The Strategic Power of Embedded Finance

Jim Marous (00:11):

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.

(00:21)
I'm coming to you today from Money20/20 in Amsterdam, and we have a great guest today to talk about embedded finance. Money20/20 offers an amazing view of the future of banking and FinTech, with hundreds of organizations that serve the banking industry, and literally thousands of people trying to absorb as much as they can at the event. From the onset of the event this week, embedded finance has been one of the major themes, as it was in the USA last year. Embedded finance offers financial and non-financial organizations the ability to provide frictionless experiences for a consumer that helps them along their daily life. More than ever, financial institutions need a strategy to unlock this potential and be part of the future of banking.

(01:12)
I'm excited today to have Christoffer Malmer, the Head of SEB Embedded, and Pal Krohdahl, the CTO for IBM Core Banking and Payments, on the Banking pPatform podcast, we're going to be discussing how the Swedish banking giant SEB reorganizes tech and innovation platform to become a leader in the embedded finance area. Customers increasingly expect financial services and products to be an integrated and seamless part of their everyday lives. Non-financial brands are meeting customers' evolving expectations by offering more and more embedded financial services as part of their overall value proposition. More than ever, bank and financial services providers must build a strategy around embedded finance to become future ready and to achieve continued growth. Welcome to the show, Christoffer and Pal.

Christoffer Malmer (02:01):

Thank you.

Jim Marous (02:02):

Before we begin, can you share a little bit about who you are and what your background is, but also where you're going right now?

Christoffer Malmer (02:08):

Thank you. Thanks for having me. Great to be on the show. My name is Chris Malmer, and my background is banker. I've been studying finance, I worked for Goldman Sachs many years in London. Worked for a hedge fund and then worked with SEB in different positions. And now I am effectively running business we call SEB Embedded, which is all about engineering and technologies, which is fascinating.

(02:29)
But this is really the intersection where banking meets technology. And in your introduction you talk about embedded finance, and in my mind that is really at the crossroad between technology and banking. So that's what I'm super focused on right now.

Jim Marous (02:41):

Great. And Pal?

Pal Krogdahl (02:44):

Yeah, so I'm Pal Krogdahl. Loved your introduction there. I sit within IBM's global center of excellence for banking, focused on our ISV ecosystem of partners, specifically in payments and core banking. On top of that, I'm also, as you know, the co-host of the podcast Fintech Daydreaming.

Jim Marous (03:04):

Yes. Which I've been on.

Pal Krogdahl (03:06):

You have been ...

Christoffer Malmer (03:07):

I have as well.

Pal Krogdahl (03:07):

Yeah, both of you have actually.

Christoffer Malmer (03:08):

[inaudible 00:03:10].

Pal Krogdahl (03:09):

Yeah, there we go. And I second what both of you have said. I think embedded finance is on the cusp of really exploding. I think we've only just started to see the start of this. Yes, we started with PSD2, open banking, screen scraping before that, and everything else.

(03:28)
As we're starting to realize that customers really want to do unconscious banking, customers want to have the part of their life that has to do with money and finances being embedded and part of their journey. It's fundamental for banks to be able to go out and meet the customers where they are, rather than expecting the customers to come to them. So absolutely excited to be talking about this.

Jim Marous (03:54):

Christoffer, at SEB, you, I believe, were before this the head of their SEBx, which was really, I'm going to call it innovation, but it was really a digital bank. Correct? Which provided the foundation for these new innovative ideas. And you've made it a separate part of the organization. Can you talk a little bit about the evolution of SEB, the bank, the SEBx, which was more of a digital bank, and now to a brand new unit that you're in charge of called SEB Embedded? How did that transition and how did that process evolve?

Christoffer Malmer (04:24):

Yeah, thank you, Jim. Great question. This really started when we sat in the group executive committee and we talked about all the things that we wanted to do. We want to engage with FinTech, we want to leverage new technologies, we want to bring new and great products and services to our customers. But we often found ourselves confined by, it could be legacy systems, it could be legacy processes, it could be legacy pricing models, all sorts of things where it felt like there was no lack of willingness or eagerness to try new things, but there was a lack of ability, just given the infrastructure and what we were sat in.

(04:55)
So this whole thing started as, why don't we try and build something on the side? Why don't we just start from scratch? Now how would we do that? And this was talked about, I'd say, a couple of years in the bank. And then ultimately we said, "You know what, let's do it." And our recently new CEO then, Johan Torgeby, was really pioneering this and saying that, "You know what, we just need to lean forward because these things are happening, whether we are going to be part of it or not, and we'd rather be part of it than not."

(05:22)
So we started SEBx with very, very little idea of what exactly it was going to be. We started it with what we refer to as a dual purpose, explore new tech and build new products. And it really served a purpose. Exploring tech in a sense of elaborating with new technologies, but we didn't want this to be an innovation lab, we wanted it to be a business. So we added the notion of building new products, which meant that we are going to evaluate this initiative like a business unit. Whatever products come out of this, how we're going to measure them, customers, new business being built in this unit.

(05:54)
So exploring technology, build new products. And it was a really confused start to this initiative, because normally when a bank starts a project, we have a steering committee, we have milestones, we have a budget, we have a plan, and we go to the board and we report every fortnight, whatever we've been doing. Here it was like, "Okay, so where do we even begin?" And we began seven people in a conference room in a obscure place in one of our basement offices in Stockholm. And we said, "Okay, so now what do we do?"

(06:23)
Fast-forward a little bit and we said, with this mandate to explore new tech and build new products and being part of SEB. And this is a critical part, we did not put this outside of the bank. We could have set this up like a pure FinTech, not at all within the bank, but we said, "Let's leverage the things that we have. The capital, balance sheet, liquidity, all those things that are difficult to get to." FinTechs come to us to access those things. Well, we say, "Hey, we already have them. Why don't we build on top of them?"

(06:46)
So we started to build a platform and we said, "Let's be mindful that this platform, whatever we're building, make sure that we can build new products so that we actually build a business, but also make sure that we design this in a way that the bank should be able to use this technology in its platform in the future. And also, anybody else." Coming back to your point on embedded finance, we didn't talk about banking as a service embedded in finance at the time, but we said, "Hey, if we're building this new platform and there is the possibility to keep it open by design, let's build it that way." Which meant a lot of things for everything, from kind of architecture, to access rights, to data management and multi-tenancy, all those things that we need to think about from the beginning.

(07:19)
We launched our first product on this platform, which was a very dedicated, specific offering for self-employed in Sweden. That was the first product coming out of SEBx. So that was like, "Hey, we're now building a business. We're addressing customers." And that product, I would say, it's still in pre-product market-fit kind of phase, looking to find exactly where it should be in the market. But having had the platform then in place, which had been built in a cloud native infrastructure, we decided to go for Google Cloud. We found a couple of different partners, Thought Machine, that I know you guys have been working with as well. We just recently signed up Enfuce as our card processor. Again, working with different providers of topnotch technologies across the stack.

(07:59)
And having pieced this thing together, and we said, "Okay, now we have our first product on top of it. It's kind of validation, the platform is actually working. Let's let the bank start looking onto this." So the bank is now looking how they can start building products on top of this platform. And then last year we then onboarded our first external customer, which is a Swedish retailer who wanted to embed, just your previous introduction, wanted to seamlessly embed financial services into their user journeys. And we said, "Hey, we can do that with this platform."

(08:25)
And when that became public, we just realized that, "Hey, you know what? The reception into the market has been great and we've got great demand right now. Let's try and build a business unit out of this," and that's where SEBx then became SEB Embedded. So we said, "Hey, this is now a business that we want to scale more like a business unit. And that's where SEB Embedded was born into [inaudible 00:08:45].

Jim Marous (08:45):

So SEBx was more of a digital bank that's part of SEB. The SEB embedded is now taking what you've learned and what you've built and applying this to outside organizations.

Christoffer Malmer (08:55):

Correct.

Jim Marous (08:55):

So embedded finance is interesting because, to a degree for some institutions, it's kind of making the bank invisible to a degree.

Christoffer Malmer (09:03):

Yes, yeah.

Jim Marous (09:03):

And making it very behind the scenes. Was that something that management had to think about, "Are we wanting to do that? Do we want to empower a retailer to do what we did?" Or was it one of these things where management just said, "We can either wait and have somebody else do it or we do it."

Christoffer Malmer (09:22):

No, it's a spot-on question because one thing is doing this technically, how do you actually enable embedded finance? The other thing is strategically, how do you get comfortable empowering another brand to compete with yourself effectively? Because that's exactly what you're saying. And I think the notion was really exactly what you concluded, was to say that, "If this is happening and we're not going to be part of it, well, then somebody else will power these new brands and they will be competing with us anyway."

(09:49)
Now what's critical for us, it was not a discussion of either/or. It was not to say that, "Hey, we're going to power other brands, therefore we cannot have our own." No, no, no, we're going to say, "We're going to power other brands because we have the platform." But we have a brilliant brand with SEB, and we are going to be trying to win business as best we can. We're top-rated with a lot of customers, in a lot of segments, in a lot of markets, we're going to keep doing that. But in those other areas where other competitors are doing really well, why not be the provider of the infrastructure to those players? And if this is happening, we'd much rather be part of it.

Jim Marous (10:19):

Well, and it's playing off your brand. So you've mentioned about SEBx. You back-filled the knowledge and the capabilities to SEB of what you learned in the SEBx platform. Same way you're doing with embedded.

(10:32)
Pal, from your perspective, what do you seeing in the field as far as financial institutions looking beyond the traditional business model, trying to use new ways to deliver? Because what embedded financially is, and we're even getting away from embedded payments because that's where it all started, but now it's much broader than that with buy now, pay later, and a number of other products. What do you see in the marketplace from the standpoint of the thirst or the hunger for financial institutions to re-look at their delivery model?

Pal Krogdahl (11:02):

I see a certain amount of confusion, I would say. We see a number of banks that are ... They're very excited about this, they're trying to find ways of engaging in it. I think they are, to a certain degree like you said, stuck in their traditional business models. They're trying to understand, "How do we engage into this new world? How do we step out of our comfort zone? How do we, to a certain degree, not look at embedded finance or open banking as a new channel for existing products, but how can we look at new white space to be able to drive new revenue?" A little bit, like you said, in some levels compete, but at some levels compliment to the existing business.

(11:39)
And I think back to a little bit what you were saying here a minute ago. One of the strengths that most banks have got as they start moving into embedded finance is still their loyalty, their brand, and their trust. I mean, banks will have to become custodians of trust, even more than they have been in the past. And if you think about it, even though as a consumer we potentially want the financial elements of any customer journey we're in to be embedded and almost-

Pal Krogdahl (12:00):

... financial elements of any customer journey we're in to be embedded and almost invisible. We actually still want to know who it is that we're transacting with at the bottom line. Is it a trusted bank? Is it a financial institution that we really trust? And you add that to the brand of whoever you're working with. Apple is a great example on what they're doing here. They're taking their own brand and their own level of trust, but from a financial services perspective, they're also relying on embedding capabilities from financial institutions that also have a strong brand. And that's one of the things that I think SEB is perfectly positioned for. They've got a fantastically strong brand in Sweden and in the Nordics. You take that brand, you stick it out into something separate, it's a winning opportunity, but you have to do it right.

(12:46)
And I think one of the things that you mentioned, which is correct, this is a journey of exploration in technology, but goddam, it has to be business driven, because the minute you forget that connection back to business, connection back to you need to generate some revenue here, you need to think at least of what is the first product, minimum viable banking product that we're going to push out there. Without that, it just becomes a sandbox of technology exploration, and we've seen that fail time and time again.

Jim Marous (13:15):

It is interesting. I went to a session by Leda Glyptis who's been a guest on our show before and she said it really well, unless you understand the why from a corporate strategy perspective and then apply that why towards your innovation perspective, if you miss those gaps, it's all going to fall apart because you can't do innovation for innovation's sake.

(13:36)
Speaking of which, Pal, you're seeing a lot of organizations out there, there's high ambitions about what everybody wants to do. There's no lack, I think we talked before the podcast, there's no lack of people knowing what they need to do and knowing how to do it and even knowing probably who they should do it with. But the difference, there's a gap between ambitions and implementations. What is that problem out there? What are the gaps? And more importantly, from your perspective in a nutshell, which is hard, what do you see as the biggest reason why there's such a gap between what I want to do and what I implement against?

Pal Krogdahl (14:13):

I've got to be a little bit provocative and say part of it is banks need to step out of this notion of we're an IT company with a banking license to a certain degree. I think banks need to realize that technology is at a rapid pace. There is a need to modernize your core, but to modernize your core with a very different perspective than you've had in the past. And we've see an awful lot of banks and being provocative a little bit here saying, "We're going to do a core modernization, we believe it's a 10-year project," and they have this assumption that they're going to do that 10 year project and then everything's fine. But three years into that journey, they're going to have to pivot whatever they're on already then is three years legacy. So this whole notion of large banking transformations, core transformations are to some degree disappearing. I think it's more about how can you become-

Jim Marous (15:01):

I agree. I think it's totally just for me the composable concept of making it so that you can pivot your building blocks, Legos, whatever you want to use as the example.

Pal Krogdahl (15:10):

Exactly. A thin core hyper modular. Whether you do that in the way that SEB did with SCBX, done something up on the side, which a lot of banks are actually being very successful with, or whether you start internally and do a transformation internally that still has this notion of whatever we do has to be nimble, it has to be lightweight, it has to be modular because we know that everything's going to change, right? No plan survives contact with the enemy.

Jim Marous (15:35):

Yeah.

Christoffer Malmer (15:36):

There's one other thing I think, which for me has been a very important insight throughout this job, and I feel embarrassed I didn't figure this out earlier throughout the process, really from starting SCBX and then all the way through to SAB Embedded, and that's this whole notion about software development. If you build a digital product and you're bringing a digital product to market, you are a software developer, a software development organization. Banks are not designed, have not historically been software development organizations.

(16:08)
And these things, it's easy to say, to your point, and the reason I've got thing is said where banks are increasingly technology companies with banking license, you can paint it that way because technology organizations are growing bigger. But to work as a software development organization thinking that your product is software, you are optimizing your organization for software development and bringing software to market. That is a different ballgame than running a financial institution.

(16:35)
And I think what's so fascinating as well, we've seen all the new breed of companies that have been tremendously successful, neobanks or payment companies or whatever it is, they are software development organizations by definition, and they're native in that notion. But on the other hand, they're not financial institutions. So sometimes when you see those things, when you see challenges with everything from sort of regulations through to compliance, through to funding, through to capital management, that's like, "Hey, we need to learn the ropes of banking in this whole thing. We're software developers. What this banking thing all about?"

(17:09)
And we're coming at this from the other perspective, which is that, "Hey, we know our banking stuff very well, but we need to become software developers." And to me it's cracking that, bringing those two worlds together and making that work, that is so much more than just the technology or getting into the cloud or starting using AI or starting to do innovation labs. It's like running an organization as a software development organization inside a bank and bringing it all digital software to market.

Jim Marous (17:39):

I have a question about that.

Christoffer Malmer (17:40):

Yeah.

Jim Marous (17:40):

When you say software development company, is it software development as a, you're really writing code or is a software development in that you're collaborating the right partners to come together to deliver that software at scale?

Christoffer Malmer (17:55):

I think it's both. I think it's both. But if I think about Spectra Banking. Take one, Spectra, take traditional corporate finance and investment banking, you could argue that is not an all digital product today. To do an M&A transaction, to kind of sit together with parties and forecast the details of an agreement, or even orchestrate an IPO, canvas interest in the investor community, or whatever you do, that is even today, it is a pretty analog and manual delivery of that product. That is not all digital product.

(18:21)
If you go the other end of the spectrum of retail banking, making a payment or checking your balance, there's no reason that should not be a fully all digital product. So all of a sudden you can argue that inside the banking organization, I think you need to be honest with yourself like, hey, which one of these products are effectively have become software products that are all digital products that need to be thought about, dealt as and organized and being delivered in the context of a software development model?

(18:49)
And that comes to your point then, how do you run that? Well, you definitely work with best in breed technology partners. You organize yourself differently, you run things. You don't talk about business in IT. Go to Google or to Amazon or to Adyen or to Klarna, nobody talks about business in IT. The product is the software that is the business.

(19:09)
Now, in a bank, you very often find the notions like, "Hey, here's the business. We do the business and we have an IT organization that does the IT." In an organization where the product is software, that disappears. So again, you come back to this notion of what is software, what is an all digital banking product, and what is the piece that is actually still, to this day, you're going to have support from all sorts of models and things, but at the end of the day, it's a reasonably manual delivery model. That in my mind is a critical part in that kind of strategic assessment as a bank.

Jim Marous (19:38):

Well, it's interesting because a lot of banks are taking this desire, this drive, and they're finding a different way. Some are building on their current platform, some are doing it outside. Did it help at SEB to take it from the great foundation of SEB Bank and almost rebuild a separate unit so that you could avoid legacy back office? Because as we talked about yesterday, Pal, that reconfiguration of the back office has a lot of challenges. Number one, you can find the software and the technology to make it work, but there's a lot of swimming upstream because people are involved. People don't want to let go of the legacy process because in their mind that's their job.

(20:24)
By separating the units and building a digital bank initially, it allowed you to really build from scratch but in a way that didn't hold you back. And as you mentioned very early in the conversation, you're then sending a lot of this knowledge and infrastructure back to say, "This can replace this." But that's not our problem within your organization. But it's important when you're picking partners, I'm starting with you. How do organizations, financial institutions, there's thousands of people here and there's hundreds of solutions and you look at the names you go, "I've never heard of them." How do you pick partners to run your business in today's world that's ever-changing? How do you make that decision?

Pal Krogdahl (21:12):

That's a really broad and interesting question. I think it comes down to a certain degree to individual choice and research, et cetera. I think most banks or financial institutions take two paths here. One is they do the research themselves, right? And you see that quite often. You guys did it. You reached out, found Thought Machine and decided to go with Thought Machine for the base for SEBx. Other banks, I get involved quite often with banks that say, "We've got a need to transform. We know the journey we need to go on, but we don't know how we're going to get there. What are the best of breed complementers out there that we could take advantage of to help us to streamline that process?" A little bit back to what you were saying, they don't want to be stuck in being large development organizations. They want to be able to pick and choose. If you pick and choose, you can swap up a lot quicker and you can fire an external FinTech easier than you can fire your own internal development teams if things go wrong.

Jim Marous (22:12):

To a degree.

Pal Krogdahl (22:12):

To a degree.

Jim Marous (22:13):

You got to find another organization that's going to take it from there.

Pal Krogdahl (22:16):

But if it's modular, you can partially swap it out. API enabled everything else.

Christoffer Malmer (22:21):

That's a critical piece. To try and design it from the beginning such that you can actually do those changes and replacements over time, because I think if we were to spend time to say that I'm going to find the perfect core banking, provide the perfect card processor, the perfect data partner, then you'll end up spending too much time and you're going to be changing it anyway. So instead spend the time designing an architecture that allows you over time to make those things more modular. It's never going to be plug and play, never is, but as much as it can possibly be. You still need the new agreements and arrange, you still need, you get all those things in being in place, but you can do it. And I think it is a seismic different compared to how we have built things in the past where there was almost impossible.

Jim Marous (23:00):

You had an announcement yesterday, so we have a real live example of partnerships. What went into that decision and what were you looking for?

Christoffer Malmer (23:08):

Yeah, so this was a card processor that we've gone with called Infuse, and for us building a new technology stack where we are really trying to work with cutting edge Frontier partners, Infuse was one of those that they're also born in the cloud. They've never didn't have the legacy prior to that, so their infrastructure very much came from leveraging the best of technology from the onset.

(23:32)
When we started working with Thought Machine, they were very mature. We were one of the first customers, I think we were, technically speaking, the first one to go live on the platform with real customer data in Thought Machine Vault. Infuse has come much further down the road, so they are much more proven. And one of the learnings we've had from our journey is to say that that was a fascinating journey with Thought Machine, but it was also a lot of work going into kind of growing up together. We've come to a point now where we're probably looking for somebody who's a bit more advanced, who can hit the ground running, and who is a bit more battle proven, and that's what we felt with-

Christoffer Malmer (24:00):

Ground running and who is a bit more battle proven. And that's what we felt with Enview, so they have the combination of great modern technology, but still battle-proven and deliver organization that we feel is really on their toes.

(24:12)
But to your point as well, Pal, it comes back to people. It's come back to kind of getting along with a team and feeling that when something goes wrong, somebody steps up and takes responsibility. You pick up the phone and call somebody, somebody picks up the phone and realizes, "Hey, I need to try and help you out." Whatever's happened. Those things are incredibly important.

(24:28)
So, when we think about delivering banking as a service to our customers, we really think about all our vendor relationships and partner relationships and FinTech relationships, we're thinking, "What are the things that we've loved? And what are the things that we've been frustrated by?" Let's make sure that when we are the supplier to our customers, make sure that they get that very nice experience of we give them what they love and we'll make sure that they'll get as little as possible of the things that are frustrating.

Jim Marous (24:54):

You've talked about on your podcast often. And when you talk about things like Thought Machine that help put these things together and give you guidance for that, you still have, as you guys said, bring it to people. You still have to have the people allow it to work. Because as much as technology is great, we talk about it often, that it does still get down to people. People can mess it up.

(25:15)
And in fact, I use the analogy that it's like kicking a soccer ball that to your partner that's going to make a score and then you run and jump in front of the ball. We can't get out of our own way. We are often in the financial service industry taking solutions that are really good if you let them be good. And we say, "We like this the way it is, but we want to keep this the way we've had in the past."

(25:38)
Do you see this as a big challenge? And how do you work around that? Because I know that at IBM, you guys build a lot of partnerships around the world with different organizations to bring a better solution to the marketplace. We've talked about it quite a bit in the week I've been here, that it's no longer, "Oh, you pick IBM, you're going to use us for everything." It's IBM's going to help facilitate a lot of these partnerships. And we're building, you're building ... We. You're building partnerships that make it so that you can implement these solutions better as well. Explain that a little bit.

Pal Krogdahl (26:07):

Yeah, absolutely. And I think it's fundamental to IBM's business going forwards. We truly believe in an ecosystem of partners where the partners can bring best of breed, but we can bring best of breed to those partners. I mean, a common connection we've got is Thought Machine. We are a strategic partner to Thought Machine. We're a system integrator. We are a business transformation partner to them. Banks are looking for assistance to be able to not only pick the right capabilities, be that from ISVs, independent software vendors, FinTechs, et cetera, but also looking for who can best help them to get the most out of these packages, these solutions.

(26:43)
So, when you look at IBM and what we do, it is all about how can we take an ecosystem of partners, what we see as best of breed, how can we bring them to the table with ourselves, with the banks to be able to get that perfect? Well, not perfect because like we already said there is no perfect end goal. It is a journey that we're all on and we have to continue modernizing that journey.

(27:06)
But a little bit back to what you were saying, you are absolutely right. A lot of banks, when they're stuck in their need to modernize, what they do very often is they turn around and look at their legacy and they say, "Let's analyze our legacy, what is in our legacy?" And then they try and turn around and say, "Now what does our future look like?" And they suddenly realize that they've been frameworked by looking at their legacy.

(27:28)
So, what I say to most banks is don't look at your legacy. Put your legacy in a cupboard for the time being. Let's sit down and redefine what does a bank look like to you? What is your bank going to look like in three, five years time.

Jim Marous (27:43):

Or what does banking look like?

Pal Krogdahl (27:43):

Well, banking, bank.

Jim Marous (27:43):

Yeah, right.

Pal Krogdahl (27:44):

However you want to describe that. But do it without being constrained by your legacy. Because the minute you get constrained by your legacy, you run the risk of redeveloping what you had in the old days in new technology and you'll end up with the same constraints. So, what I say is redefine what the future looks like. I mean, what SEB did was perfect. They said, "What are we going to do out here? We're going to forget what is in SEB. And then at the end of it, we might turn around and say, well, is there something behind here?"

Jim Marous (28:12):

Reintegrate.

Pal Krogdahl (28:13):

"On the carts that we want to bring across? Or do we believe that all of those products, just leave them there, build something new?" So, most of my job is spent with banks saying: what does that future look like? Once you've defined that future, can we bring an ecosystem of partners and capabilities to help you to build that future as flexible, as modular and as robust as possible? And then, obviously being IBM with our mainframes and our footprint in the banking world, we can help you to look at the legacy and say: how can we decompose that in the best possible way to help you to remain relevant in the future?

Christoffer Malmer (28:49):

So, can I just pick up one thread just on this people question that you're on? I think it's so, so important. And I think when we sat down in my CEO's office starting SEBx, I think we all had an over-reliance on technology. I think we all thought that if we just get to work with the new tech, and to your point, if we just get to not having to relate to our legacy, then it's just going to be beautiful.

(29:12)
Now, the whole thing is all about getting the right people. Yes, the technology is a critical enabler, but the team and the people are the ones that's going to make it happen. And that's so, so true for whatever you're doing. And I think when I look back at SEBx and SEB Embedded, I'll say that the best thing we've accomplished is the team that we've built. The team that is now running, building these products, operating in a way with cultures and values towards a vision and a mission. That is, to me, it's a formidable opportunity to build upon. And that's what makes me so, so proud every day is that, hey, this team is here and they weren't here before and they're running mad towards this new opportunity. And that's fascinating.

Jim Marous (29:57):

And when we talk about people, and you've referenced it a couple of times, it starts at the very top. And as I talked before we started the podcast, over and over again I'm seeing examples of innovative organizations and where the innovation started it is always at the top. You can't be a really strong innovative company if you have legacy thought leadership.

(30:18)
And the other challenge is, and we talked about the good news about your people, but the other challenge is we have a lot of people that as we're moving to the digital world, there's a lot of people in the legacy world that feel extraordinarily threatened. Everything from branch employees to back office employees to people who have been in charge of legacy processes. But at SEB, with what you've done, you're given an opportunity for people to move forward with the company. You can be a part of this other entity because we need your experience. But you're also going to have to let go of some of that legacy stuff.

(30:51)
So, from an embedded banking perspective, are you differentiating yourself in the marketplace compared to other financial institutions? And how is that done?

Christoffer Malmer (31:03):

And so on that last part of the question, our differentiation, I think it ties into what you said previously about being part of the SEB group. And the way we've designed our products, the way we built them, it's not been, "Let's build them over here and then go to compliance, or risk, or legal, or whatever and try and make them work." It's like get them on board from the very beginning. So the expertise, the knowledge, the experience that we have within regulations, within compliance and legal, they are instrumental.

Jim Marous (31:34):

Branding.

Christoffer Malmer (31:35):

Branding. I mean, there's so many assets that are just in incredibly valuable when you start a business like this.

(31:42)
So for us, a couple of things that we've said is, number one, we want to be very clear that it's part of SEB. We're calling it SEB Embedded because it's part of SEB and that's part of the branding to your point. The second thing is that we've also said that we want it to be clear that our distributors own the data. They decide what they want to do with data. We have no interest or no plans or no ambitions of using data of their end customers to try and offer them something or cross-sell, or anything like that. We are extremely conscious to say that the data is yours, you decide whether you want to be a processor, or whatever you want to do with the data, it's up to you. We will make sure that you get the tools enable you to do that.

(32:16)
The third thing that we want to do is to say that there's many ways that you can embed financial services. We want to make sure that you can actually get to whatever you want to do through one interface. So, if you want to do credits, if you want to do payments, if you want to do accounts, you don't need to put your customer service organization in three different systems with three different providers. "Hey, here's one system, there's one login. Here's where you find all you need. And if you want to over time expand your offering and add more products, they should be available from the embedded toolbox." So, those are a couple of things that we think are important.

(32:46)
And then of course, being able to have a balance sheet in the capital and cheap accessible funding is tremendously valuable when we talk to our distributors.

Jim Marous (32:55):

Now, do you see the embedded banking platform, just like the digital banking platform, an ability to build beyond your legacy core and even going to new geographic areas? Scale is important to this game because embedded finance is a low margin gain. It is even lower margin than traditional banking could be. However, with open banking, you can expand that financial relationship, but you can make it more valuable. But scale is still important. Do you see SEB being able to go, SEB Embedded, excuse me, going beyond its borders from a geographic standpoint with these partnerships you're building?

Christoffer Malmer (33:35):

Yeah, I think you're right. It is a scale game and it is definitely an opportunity to go cross border because, from a technology perspective, anyone, I'd say, and we will come back to the software comparison, anyone who is a software product today thinks globally there. You want to build a product that can travel borders. And of course, with the financial services product there's much more regulatory aspects to that. But from a technology perspective, we're designed to go across Europe, and we have an ambition to be a European provider of banking as a service.

(34:02)
Now from profitability perspective, I think what's interesting is that this adds a new revenue stream to banks. I think this is not to be underestimated. So yes, there are the financial products that are being distributed, the loans and the credits and the mortgages and the savings or whatever it is. But there's also an element of technology products that are being provided. And that's a revenue stream that banks historically haven't really had.

(34:24)
And that part of the model that also does it is not the one that is capital heavy and capital intensive. These are actually the capital light side of embedded finance. We actually have it, there's a platform that you're providing and that adds another dimension of revenues. And I think what's interesting with that is that we spend billions every year on compliance, risk management, transaction monitoring, fraud prevention for our own business. Now here we get an opportunity to leverage that and those investments through a broader set of customers.

Jim Marous (34:51):

So, your partners don't have to do it themselves in much the same way you're using partners to avoid those things as well.

Christoffer Malmer (34:57):

Exactly. So it makes sense. And that opens up new revenue opportunities for us as well. So I think it's a fascinating space.

(35:03)
But to your point, Pal, initially we're still early days. It is early days for this business. I think what's going to be critical now I think is to see a couple of really powerful use cases where people see, "Hey, this is what banking could look like. This is how it gets seamlessly embedded." And starting to see this come to fruition and come to the fore and it's like, hey, it's going to be a question of why wouldn't you? If you have a strong brand, if you have a customer base, you need to ask yourself, why wouldn't I not want to have financial services embedded?

Jim Marous (35:32):

Well, it's interesting too because consumers are increasingly using embedded finance without knowing it. We're driving through turnstiles on a freeway and not stopping the car to make payments anymore. You just drive through because you got the little monitor. You're going through grocery stores and not having to check in or check out. You have those capabilities you. You're going to retailers and you can have embedded finance. You can buy something bigger than you would've bought otherwise, and they're not providing it as a finance company. It's embedded in the process. You were going to say something, I just want-

Jim Marous (36:00):

Finance company, it's embedded in the process. You were going to say, so I just wanted to understand what you're saying.

Pal Krogdahl (36:05):

I just wanted to add onto that and back to you sort of asked me about how are banks reacting generally to embedded finances and what are they doing? Like you said it's critical, this is new revenue streams. There are new business models here that the banks should take advantage of. Because the minute they get set back on their laurels and see this as another channel for existing products, they end up in a zero-sum game. It becomes a commodity based business and banks cannot survive in a race to low price, high volume. It's not going to work.

Jim Marous (36:33):

Right.

Pal Krogdahl (36:34):

So they have to figure out how can they still stay relevant in a world of embedded finance and it is like you said. It's about that wider value proposition around the technology and everything else that you can put in there and back to what does my brand as this bank bring to this integration?

Christoffer Malmer (36:52):

Building to your point, what are the relative competitive advantages of banks? I mean it is the access to capital and funding. I mean, most banks would fund themselves tighter and cheaper than a fintech would. Most banks would have access to capital in broader markets than a fintech would. So those are things that really gives those opportunities to build upon in combination with other things that you mentioned.

Jim Marous (37:13):

Well, and we talk about collaboration in all different ways. But you look at open banking and the capability for your partners then to potentially partner back to the banking for your banking customers. Providing them benefits in a kind of an overarching building block scenario, where I mean I know that Emirates NBD in the case has done things with youth markets where the banking product itself is a loss-leader at best. But their partnerships are funding the entire initiative, but that takes scale and as you build scale and then provide those benefits back to your SEB customers it works both ways. Creativity, and we're finding it happening so quickly. So when we talk about quickness where do you see not banking, but where do you see SEB Embedded being a year from now? What's on your maybe to-do list that you can share?

Christoffer Malmer (38:08):

Our to-do list is very clear with the organization within the organization, outside the organization. It is to keep proving the model and signing up more distributors to build upon our platform. That is the ultimate way to prove that this model works, that we scale properly and that the business has a real kind of [inaudible 00:38:28] on that. So that's our definite top priority now is to work with more distributors and sign more distributors on the platform.

Jim Marous (38:37):

From IBM's perspective, where are you seeing banking going in the next two years? Now mind you I used to say five to 10 years, I used to say 10 years. We realized I can't even tell you what's going to happen next Monday and unfortunately that's becoming more and more of a decision. That in a financial institution you have to be ready for things that are completely unthought of [inaudible 00:39:01] on the bank that happens in four hours as opposed to four weeks. Where there's no buildup where it can simply be a social media post that creates all this steamrolling effect. But from your best perspective, you talk to a lot of people on Fintech Daydreaming. What do you see as being in the horizon of what's going to happen in banking overall?

Pal Krogdahl (39:23):

Yeah. First of all you're absolutely right, we're not talking about years anymore we're talking about months. We're talking about what's going to happen in the next three months, six months rather than three to six years. I think we're going to continue to see a fundamental growth of... Was it Chris Skinner that came up with the term invisible banking? I think we're going to see a continued growth of that. I think we're going to see banks changing their narrative a little bit to really become custodians of trust and storage of value. 'Cause at the end of the day as we move into this whole embedded banking, etc, I have no problems with transactions being done through fintechs and platforms and everything else. But I don't want to have my salary stored in some ambiguity world where I'm not quite sure because I need that trust. I need to know that when I need my money my money is there and that I can rely on the underlying financial institution to have everything in place to keep my money safe. It's back to trust.

(40:27)
So I think we're going to see banks change, I think we're going to see banking change. I think we're going to see a proliferation of how we deal with our financial life as individuals. I think that's both retail and SME and to a certain degree corporate as well. But for banks it's going to be about that new value unit of trust. How do I look after that customer trust?

Jim Marous (40:53):

Rethinking the value of chains. So I'm going to end up with you, and we usually try to end the podcast with the what do you take away from this? So I'm a financial institution of any size, small to large and I'm wanting to do an embedded banking or banking as a service initiative. Where does a company start? What does it have to do first from your perspective, from your history of doing that?

Christoffer Malmer (41:18):

I think the first and the pivotal moment to get going is to make the decision and actually go from planning and discussing to actually get started. There are so many things that you're going to find out along the way that you had no idea was going to come your way. That was not part of the plan and was impossible to foresee and you'll only get there by actually getting started. So whether you want to build an embedded finance offering, whether you want to go and reinvent your core platform, whether you want to do an X type initiative. The first thing is just kind of decide it, make it a priority and get going and to your previous point. I think it is important that you have a senior management and a board that wants to lean forward into this. We're fortunate to have owners who are very, very long term oriented in their thinking, in their strategic planning and do not think about just the next quarter and the next half year.

(42:10)
That's important too, but what about the next generation? What about the next century? We've been around since 1856, we want to be around for another nearly 200 years. So how do we make sure that we future proof the bank? With that notion and with that mindset, these things are a high priority. Yes, it is important to deliver on the next quarter set of results. But it's also going to be tremendously important to future proof the bank. So get started, whatever it is that you want to do just make the decision and get started and then so many things can happen. So no point to plan too much beforehand because a lot of those plans are going to be up in the air anyway. So let's just get going.

Jim Marous (42:43):

Both you gentlemen, thank you so much for being on our podcast and it always is one of these things where you go okay we could go another three hours because we've just scratched the surface. So Pal [inaudible 00:42:54] Pal-

Pal Krogdahl (42:56):

You're pal Pal.

Jim Marous (42:57):

Yes, you're my pal Pal.

Pal Krogdahl (42:58):

[inaudible 00:42:59].

Jim Marous (43:00):

How do people get to know more about what you're doing on your podcast?

Pal Krogdahl (43:03):

Well they can find the podcast Fintech Daydreaming at our website, www.fintechdaydreaming.com. They can find us on LinkedIn, we've got a growing following on YouTube and all the usual podcast channels just like your fantastic podcast. Then outside of the podcast world and into the IBM world you can find me on LinkedIn or you could reach me through email, [email protected].

Jim Marous (43:30):

Christoffer, I thank you very much. I promise you that we're going to have you back on the show in another year, because so much is happening so quickly and there's so many unexpected things. But it's exciting to see an organization that as you mentioned as legacy as legacy gets in a very traditional country with a lot of things happening every day. That you find the time and you have the support to do important things like embedded banking and SEBx which is a digital bank. So thank you very much again.

Christoffer Malmer (43:59):

Thank you very much, and feel free to reach out to me on LinkedIn as well. I'd be very happy to connect and share our experiences and we're humble. We can learn a lot, so we'd love to learn from others as well.

Jim Marous (44:08):

So thanks for listening to Banking Transformed, the winner of three international awards for podcast excellence. If you enjoy what we're doing please be sure to give us a solid positive review on your favorite podcast app. In addition, make sure you catch my recent articles on The Financial Brand and the reports we're doing for the digital bank report. This has been a production of Evergreen podcast. A special thank you to our Senior Producer, Leah Haslage. Audio engineer, Sean Rule Hoffman. Video producer Will Pritts, and I can't forget our onsite producer Carson Masterson from IBM. I'm your host Jim Marous. Remember, banks must empower innovation and help support the way customers want to interact with money.

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