Embedded Finance and BaaS: The Future of Banking

Jim Marous:
Hello, and welcome to Banking Transformed, the top podcast in retail banking. I'm your host, Jim Marous, owner and CEO of the Digital Banking Report, and co-publisher of The Financial Brand.

Jim Marous:
Embedded finance integrates financial services, such as payments, lending, insurance with non-financial business infrastructure. This provides a seamless bridge between a brand, the consumer and the financial solution provider. The expansion of embedded finance solutions on the B2C side has skyrocketed while B2B solutions have seen much more tepid growth. Innovation of both forms of solutions is expected to continue to be robust in the foreseeable future.

Jim Marous:
We are fortunate to have Mike Kresse and Taira Hall from FIS Global on the Banking Transformed podcast. They discussed the current embedded banking and banking as a service solutions and how they can provide both opportunities and a threat in the future. So welcome to the show, Mike and Taira.

Jim Marous:
Consumers and businesses increasingly expect embedded banking experiences, yet many banks and credit unions still struggle with supporting this due to legacy technologies or lack of internal expertise, or maybe not even understanding the entire concept. As with any major trend, embedded finance is both a threat and an opportunity with the collaboration between traditional financial institutions and FinTech organizations being part of the solution.

Jim Marous:
So to start, can both of you provide a little bit of your individual perspective as to where embedded finance is today and why traditional finance institutions need to pay attention? Mike, why don't we start with you?

Mike Kresse:
Yeah, I really appreciate it. And thanks for welcoming me on the show and super happy to be here with you and with Taira.

Mike Kresse:
So first of all, embedded finance is showing up in our everyday lives and we're seeing it as consumers. And essentially what embedded finance is, for those that are very new to it is it's taking a financial service or experience that historically a financial institution would've offered and it's embedding it at the point of need for a consumer or a business in a non-financial service context, which often is a digital front end of another application. So as an example, just think about when you're riding with Uber, your payment is just embedded as part of your ride experience.

Mike Kresse:
So as we look at that marketplace in totality, I've always found that consumer experiences end up informing expectations of business experiences. And so now we're seeing a trend where starting with small businesses, as they're interacting in their various software packages or interacting in their various platforms where they're actually selling their goods and services, there's a great opportunity for financial institutions, banks, credit unions to offer opening deposit accounts, linking debit cards, getting merchant cash advances, accessing credit, all sorts of different value added services into that platform where that seller, that small business is already interacting.

Mike Kresse:
Similarly, there's a great opportunity for financial institutions that are offering business banking to their end customers, in particular small business customers, to transition from transactional banking, where you can pull your accounts and look at transaction views to offering value added services, whether those are full liquidity views of your position as a small business, or whether that's the ability to send an invoice or receive a payment or any of those other dynamics in play. Taira, what are some of your thoughts?

Taira Hall:
Yeah. And Mike, I would just add to that. And again, Jim, thanks to you and the team for having us on today. You think about the small business customer that Mike's talking about. I mean, that's the same customer who could be walking into a bank branch or it could be in a marketplace, like an Etsy to provide their goods and services or could be accessing their whole experience through a brand. They're walking into to a CVS or they're walking into a Target.

Taira Hall:
And so the vision with embedded finance, as Mike said around point of need is you want to be interacting and engaging with them in each of those channels. And I think coming from a context where I have a long history on the bank side and we serve a myriad of those banks today, we see this as a big opportunity for those banks to start to access those channels with very different economics and different ways that they distribute that end customer experience.

Taira Hall:
And around the experience piece, that's so important because we think a lot about how do you delight your customers. The small business customer today, we know 80% of small businesses are really concerned with cash flow, and particularly heightened by COVID. But we want to be helping them think about that financial services bundle. You want to be onboarded once in an ideal experience, right? You want to go through that onboarding and really say, I'm starting a business, what is that financial package that's going to give me security and the ability to grow as I think through where I want to take my business? And so how we can access that in the various channels we start to bring that to life in are critically important to us.

Jim Marous:
It's interesting because embedded finance and even banking as a service, which is kind of like I'll call the flip side of the same coin is interesting, because it's one of these things that's really all about the customer experience. What we're trying to do is build a way to embed financial services in such a way to make my process, my daily life easier without having to link things every time. You can give a number of examples. Taira, can you give some examples, both from a business perspective, but also from a financial institution perspective as to the kind of services we're talking about, but also maybe examples of organizations that have done these things?

Taira Hall:
Yeah. So Jim, they're a couple. I'll just spend some time building on Mike's point too, around Uber. I mean, Uber's such a great example because it's relatable to so many people. It's not just the payments, I think. I think where they really innovated was understanding that for gig workers, there's a whole set of financial services that can be provided to them.

Taira Hall:
And so they expanded the vision beyond just the seamlessness of the payment itself, but starting to get into issuing checking accounts without overdraft fees, without long credit checks around it. Then you start to move into how do I get into early wage access, instant payouts. And from there, then moving into new areas like value add services where you can start to offer insurance, right? So you have insurance to the driver, you have insurance to the rider and that's embedded in the ride. So that's a consumer experience, but really ties back to a gig worker, really a sole proprietor that's running and managing that business and the set of services that they want to consume.

Taira Hall:
On the other end, you can see players like NetSuite. They announced a partnership with HSBC back in 2021. They were really looking at, as the leading ERP providers, that persona of the business that's in there in their ERP that's struggling with bank. They don't know how to move money, or they might have different variations of how they move money today, but it wasn't seamless in terms of the reconciliation and the processes that they want to do with their ERP. Now they've created a platform with HSSBC, where they can do specifically cross border wallets and be able to support many of those cross border flows or file an expense report within NetSuite and be able to settle that.

Taira Hall:
On the banks' side, there're a myriad of examples. I mean, they're the banks that really started the FinTech journey, the Evolves, the Coastal Community banks, the Cross Rivers. But Mike and I have seen a lot of those banks now start to say, what does it really take to bring on the risk and the compliance and understanding the underwriting needs and how to more play in that ecosystem? And so those are the types of entities that we're starting to work with and where we're really helping them navigate that journey more broadly.

Jim Marous:
Well, it is interesting, Mike too, is this is really not something that only can be done by the biggest financial institutions. Is it? I mean, it's really something that an institution of any size can build what I'm going to call the 21st century version of merchant services, but also can partner with FinTechs to provide services within those FinTech operations as well. Correct?

Mike Kresse:
Yeah, that's 100% correct. And so we're seeing a couple of trends that are key. And first is we're watching as financial institutions are embracing technologies from providers, and FIS is such a provider, where we've enabled journeys that financial technology firms can consume from those financial institutions, like opening an account, linking a card, issuing credit. So the financial institution, regardless of size, can microservice API enable their underlying platforms through a provider like us, so that those FinTechs can actually consume that capability and bring those journeys out.

Mike Kresse:
Similarly, FinTechs are able to completely ideate directly with a provider like FIS, to be able to figure out what journeys they want to offer and we can bring our banking partners to bear. Either way, it's always a partnership. It's financial institutions partnering with financial technology companies to, at the end of the day, make the client experience more seamless and more easy.

Mike Kresse:
Taira talked to me in the very early days when we first were bringing this together about 18 months ago, about the set of five minute sprints that every small business has to do at the end of their core job of selling their goods and delivering their goods and services. They have to reconcile their GL, they have to go to their bank account, they have to check their liquidity flows, they have to send out invoices. Why can't all of that be consolidated into a single place? And the answer is, there's no reason why it can't, today it can be. And that's what we're seeing happen and we're seeing that get driven out across the marketplace today.

Jim Marous:
Well, it's interesting, Mike because we had a gentleman from Webster Bank on the show and they talked about how they're building not only a bank as a service platform, but also embedded banking platform. This is a $60 billion bank. This is not a huge bank, but they're doing some very innovative things to not only distribute their services to a much broader customer base, but do it at a scale and efficiently, more efficiently than they would ever have been able to do it outside of this environment.

Jim Marous:
So I'm going to go back a little bit on definition point, Mike, if you could provide a little point of clarity with regard to the differences, the nuances between embedded banking, banking as a service, and open banking.

Mike Kresse:
Yeah, absolutely. I'd love to touch on that. And then Taira, I'll kick it over to you for any more additional detail around it.

Mike Kresse:
So for us, first of all, we think of embedded finance is the macro category, which is embedding financial services at a place where financial services historically weren't offered, and we've talked about a number of examples around that. Banking as a service is really the ability for a financial institution to enable their capabilities within that embedded finance experience. So it's a bank taking their banking capabilities, service enabling them so that a FinTech can come in and consume them and actually then make those available to their end clients.

Mike Kresse:
And then when I think about open banking, that's really more about the free exchange of information and the portability of account data and client data from financial institution to financial institution. So as an example in Europe, you'll see that it's much easier for a consumer or a business to move from one bank to another with that open banking initiative and open banking platform, whereas in the US, that's still somewhat difficult, but we're certainly heading in that direction.

Mike Kresse:
Taira, anything you'd add or clarify around that?

Taira Hall:
I would just add to Mike's point. I think Jim, another thing is when we think about embedded finance, there's embedded banking, as you said, so there's a whole set of services that the bank's providing, right? Mike talked about the deposit account, the debit card, the issuance, the lending capabilities and the balance sheet, but there're also really attractive adjacencies that are very important to that small business customer. I talked a bit about insurance, payroll, accounting, that reconciliation to the general ledger, that's that five minutes sprint at the end of the day that the small business wants to get through as quickly as possible so they can focus on doing what's at their core.

Taira Hall:
So for us, what's been so exciting is we're talking to banks, similar to what you're talking about with Webster is that you're in an ecosystem where we're really trying to democratize more of these financial services for these entities. The magic is in how do you do that. How does a bank that has 10 billion in assets or 100 billion in assets really think about starting on this journey? And what does it be mean to be API enabled within that ecosystem as well?

Taira Hall:
So those are some of the things that we've spent a lot of time trying to think through and making sure that we're offering services across that broader set, but then also married to the data and the key areas that the bank is most versed in to really bring that in and make it a differentiated market for them.

Jim Marous:
So Taira, sticking with you for a second, what more market forces in the industry have driven this shift and why now? And did COVID play a role in this with regard to embedded banking, both in the B2B and the B2C categories?

Taira Hall:
Yeah, so Jim, absolutely. I mean that's a big one that Mike and myself and the team have looked at. COVID has obviously driven an enormous shift for how in particular small business customers are accessing new customer points. They're looking to grow revenue with their existing customers and it's forcing them online. So we've seen that shift in payments, on the acceptance side. We know also that it's creating variability in some cases in their income streams, in their cash flow. So it's been much more around how do you start to create that as an impetus for how do you save your business, or how do you grow your business and go through those inflection points where you're bringing that into the ecosystem.

Taira Hall:
The other big thing of course is the digitization of the customer experience. And so customers are demanding more and they want to be served differently. And we know that historically, as someone who came from the bank side, you didn't have necessarily all of the tools at your disposal to create those kind of unique experiences, if you were relying on a retail bank branch, or you were reliant on that face-to-face interaction. So now we're in an ecosystem where that's where the FinTechs and where the brands are really starting to differentiate themselves and why this becomes so compelling to bring it in.

Taira Hall:
And then I think the third area in terms of trends is that we are seeing customers that are looking for a one-stop-shop. If you're FinTech, you don't want to have to be integrating with multiple providers, right? That can be a one to two year path. You got to get a BIN sponsor set up. You have to think about how you want to do the card issuance fees. You want to come up with a lending platform that can offer various forms of lending.

Taira Hall:
We really see increasingly that you want to integrate once, you want to be able to leverage onboarding one time, and then have at your disposal, this broader breadth of financial services that Mike talked about originally within the definition of EF and start to create that out. So those are really some of the trends that are driving what we're seeing in market, and a lot of the development we're doing from a product side.

Jim Marous:
So Mike, from your perspective, before embedded banking and over the last 10 to 20 years, traditional financial service organizations, except for the biggest players have really lost the payments business. I mean, I remember when merchant business and payments business was the biggest at every organization, but traditional financial institutions in many ways have let that go or lost control of it. I mean, if I link a card to an Amazon account, then the traditional financial institution doesn't have access to the micro information that may talk about who I am, what do I buy, and these things. But doesn't embedded banking and banking as a service now possibly bring that payment service back into the limelight and allow financial institutions to access data that they lost in the experience previously?

Mike Kresse:
I, 100% agree with that statement. And I go a couple of different directions with it. First of all, I think that there's been a proliferation of providers of different financial service products. And as we watch this happen, both consumer users and small business users are really consuming many different platforms for many different things.

Mike Kresse:
I think just as Taira was talking about, a one-stop-shop that bank partners and FinTech partners are looking for, I think that consumers and small businesses are going to start rationalizing down the different areas that they go to manage accounts, to manage payments that are coming in, and to be able to manage their overall experience around money. So I think we're going to continue to see that.

Mike Kresse:
I also think that this is a great inflection point where, as we enter into a slightly more recessed environment, and we don't know what the future is currently going to hold in that way, we're going to watch some financial technology firms who might have been more upstart or newer start to dwindle on the capital they have access to and people are going to look back to where's the place where I know I can keep my money and it's going to be safe. Who can I trust? And ultimately in everyone's mind where they immediately go is to their financial institution. We see that happen time and time again.

Mike Kresse:
And especially as we're watching the cryptocurrency bubble little bit burst, and some of the things that have happened there out there in the marketplace, people are rethinking, hey, where do I really want to have all of these payment flows and dollar flows? I think if financial institutions, banks and credit unions can demonstrate nimbleness and the ability to bring those same embedded experiences, but still have it backed by that trust and that security and that FDIC of the banks and the credit unions, I think that really positions financial institutions well, to be able to capitalize on this inflection point.

Jim Marous:
So Taira, when we talk about the bringing together of traditional and FinTech organizations, to Mike's point, is the marketplace now really stoked up to make this even happen more? I mean, we see that the funding mechanisms that were there in the past for FinTech firms really aren't there as much as they were.

Jim Marous:
At the same time, traditional financial institutions really need a boost on their innovation capabilities, which FinTech organizations can combine. So is this maybe the perfect storm in a good sense where the coming together of both traditional banks and FinTech organizations can really come together and bring this embedded solution or banking as a service solution to the forefront?

Taira Hall:
Yeah, Jim, that's exactly the way we're seeing it. I mean, if you think Cornerstone Advisors used a term called flywheel effect around embedded finance, and that's very much what we're seeing. We're seeing that there's a symbiotic relationship that exists now. The brand and the security and the trust that comes from your bank provider, as Mike was talking about, that's powering these experiences. You aren't going to see FinTechs that really want to go out and procure a banking license. And we know what that path looks like, both in terms of expense and timeframe.

Taira Hall:
But I also think with the coming down of some of the valuations, you're seeing FinTechs that are saying, we need good partners that are nimble, we need partners that know this space that can bring knowledge of risk, compliance, regulations that we might not be versed in and help us think about how do we package that. It could be an asset, it could be different sets of services that they're offering, or it's sitting in the back end as they're onboarding new clients. And so there is a lot of opportunity for banks depending on where they feel comfortable in their risk profile.

Taira Hall:
The other big thing here is, as we talked about the democratization of many of these banks, these banks have tremendous expertise. I mean, Mike and I spend time with banks all day that are deep in crypto, or they might be deep in certain verticals, like property management or homeowners associations. You imagine you bring the power of that against a software platform that's serving property managers and helping them with their workflows and just managing the day to day operations of the property and collecting rent.

Taira Hall:
You start to marry the value of that data together when you do it seamlessly with the right API connections against it, it is extremely powerful because they're each bringing, one, the sense of credit underwriting and risk, and the other really bringing a knowledge of what the customer interaction is day in, day out. The combination of that is extremely, extremely powerful in markets. And so that's where I think you're going to see things really start to converge.

Jim Marous:
Well, to take that a step further, Taira, I think also, and you work with financial institutions from the front to the back, from the side to the side, I mean, almost throughout the organization as a core provider, but I think more than ever, this really puts a heightened focus on efficiencies, data transfer and democratization, speed and scale.

Jim Marous:
I mean, if you don't have that efficiency, the building a digital bank from the inside out, if you don't have those capabilities, you're really playing catch up in more ways than one, aren't you? Even, if you want to provide an embedded banking solution, you may not have the back office to support that, which means you really got to be future ready, don't you?

Taira Hall:
Yeah, exactly. And I think as we have been on this journey with many of those banks sitting in the regional and community bank, all the way up to the tier one space, that that is really what it comes down to. It's do we have an API platform that a developer can come into and start to access these sets of embedded banking services that we want to take to market? What is the breadth and scope of those services, because again, you don't want to be having to go to multiple providers depending? So do you have appetite in lending? Do you have appetite around deposits and KYC and KYB? And then the ease and simplicity of just even if you access those, getting those experiences set up. But then as you said, it's the servicing and it's the support and it's the back office.

Taira Hall:
And so we've seen models in market where either banks are willing to provide that themselves where they've staffed for it, and they've accounted for it because at the top of the house, they're really seeing this as a big new growth channel for them. And we're also seeing players and providers in markets that specialize in risk orchestration or in back office case management.

Taira Hall:
And so, it's so dynamic right now that depending on where you want to be, do you want to be a bank that dabbles in this and starts to get motions around it, or do you want to be one of those banks that's really committed to FinTech banking? Dependent on where you are on the spectrum, there are different ways that you can pull together a breadth of solutions to meet that need.

Jim Marous:
Mike, we haven't touched too much on it except in discussions around B2C, but you head up the B2B and money movement area of FIS. Why has B2B embedded solutions lag those that we see in the B2C markets?

Mike Kresse:
Yeah, and before I answer that question, I just want to tie off on one other point for the last question that Taira was answering. I think it's going to be really important for financial institutions to focus on how can they differentiate in their core offering? Who are they that differentiates them as a player? Where does, as Taira is referring to, that vertical expertise lie, or that risk management expertise lie? And then really focusing on that area of embedded finance.

Mike Kresse:
Now, Jim, to your question on B2B and why that's lagging. I've been in this industry for a long time and B2C disbursements also flow up under my remit within FIS. And what I would tell you is, first of all, consumer to consumer is where the innovation almost always starts. And then pretty soon consumers start expecting those same things from the business interactions they're having.

Mike Kresse:
And when those consumers are employees at that business interacting with other businesses, they're like, wait, if I can go out to dinner with Jim and we can split the check real time, we can pay each other, then shouldn't I as a business, be able to pay this vendor real time when the money is due for that good or service that they brought to my table?

Mike Kresse:
And so that consumerization I'm watching it happen in real time. So I know we're thinking, wow, this is kind of lagging, where are these experiences for businesses, but real time, we're already seeing, especially with small businesses where the consumerization generally starts first, we're starting to see a whole slew of embedded finance offerings coming into the market and ultimately that'll get to larger and larger businesses.

Mike Kresse:
So I'm super excited, because I think at the end of the day, the CFO of a Fortune 500 company or a Global 100 company, along with a sole proprietorship can walk into a single interface, see all of their liquidity, see their cash flows in, their cash flows out, understand if they're going to be out of balance, get easy access to credit, be able to manage any of their insurance, any of their payroll, all through this single interface, which is embedding all of the different embedded financial experiences and all the different value added services that they need to run their business.

Jim Marous:
So, Mike, same with you, there still is a gap exists. I mean, we talk about how great embedded banking and even banking as a service and open banking is, and yet a lot of traditional financial institutions, big and small, are really lagging the marketplace as far as what's needed and what's wanted to be done. What do you see as the biggest gap or the biggest hurdle that many financial institutions face? I mean, you probably sit down with them and they're shaking their head yes. They understand everything, they agree with everything, but they don't pull the trigger. What do you think stands in the way from watching and doing?

Mike Kresse:
So I think there's a couple of dynamics in play there. I think the first is do they have a technology stack? Have they made the investments? Are they working with a set of providers that actually make it possible for that financial institution to participate in embedded finance, banking as a service, embedded banking, open banking? Does their technology actually allow for it? And if not, the time to pivot actually was in the past, but the time to pivot is now, right? That decision has to be made because that is where the future of financial services is going, financial services delivered at the point of need, not necessarily through the bank's pane of glass or through the branch, but absolutely at the point of need. So that's dynamic number one is, do you have the technology?

Mike Kresse:
Dynamic number two is people are blending concepts, right? So as an example, people are blending the concept of open banking, which is the portability of account information and data and the democratization of that with embedded financial experiences in a FinTech application where a single dry cleaner franchise is able to get the bank account that they need and be able to accept payments and be able to order supplies and pay those bills and get cash advances. There's too much blending happening.

Mike Kresse:
What I would offer to the financial institutions listening is first figure out, do your systems make it happen? But then after that, what is your core expertise? What is the differentiation you bring to market, because I guarantee you there's a set of financial technologies companies out there that are interacting with your customers, providing them the technologies to run their businesses, that they would love to embed your banking services in.

Jim Marous:
That being said, what you're able to do now more than ever I believe is as opposed to converting your entire back office to a complete core conversion, you can compartmentalize this in such a way to address the segment needs that you may want to address. Taira brought up earlier dealing with certain segments and knowing your specialty.

Jim Marous:
Well, what's great about the marketplace today is you can find providers, including your own company that doesn't have to convert the entire back office. You can convert part of it, so you can catch the speed, you can still handle that first mover advantage. And Taira, from your perspective, is there still any first mover advantage available to embrace both embedded banking and banking as a service?

Taira Hall:
Yeah, Jim, I very much feel that there is. I mean, what we've seen is, again, coming back to the specialization these banks have such depth of expertise in the verticals and in the segments that they operate against. And so that's hard to replicate when you move to a different bank, even if it has global or a national footprint, they have different segments that they serve. And so for those banks that want to come in and say, as you said, this is where we know underwriting incredibly well, this is where we can read the market, this is where we have additional data sources that we leverage against it, and so we think we can credit decisions faster than a bank that doesn't have the step. Those are the vectors that you want to push on.

Taira Hall:
And just coming back to Mike's point on, as you're thinking about this from a bank journey perspective, we've seen a lot of success of even helping our bank start small. And by that, I mean we offer today at FIS, a big online banking platform that we call Digital One. Within that online banking platform, we've been bringing to bear for small business customers, not just their banking data and their banking transactional information and being able to do bill pay, but also being able to generate an invoice.

Taira Hall:
So I'm on the fly from my mobile device, I can generate an invoice and then I can accept a payment. So I'm out in the field, I'm a field services worker, I'm doing lawn care, I can accept a payment at that point in time. And then it reconciles seamlessly into my accounting solution.

Taira Hall:
We've seen a lot of banks say let's launch something that is more comprehensive to the customers we serve through the existing channels in which we serve them, but again, broaden the space where we historically play. So it's not just bank transaction information, it's really getting into what's the flow of that everyday experience for that end customer.

Taira Hall:
And then use that as a building block to say again, these are the verticals we specialize in, as you said, let's cordon off a portion of our back office or our risk and underwriting department and see where we are comfortable lending. And then this really just becomes a new avenue to distribute those experiences through different channel partners, but still biased or based on the motions that they've already been putting in market today.

Jim Marous:
Well, it's really about incremental innovation, and at speed. It gets frustrating at times when I talk to traditional banks, because I remember what it was like where we innovated maybe once a year or once every two years, and introduced something new, that big new thing, and it really wasn't all that new and it wasn't all that big. But the reality is now there's really a premium placed on the ability to innovate at speed and to be able to scale up quickly and realizing that you may not have that one big push, but it all works together.

Jim Marous:
And Mike, from your perspective when you look at that first mover advantage, number one, I'll ask you the same question, is it still there and why is it still there?

Mike Kresse:
Yeah, so the first mover advantage is absolutely still there. And one of the reasons why is because this space is still very much greenfield as we'd call it. At the end of the day, the technologies that have taken things like opening an account, linking a card, getting a cash advance, populating insurance offers, sending out an invoice, paying a bill, the ability to expose those into a development layer that allows you not only to do deep integration, if you want to, but also low code development, to be able to integrate that into a set of journeys, whether those are through the business banking and the digital banking experience of the FI or directly through the FinTech, that's newer technology, right?

Mike Kresse:
That technology has shown up on the scene over the last two to three years and the early adopter curve is kind of done now. And so it's a wide open space for financial institutions that are really available to do this from a technology standpoint, to jump in.

Mike Kresse:
And as Taira suggested, we really do have the opportunity to increment financial institutions along the way. We've set up the customer journeys and set up the capabilities in a way that you can start with something as simple as opening an account. You can then follow on with issuing a debit card. You can then follow on after you see the cash flows in and out with offering a line of credit or doing a merchant cash advance.

Mike Kresse:
And so we'd really loved to partner in any way with any of the financial institutions that are listening to this and FinTechs that are listening to this, and we've already done that with a number of our existing financial institutions and FinTech clients as well. And I've got to tell you, the results are really, really satisfying.

Mike Kresse:
The example that Taira was talking about, where we enabled through Digital One, this ability for a small business, while looking at their transactional banking to send an invoice, accept a payment, reconcile down to their general ledger, we've been watching as that gets enabled on a bank by bank basis. We've been watching purchasing volumes growing by 30%, 40%, 50% month over month because small businesses are hungry for this capability.

Jim Marous:
Okay, so I'm going to throw this out to both of you. You both go out in the field, you're presenting the potential of embedded banking, both on the B2B and a B2C perspective. You get the visual buy in, but nothing happens. How do you convince leadership at times of continued success to embrace a completely new banking solution that disrupts the status quo when nothing feels broken?

Mike Kresse:
So Jim, I'll start and then I'll hand it to you, Taira. And maybe this is a result of the role that I'm in, but I'm actually not finding myself in that position. The financial institutions that I'm in the field and that I'm meeting with are already there in terms of, we need to get on this train and we need to do this.

Mike Kresse:
And so whether it's the top tier, top five FIs in the country that are already doing it mostly internally in their own different ways and enabling their capabilities through FinTechs, whether it's some of these nimbler, really tech focused banks, as Taira was mentioning earlier, who got an early start in the game and really did a lot of the great pioneering that was happening, the banking leaders that I meet with, from a president of a $16 billion asset bank give or take here in the US a week ago to the largest of banks, to banks under a billion in assets, everybody is thinking about this.

Mike Kresse:
So I'm not having to convince anyone, it's more about how can we strategically come alongside and consult with them on the right way using their core expertise to come into the market. Taira?

Taira Hall:
Yeah. And Mike, that's exactly what I think we feel that we can add the most value around is that consultative approach that Mike was talking about, because it is a big piece of work, both whether you think about the development, the back office support, getting your risk and legal and compliance departments geared up to support this. It's a big amount of work.

Taira Hall:
So I think Jim, some of the things we fall into sometimes is the commitment's there at the top of the house, we want to get started, but this can't be a three year journey, because there's concern about we missed the market, we're not in there, right here, creating those experiences at point of need.

Taira Hall:
So that's where starting to think about the smaller things that are more bite size, that you can do as we were talking about within your digital banking experience or focusing, very hyper focused on a vertical and setting up a team of dedicated people. And it has to be cross functional, because everything we're talking about works in lockstep with product technology, legal compliance. Everyone has to have a seat at that table, but you set up a team.

Taira Hall:
We've seen banks, Mike and I have been talking to a number of banks, we're seeing the proliferation of embedded banking divisions, embedded payment divisions. These are being set up. They're sometimes being set up under the head of strategy, they're being set up under the head of innovation. So we've seen that as a really successful model because then you not only have the buy-in from the top, but you have the subject matter experts that are all coming together with a shared vision and a shared goal. And then they say, how do we build this?

Taira Hall:
To Mike's point, many of that, it can be partnership, it can be things that they bring to the table immediately and they start to see the proof points. You got to be able to start to see within 12 months, where am I making some meaningful progress that I can point back to. And then that builds the case to make the type of investments that we're talking about.

Taira Hall:
It's the modernization of the core. It's starting to harness the power of these APIs. It's setting up a whole new back office division. You have the proof points against it because you've set that structure up for success. So that's a lot of what we're seeing as well in terms of how the banks are organizing.

Jim Marous:
And maybe you answered this in your last answer, and I think Mike did a little bit earlier as well, but when it comes down to the meat and potatoes, doing it, where do organizations need to start? If I'm a small organization, I'm a under $10 billion organization and you're my core provider, how do I start and where do I start to make this happen?

Taira Hall:
Yeah. So I would start with, I hope if FIS is your core provider and we have that privilege, you come to us because those are exactly the kind of conversations that we want to be having with you. And from that type of conversation, it would really be deep diving into who are the segments you serve today and where do you do exceptionally well and what are the assets and the expertise that you have that you bring to the table to serve that.

Taira Hall:
And then where do you want to grow? What's the vision of where the bank wants to be, whether it's bringing in new channels for distribution, new sources of interest income, or non-interest income? How do you see that playing out? And then we will work with you to think about ways that we can provide that type of access. We can bring in partners, we can bring in recommendations on best of breed providers. We have all of the work we've been doing to modernize our own cores.

Taira Hall:
There's a lot of education around what's available out of the box for the companies that we serve today. And so we just want to make sure we're part of the dialogue and we're sitting at the table with you, if we're in that privileged position to be able to serve those banks. Mike, what would you add to that?

Jim Marous:
Or even more importantly, Mike, what would you say if I'm not an FIS customer? Because I know that the great thing about solution providers today is everybody is working together to get their financial institutions up to speed, even if it means knocking on the door of something that is already being done by somebody else, but maybe not as well.

Mike Kresse:
Yeah. I think that in any case, if we're talking about a financial institution, I think the financial institution needs to look in the market to find out who's talking about embedded finance, who has the expertise to move forward. Ultimately it's not really a core dependent solution, there's a lot of ways to be able to get into offering your services into FinTechs.

Mike Kresse:
And if I think about FIS as an example, because we have such a large merchant business where we have gone to market in partnership with financial institutions and in partnership with FinTechs to enable payment acceptance across more than a million merchants globally, we have those connections with those FinTechs and ISVs to slot you as a financial institution, into a relationship to provide embedded financial services.

Mike Kresse:
And so I would say call us, if not us, make sure you find an expert in the industry and start your journey because we are in this perfect moment where the technology solution has proved itself out. We've crossed the chasm of early adoption, and we're now ready to go out into the green field and really, really add a lot of value to the customers out there and generate a lot of interest based and non-interest income for your financial institution.

Jim Marous:
So finally, this is a quick round, it's only one question, but to both you, knowing that we don't want to make any predictions further out than three years, because we've already proven that that is a faulty assumption that we can do that, given all that's happened in the last three years, what is going to be the biggest thing that we see in the embedded finance marketplace in the next one to three years?

Taira Hall:
Mike, you want to go first?

Mike Kresse:
Sure. So I think what you're going to see is you're going to see the winners will have started to be significantly ahead and you'll see the trailers start to trail back further and further behind because I think the embedded financial journeys are really well understood. I think that 80% of the use cases or 50% at least of the use cases that will ultimately be embedded are probably already there or available to be embedded, and then I think you're going to see the additional use cases get embedded.

Mike Kresse:
But then the leaders of offering those services and empowering the entire ecosystem and bringing value to every constituent in the ecosystem are going to start to emerge out of the pack over the next three years. Taira, what are your thoughts?

Taira Hall:
And I would also add that I think you're going to see this movement to embedded finance platforms. So what I mean by that is it's going to be less about individual entities, but more around a platform, an ecosystem of orchestration that as you come in, whether it be via a particular persona or a particular channel or a particular need set, small businesses come in when they start a business, when they need cash flow, when their business starts to take off or they go global, there are all these moments of truth for a small business customer. And I think as you start to see that come in, you're going to have platforms across embedded finance that are going to harness best of breed providers.

Taira Hall:
And to Mike's point, we just want to make sure that we're empowering the entities that we serve and the partners that we work with to be part of that and to build that platform vision alongside us. So that's really where I think we'll see the market going in the next few years.

Jim Marous:
And I'm going to add one more as a combination of both yours, and that is that I think we'll see a lot of what we would consider to be relatively modernized organizations gain tremendous scale invisibly without building a branch and without adding a organic traditional customer, but instead building these relationships that really bring revenue in at massive amounts because of these relationships that have been built.

Jim Marous:
And it's interesting when you look back and seeing how we viewed FinTech just as short as three to four years ago and how Fintech's being viewed today as a partner, how small businesses are partners and how innovation is so important, and how solution providers like FIS can continually provide the needed expertise so that you don't have to add a ton of resources to get there.

Jim Marous:
Both of you, thank you so much for being on the show today. Very enlightening. The time went extraordinarily fast and I don't know if there's right now, a subject matter that's more global to the financial services than embedded finance. So thank you very much for being on the show.

Mike Kresse:
Thanks for having us.

Taira Hall:
Thank you.

Mike Kresse:
Appreciate it.

Taira Hall:
Thank you so much, Jim.

Jim Marous:
Thanks for listening to Banking Transformed, winner of three international awards for podcast excellence. If you enjoy what we're doing, please take 30 to 45 seconds to show some love in the form of a review. It helps us to continue to get great guests like today. Also, be sure to catch my recent articles in The Financial Brand and the research we're doing on the Digital Banking Report.

Jim Marous:
This has been a production of Evergreen Podcasts. A special thank you to our producer, Leah Haslage, audio engineer, Sean Rule-Hoffman, and video producer, Will Pritts. I'm your host, Jim Marous.

Jim Marous:
Until next time, remember embedded finance is a foundational part of the future of banking and not just a trend that credit unions and banks can simply ignore.