and the technology of Standard Chartered’s Banking-as-a-Service solution to drive financial inclusion in Indonesia. In India, Amazon has teamed up with ICICI Bank for the launch of a co-branded credit card which offers great welcome offers and rewards to customers from the Amazon ecosystem. In Asia Pacific, this lively blend of tech and finance is offering an awesome way to boost financial inclusion on a large scale, and it’s doing it in a way that’s sustainable for the service providers.

In Canada and the US, the unfolding narrative of embedded finance differs due to distinct market circumstances. Time to double-click!

A deep dive into embedded finance trends in North America

There are two main approaches: the vertically integrated model and the modular specialist assembly model.

    • The vertically integrated model, or the ‘best of suite’ approach, is akin to a one-stop shop. Here, the brand takes charge of procuring and assembling all the elements needed to launch a financial product. This includes obtaining banking licenses, manufacturing financial products, and managing technology capabilities for identity, fraud, and ongoing compliance. It’s a comprehensive approach, with the brand overseeing the majority of the process of manufacturing and distributing financial products.
    • The modular specialist assembly model, or the ‘best of breed’ approach, involves specialists taking care of individual pieces of the banking stack. Banks act as sponsors, tech companies handle integration with the bank’s back-office tech stack, and manage identity, fraud, and compliance capabilities. The brand focuses on the customer journey, identifying where financial products can enhance experience and drive transactions.

Interestingly, these two models have been adopted differently in the two countries in North America. In the US, the ‘best of breed’ approach has been the go-to model, with specialist providers such as sponsor banks and BaaS middleware platforms taking care of individual elements of the banking stack. 

Meanwhile, Canada has traditionally favored the vertically integrated model, with brands launching financial subsidiaries and acquiring banking licenses to launch captive financial services to their customers. However, this is changing as more specialist providers enter the market with ‘best of breed’ solutions, signalling a pivotal moment for the embedded finance landscape in Canada.

The US has well over 50 BaaS providers while Canada basically has 3. The lack of enablers has created a market where all challenger banks are either owned by big banks or run by massive retailers.

Tal Schwartz, Author Canadian Fintech Newsletter

While in its early stages, the Canadian embedded finance landscape is interesting to analyze given the country’s unique factors – a developed country with high banking and credit card penetration, provincial and federal financial regulators, and a strong retail economy. Embedded finance use cases are emerging across various retail segments – supermarket and lifestyle chains being front and center.

Credit cards with comprehensive rewards and loyalty programs are the most prominent use case in the market. Canada, which has nearly 83% of credit card adoption, makes for a fruitful market for embedded credit from nonbanks. Shopify and Square are also enabling merchant cash advances to merchants on their platforms, respectively. Ride-hailing platforms such as Uber and Lyft are enabling instant cash-out options and embedded insurance offerings for drivers. 

Business model nuances in Canada

Looking under the hood, embedded finance propositions in Canada are powered mainly by various financial institutions directly. Incumbent brands like Loblaws, Canadian Tire, and Rogers have secured licenses for financial arms within their respective groups, giving them several cost advantages when embedding financial products in their ecosystem. A new addition to the list is the famous donut and coffee shop chain Tim Hortons, which through its not-yet-licensed financial subsidiary Tim’s Financial and in partnership with Neo Financial, has launched a credit card program for its loyal customers. Watch out, Starbucks 👀

The emergence of banking-as-a-service providers is picking up pace in Canada. Neo Financial, one of the country’s leading neobanks, has been increasing focus on its B2B offering, which powers brands like Hudson’s Bay, Tim Hortons and more. Brim Financial is another such company that provides end-to-end white-labelled credit card programs to banks, fintechs and brands.

Recently, US-based Synctera expanded to Canada in strategic partnership with the National Bank of Canada (NBC) and other sponsor bank partners. For NBC, which had previously acquired Finaptic (one of Canada’s first BaaS providers), this move signifies definite interest in scaling through embedded finance. Another top 10 Canadian bank which is exploring the embedded finance opportunity is Equitable Bank which acquired Concentra Bank in 2022. Concentra Bank has operated as a popular BaaS platform powering numerous credit unions and fintechs across Canada. Similar to NBC, you also have sponsor banks such as Peoples Trust, ATB Financial, DC Bank, and more, which are active enablers in various fintech and embedded finance value chains in the market.

Tier 2 banks have the largest incentive to compete in the BaaS market. Peoples and DC Bank are by far the leading enabler banks, but larger Tier 2s like EQ and NBC are extremely well positioned to take over market share, particularly because the Big 5 have no interest in participating.

Tal Schwartz, Author Canadian Fintech Newsletter

The road ahead

This seems to be just the start of embedded finance in Canada, with a long road ahead for interesting developments. With the recent trends of consolidation and increasing regulatory oversight in the global markets, we would expect well-thought-out strategies and collaborations that cater to the Canadian market demands. The much-awaited Open Banking rollout and Real-time Rails launch are expected to give a big boost to embedded finance strategies in Canada. What this also means is a shift in the long-held stronghold of the big banks in Canada as more mid-sized banks and retail brands warm up to the possibilities of embedded finance. And, you bet we’ll be watching. 😉

Authors

Co-founder & COO | afshan@whitesight.net

Afshan, the co-founder and COO at WhiteSight, loves studying business models and understanding how things work. When she's not busy working, you can catch her experimenting with new recipes and flavours in her kitchen.

Founder & CEO | sanjeev@whitesight.net

Sanjeev is a fintech aficionado who loves to explore the depths of the industry as much as he loves to explore the depths of the ocean in his scuba gear. He is the founder and CEO at WhiteSight, bringing a wealth of research and advisory experience to the fintech world.

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