Embedded finance is a natural progression from the FinTech revolution we have already seen in APAC. After making financial services easier to access and significantly cheaper, the value of embedding them into third party channels and within existing user journeys is being confirmed.
Embedded wealth refers to the offering of a regulated wealth product by a non-wealth entity and, although the term ‘embedded wealth’ isn’t yet widely used, it’s potential in the region comes as no surprise.
“Super apps” like Grab and DiskarTech in the Philippines and Tokopedia, Gojek and Bukalapak in Indonesia are already key examples of platforms with millions of users that have embedded financial services from other providers into their apps. Emerging digital banks such as Tonik, Bank Jago, Volt and Mox have also stated an ambition to embed 3rd party products –insurance, mortgages, wealth and otherwise– into their future offerings. Although the average monthly amounts per customer might still be modest, in APAC we’re talking about billions of potential users.
The inflection points driving embedded finance and embedded wealth
I recently co-wrote a paper (Embedded wealth in APAC: How to access a USD32 billion opportunity), where we explored the full market need and opportunity embedded wealth presents. I realised that four key inflection points are driving the embedded wealth market in APAC.
- Customers: APAC is now home to a rapidly growing mass-affluent market, characterised by higher levels of disposable income. Historically this segment hasn’t actively sought out or had easy access to wealth products. Nowadays digital wealth services are increasingly being offered using mobile apps. And since the pandemic, a major build-up of cash and near-cash assets has attracted new players with attractive digital wealth offers.
- Costs: As margins are squeezed due to increasing competition (as highlighted by declining industry return on assets and profits), cost growth is outpacing revenue growth for the wealth management industry. This is further exacerbated by legacy IT system maintenance costs, with additional compliance and cybersecurity requirements. To remain competitive, banks have to reduce fees. This can only be feasibly sustained if clients are managed more efficiently, with decreasing marginal costs. Banks are therefore partnering with digital platform vendors to launch high-margin financial services to broaden their customer base, increase profitability, and embedding their wealth services into new distribution channels.
- Compliance: A more open financial services industry stimulates competition, increases financial inclusion and directly impacts economic growth. Hence regulators across APAC have already issued digital banking licenses, or are in the process of doing so. These new regulations create a huge opportunity for banks to offer a wider range of regulated products to new market players: neo/challenger banks, super apps, e-commerce platforms, etc. This is achieved because an agreed framework lets customers share access to their financial data with third parties via various platforms utilising APIs. These platforms are using personalised services to provide customers with an “Uber-like” banking experience through an embedded finance model.
- Competition: Off the back of the fast-growing mass affluent market, adoption of digital platforms, and market liberalisation pushed by governments across APAC, new innovative digital banking players have emerged over the last years. With new market entrants jFoin an increasingly competitive landscape, incumbents have no choice but to rapidly digitise their offerings and channels to compete. The pandemic has forced customers to turn to online channels, with mobile becoming the dominant channel.
Embedded wealth: the next phase of FinTech disruption
From a digital wealth management perspective, ‘embedded wealth’ services can be offered through a wide range of platforms. Below I have identified six major use cases for embedded wealth that will have significant market potential:
- Retail and challenger banks: increase customer lifetime value through building recurring income by embedding saving and investment services.
- Health insurance providers: leverage the unique insights from your customers lifestyles to help them achieve financial independence.
- Asset managers: embed wealth services into your own or 3rd party platforms and channels to complement and expand the distribution of your investment products.
- Financial health platforms: help customers and/or employees along the journey from financial planning to investing – all from a single, transparent application.
- Pension and life insurance providers: remove retirement planning silos and combine insurance, pension and investment into a single application, serving accumulation and decumulation life cycles.
- Super apps and consumer platforms: leverage customer loyalty and powerful data insights to add financial services to your platform and channels, opening new income streams.
Regardless of the use case, the embedded wealth management market is huge and largely untapped – a unique opportunity for fast movers in APAC to make outsized returns. When facilitated by an established ecosystem and deployed in the cloud, embedded wealth it is quicker, easier and cheaper to offer to an existing customer base. Strategy consultancy aperture estimates the embedded wealth opportunity to be worth USD32 billion in APAC alone.
At additiv, we believe that the embedded wealth phenomena in APAC reflects how future digital wealth services will be consumed. With a market-potential of billions of young, digital-savvy consumers who are using their mobile phones for everyday digital financial services, including digital wealth, financial institutions in APAC should not only take note, they should take action.