Embedded Finance made in Berlin: Pioneering the Evolution of Financial Services
The Hype is Real – But Are the Opportunities?
In a world where convenience is king, embedded finance is reshaping industries by bringing financial services directly into the apps and websites we use daily. Whether it's checking out with a Buy Now, Pay Later option or accessing investment products within your favorite platform, the experience of consuming financial services is evolving.
A prominent example is Starbucks, which has effectively utilized embedded finance through its Starbucks Card and mobile app. Launched in 2001 and 2009 respectively, these tools allowed Starbucks to create a loyalty and rewards system that has now become a major component of its customer engagement strategy. Today, customers store over $1.6 billion on their Starbucks wallets, blurring the line between traditional financial services and brand loyalty programs.
Generally speaking, the benefits of embedded finance include increased customer satisfaction through more convenient and faster services, improved customer engagement, and new revenue streams for companies that have not formerly been involved in finance. For consumers, embedded finance often means less paperwork, faster service, and a more personalized experience.
Embedded finance is revolutionizing how customers interact with financial services and vice versa. It has the potential to fundamentally reshape the financial services industry landscape by blurring the lines between different sectors of the economy.
How Embedded Finance Differs from Conventional Fintech
Speaking of blurring the lines, embedded finance has become one of the buzzwords in the fintech world recently. As everyone and everything seems to want to be part of embedded finance these days, I reached out to someone who must know: Lars Markull. Lars, based in Berlin, works as an independent advisor on embedded finance and publishes his own newsletter on the topic at Embedded Finance Review. When asked what embedded finance means to him, he answers: "When brands seamlessly integrate financial products to increase customer value, we refer to this as embedded finance. By 'brands,' I mean non-financial companies, not fintechs or banks. By 'seamlessly integrate,' I’m not talking about separate credit cards or add-ons, but truly integrating financial services into the customer journey. The creation of new financial products – not open banking or open finance – should always start with customer value as the key focus."
Embedded finance and fintech are indeed related but distinct concepts. Fintech broadly refers to the use of technology to enhance or disrupt established financial services, typically focusing on improving efficiency, accessibility, and user experience. Fintech companies are usually financial businesses at their core, aiming to revolutionize banking, lending, payments, or other financial sectors. In contrast, embedded finance involves non-financial companies integrating financial services into their offerings to add value to their core products, with the financial aspect being secondary.
"Embedded finance means that the brand, offering the financial product, must have its core value proposition in the non-fintech space. A great example is Mews, which provides software for hotels. Over 50% of their revenue now comes from financial services, but none of their customers come to them for financial services – they come for the regular SaaS solution." explains Lars.
To determine whether a financial product truly falls under embedded finance, it is essential to consider why the customer initially engaged with the brand. As Lars Markull suggests, if the primary reason for choosing the brand was to use a financial product, then it is likely not embedded finance. This distinction is crucial to identify genuine examples where finance is embedded as a supportive feature rather than the main product.
Embedded Finance Providers and Their Categories
Embedded finance providers are companies that offer the technology and infrastructure needed to integrate financial services into non-financial products or platforms. Embedded finance can be divided into five key categories, each serving a distinct purpose within the embedded financial ecosystem:
1. Payments: This category focuses on integrating payment solutions directly into a platform, allowing customers to make transactions without leaving the environment. Below are some prominent examples of service providers from Berlin's embedded finance ecosystem:
- Pliant: Offers a B2B credit card platform that helps businesses manage payments, expenses, and related services. Pliant can be embedded in offerings from other fintech partners.
- Mondu: A provider of Buy Now, Pay Later (BNPL) solutions tailored for B2B. Mondu's services are embedded into other businesses' checkout processes.
- Iota: Its cryptocurrency can be used for machine-to-machine payments, which is a future form of embedded finance.
2. Banking-as-a-Service: Providers offer the infrastructure for companies to integrate banking functionalities, such as account creation, debit cards, and money transfers, without needing a full banking license. Here are two notable examples:
- Solarisbank: Provides a modular banking platform enabling companies to offer their own financial products. Solarisbank holds a full banking license.
- Mambu: Provides a cloud-native banking platform that enables financial institutions to offer banking services. Mambu does not hold a full banking license but supports financial institutions with core banking technology.
3. Lending: This category involves embedding credit options within a service, enabling consumers or businesses to access loans directly through the platform they are using. Here are three providers:
- Banxware: Offers embedded lending solutions, enabling platforms to provide financial services to their business clients.
- Topi: Offers embedded financing services, allowing businesses to access equipment financing through an integrated experience.
- Finiata: Provides working capital solutions and flexible credit options tailored for small businesses and freelancers.
4. Investments: This category enables platforms to offer investment products and wealth management solutions, such as savings accounts, investment portfolios, or retirement planning. Non-financial platforms can thereby enrich their customer offerings with financial growth options.
- Upvest: Provides an investment API that enables other platforms to offer investment products such as securities. Upvest focuses on enabling embedded wealth solutions for financial and non-financial platforms.
- lemon.markets: Offers an API for integrating trading and investment services into third-party applications, allowing non-financial platforms to offer stock trading to their users.
5. Insurance: Embedded insurance integrates insurance products directly into other services, making it possible for customers to easily opt-in for coverage when purchasing goods or services. Travel insurance options offered during the booking process are a well known example of this. Here are two providers from Berlin:
- Simplesurance: Offers an API that allows e-commerce platforms to embed product insurance at the point of sale, providing customers with easy access to insurance coverage for their purchases.
- Element: Provides digital insurance solutions. They offer an API-first insurance platform that allows partners to embed various types of insurance products directly into their digital services.
These categories collectively illustrate how embedded finance is reshaping traditional financial services by making them more accessible and seamlessly integrated into non-financial platforms.
Berlin's Role in Shaping the Future of Embedded Finance
Berlin, as the premier fintech hub in Germany, has naturally evolved into a hub for embedded finance. While the pros and cons of Berlin as a location for financial technology have already been discussed in depth, for example, here and here , embedded finance providers need more than just the usual ecosystem to thrive. It is all about tech companies, explains Lars Markull: "Berlin is, in my opinion, the perfect location in Germany for embedded finance. There is a strong concentration of fintechs here – not all of them focus on embedded finance, but companies like N26 and Trade Republic contribute to the ecosystem. There are also many SaaS and technology companies here, which is exactly what you need. When employees are in the same place, attending the same events, there is more exchange of ideas, and employees often switch companies and share knowledge, which has a significant impact.".
This is not only true for Berlin's homegrown fintech startups but also for all embedded finance providers operating subsidiaries in the city. Examples include Swan, Pleo, Stripe, or Adyen, which have teams operating in Berlin.
"Berlin continues to be the gateway to Germany for many non-Germans. Many tech companies choose Berlin as their first location when entering the German market, which certainly plays a significant role in its ecosystem." adds Lars.
Impact of Embedded Finance on Financial Services Industry
German incumbents – established banks – are struggling to seize the opportunities that embedded finance offers. This follows a pattern of having missed many of the chances that arose with the rise of fintech over the past decade, driven by technological innovations. Lars Markull notes: "Decades ago, banks could only reach customers through branches, then came the internet, then mobile, and many other new channels. Now, embedded finance is yet another channel for banks to distribute their products. The challenge is that, to succeed in embedded finance or any partnership, you need excellent technology and compliance – compliance that truly understands the specifics of this space. And that’s really difficult for banks. This is why many banks struggle – not just with embedded finance, but with fintech in general."
Interestingly, what Lars doesn’t mention is the diminishing role of a bank’s brand in the world of embedded finance. For consumers who use a Buy Now, Pay Later option to purchase a new pair of sneakers, the funding bank is of little concern – they care about the sneaker brand. Banking services are becoming commoditized. While a bank's brand still matters, it is mainly relevant to the non-financial brands selecting the right provider. Consumers, as the customers of these non-financial brands, are largely indifferent.
Startups have a clear advantage over incumbents. When entering into embedded finance, incumbents must not only recognize that their investment in brand building is now essentially a sunk cost, but they must also build up the necessary tech and compliance capabilities.
Embedded finance promises vast new market opportunities, yet many incumbents remain hesitant to embrace it. This reluctance could stem from the fact that embedded finance feels too far removed from their corporate DNA, at least from a cultural perspective. As Lars puts it: "A German bank definitely has an advantage, although I think this advantage will diminish over time. If you manage to establish an embedded finance solution with a strong bank brand – like SEB or NatWest – it will help, but consumers adapt quickly, and timing is crucial." In other words, it's now or never for incumbents to join the embedded finance wave.
For Berlin, this is good news. The city's strength as a tech and fintech hub can be fully leveraged. In contrast, Frankfurt’s strength as home to the headquarters of many banks and financial institutions – making it Germany’s financial capital – has traditionally been a weakness for Berlin. However, as we’ve just outlined, incumbents are not essential to building successful embedded finance businesses.
Embedded Finance: A New Market or Just Hype?
Where is embedded finance in the hype cycle? Lars responded to the question with this: "I sometimes compare embedded finance to blockchain; when blockchain was hyped, everyone claimed they were working on it, even if it wasn’t true, just to attract more investor attention. I feel the same is happening now with embedded finance."
So, will embedded finance eat all incumbents for breakfast, as it was feared for fintechs to do so some 10 years ago? Not very likely. There are many good reasons you want to consume your financial services directly from the provider. But there are also many cases where you don’t want to. When convenience is high, the non-financial brand is strong, and it provides value, embedded finance becomes compelling.
"Just because you can embed something doesn't mean you should," warns Lars. There needs to be value created for all three parties at the end of the day: consumer, non-financial brand, and embedded finance providers.
As we have seen, a fully new market arises here, parallel to the existing financial service industry. Be there or be square. Berlin might just be the place to be in this instance.
Text: Clas Beese, Freelance Journalist and Content Creator for FinTech, linkedin.com/in/clasbeese
Header image: © Adobe Stock - peopleimages.com
