- Embedded Finance is estimated to be a $3.6 trillion market opportunity (Matt Harris, Bain Capital Ventures)
Embedded Finance means it’s embedded in an existing ecosystem, it complements the customer experience already there with i.e. ‘one click finance/insurance, it’s the dashboard, app or POS where your customers already interacts.
To put this opportunity in perspective, it is larger than the mobile, cloud and the internet value creation over the last 25 years! Embedded lending is expected to account for nearly a third of the opportunity and some of this impact we already see today. Think about the embedded payments, you book and pay your taxi, food delivery, groceries delivery or Amazon delivery in one simple click.
Klarna is one of the leaders in embedded consumer lending with their Buy Now Pay Later proposition, you purchase your fancy new pattas (Dutch slang for shoes) in 3 instalments from your favourite webshop without having to think about payment or repayment. It’s all automated in one-click from your bank account, whilst Klarna does the KYC, credit and bank account checks in less than a second. Other applications will be the ‘checkout free’ shopping experience that Amazon is pioneering, which will come to the hospitality sector soon. And for SMEs, we will likely see the large market of leasing / hire purchase disrupted by instant financing offers on equipment, that is traditionally still majority done manually through broker networks.
- Revenue Based Finance is celebrating it’s 150 year anniversary, and is making a rapid return to become the standard for Small and Medium Business funding
Yes – you read that correct… the rumours are that Revenue Based Finance dates from the late 1800s where oil wells were funded with this construct. High upfront cost to develop an oil well required creative structuring for repayment through a percentage of their future revenues. Over the years, this construct has been around as the Merchant Cash Advance and is now rapidly becoming main stream for funding fast growing eCommerce merchants to purchase inventory and high ROI marketing so they can double down on growth without diluting themselves with expensive venture capital equity raises.
Liberis has been pioneering Revenue Based Finance since 2007 and funded over $800m in more than 40,000 transactions. Small and Medium size business owners love the construct as it doesn’t dilute their equity, the outstanding amount repayment flexes as a percentage of their daily sales so they don’t ever have to think about making the monthly payments, and pricing is typically a flat fee so throughout the pandemic, Liberis’ impacted customers weren’t hit with increased fees or ballooning interest. That’s truly fair and flexible for the business owners!
- Buy Now Pay Later will become a true challenger to the credit card but regulation is looming
Buy Now Pay Later has been around for many years by banks and store credit, though the embedded finance version of BNPL started off in the late 2000s with players like Klarna, Affirm and Zilch having made the mainstream public embrace the term BNPL and as a result they have shown record breaking equity raises and valuations! This trend is here to stay, it’s easy and fast checkout journey and merchant revenue boosting features mean it’s liked by both sides of the transaction. We will see a rapid advancement in the number of players with banks and credit funds looking to take a slice of those consumer debts, and commercial BNPL startups are likely the trend of early 2022.
But regulators are moving in to review customer impact of BNPL as they fear there are negative consumer impacts especially by young adults who don’t realise you have to repay this over time (!) and get themselves into trouble due to the easy availability of credit and BNPL players not having to report their debts to the credit agencies. My view is that the UK, US and other regulators in Europe will look to regulate BNPL similar to other consumer credit with stringent affordability checks, credit limits, credit agency reporting and regulated debt collections. In Sweden the regulator has already moved in, and in the UK the FCA is reviewing the sector. And as they showed with High Cost Short Term Lending and Guarantor loans, the FCA moves in quickly and with no mercy if players aren’t having the customers’ best interest at heart.
By no means will this imply that BNPL is just a fad which will disappear in the next years. It will grow rapidly because of consumer preference, ease of use and rapid online adoption. Though over time, the regulators will imply the same framework on BNPL as it has done on credit cards and personal loans. This means BNPL players will have to conduct appropriate affordability checks, and regulators will ensure sufficient consumer protection which will likely reduce the amount of BNPL players in the market. And reporting outstanding balances on peoples credit files will help reduce consumer over-indebtedness or long term indebtedness if people lose track of the many different credit solutions they’re using.
- One Click anything will become the defacto way of interaction for all embedded finance
I’m probably not the only one who facepalms when I have to fill in all my details for the 3rd time when buying something online or when applying for insurance/cards/loans/online payments etc. With the pre-population features by Google Chrome / Apple Safari / Edge, online payments and address details are made much simpler, but what really makes it stand out is the experience by i.e. Amazon Payments, Shopify and Paypal Checkout on websites. Though you still have to log in with your email and password (or face scan for Apple).
In 2022, many fintechs and hopefully several banks as well will roll out one click checkout for their products, including one-click finance, one-click insurance and for existing Liberis business customers, one-click funding that will hit your bank account in as little as 5 minutes. So Small Business owners don’t have to wait weeks for finance to buy that bargain discounted inventory, pay for goods that won’t be delivered until 3 months from now, or launch a great marketing campaign!
- Will Crypto lending become mainstream?
Crypto is here to stay, even the ‘never crypto’ crowds can’t deny that blockchain and crypto will become mainstream over the next 10 years, crypto is here to stay in one way or another for both the Decentralized Finance (DeFI) world as well as in traditional finance. This can be money transfer, financial exchanges, insurance, healthtech, identity, lending, etc. What it’s really great at, is reducing the ‘cost of trust’ between 2 or more parties. Over the past year, we’ve seen many companies who have launched ‘lending’ features for crypto to allow for speculation on crypto and mostly hedge funds to borrow crypto through middlemen, which allows high interest rates to be paid to retail crypto investors.
So far, the SEC has shut down several of these programs such as Coinbase’s Lend program, and deems them ‘securities’. There is a huge appetite for higher interest rates, especially in the light of high inflation, and savvy adopters of crypto will look to monetise their considerable crypto deposits. It’s a high risk, potentially high return strategy though if there is one key learning from the pandemic and the enormous amount of ‘free money’ pumped into the economies, is that consumer demand will drive rapid innovation and the FinTech platforms will find a regulated way to offer crypto lending products to stay ahead of the competition.
Wealth Managers and the Future of Trust: Insights from CFA Institute’s 2022 Investor Trust Study
Author: Rhodri Preece, CFA, Senior Head of Research, CFA Institute
Corporate responsibility is more important than ever. Today, many investors expect more than just profit from their financial decisions; they want easy access to financial products and to be able to express personal values through their investments. Crucial to meeting these new investor expectations is trust in the financial services providers that enable investors to build wealth and realise personal goals. Trust is the bedrock of client relationships and investor confidence.
The 2022 CFA Institute Investor Trust Study – the fifth in a biennial series – found that trust levels in financial services among retail and institutional investors have reached an all-time high. Reflecting the views of 3,588 retail investors and 976 institutional investors across 15 markets globally, the report is a barometer of sentiment and an encouraging indicator of the trust gains in financial services.
Wealth managers may want to know how this trust can be cultivated, and how they can enhance it within their own organisations. I outline three key trends that will shape the future of client trust.
THE RISE OF ESG
ESG metrics have risen to prominence in recent years, as investors increasingly look at environmental, social and governance factors when assessing risks and opportunities. These metrics have an impact on investor confidence and their propensity to invest; we find that among retail investors, 31% expect ESG investing to result in higher risk-adjusted returns, while 44% are primarily motivated to invest in ESG strategies because they want to express personal values or invest in companies that have a positive impact on society or the environment.
The Trust Study shows us that ESG is stimulating confidence more broadly. Of those surveyed, 78% of institutional investors said the growth of ESG strategies had improved their trust in financial services. 100% of this group expressed an interest in ESG investing strategies, as did 77% of retail investors.
There are also different priorities within ESG strategies, and our study found a clear divide between which issues were top of mind for retail investors compared to institutional investors. Retail investors were more focused on investments that tackled climate change and clean energy use, while institutional investors placed a greater focus on data protection and privacy, and sustainable supply chain management.
What is clear is that the rise of ESG investing is building trust and creating opportunities for new products.
TECHNOLOGY MULTIPLIES TRUST
Technology has the power to democratise finance. In financial services, technological developments have lowered costs and increased access to markets, thereby levelling the playing field. Allowing easy monitoring of investments, digital platforms and apps are empowering more people than ever to engage in investing. For wealth managers, these digital advancements mean an opportunity for improved connection and communication with investors, a strategy that also enhances trust.
The study shows us that the benefits of technology are being felt, with 50% of retail investors and 87% of institutional investors expressing that increased use of technology increases trust in their financial advisers and asset managers, respectively. Technology is also leading to enhanced transparency, with the majority of retail and institutional investors believing that their adviser or investment firms are very transparent.
It’s worth acknowledging here that a taste for technology-based investing varies across age groups. More than 70% of millennials expressed a preference for technology tools to help navigate their investment strategy over a human advisor. Of the over-65s surveyed, however, just 30% expressed the same choice.
THE PULL OF PERSONALISATION
How does an investor’s personal connection to their investments manifest? There are two primary ways. The first is to have an adviser who understands you personally, the second is to have investments that achieve your personal objectives and resonate with what you value.
Among retail investors surveyed for the study, 78% expressed a desire for personalised products or services to help them meet their investing needs. Of these, 68% said they’d pay higher fees for this service.
So, what does personalisation actually look like? The study identifies the top three products of interest among retail investors. They are: direct indexing (investment indexes that are tailored to specific needs); impact funds (those that allow investors to pursue strategies designed to achieve specific real-world outcomes); and personalised research (customised for each investor).
When it comes to this last product, it’s worth noting that choosing advisors with shared values is also becoming more significant. Three-quarters of respondents to the survey said having an adviser that shares one’s values is at least somewhat important to them. Another way a personal connection with clients can be established is through a strong brand, and the proportion of retail investors favouring a brand they can trust over individuals they can count on continues to grow; it reached 55% in the 2022 survey, up from 51% in 2020 and 33% in 2016.
TRUST IN THE FUTURE
As the pressure on corporations to demonstrate their trustworthiness increases, investors will also look to financial services to bolster trust. Wealth managers that embrace ESG issues and preferences, enhanced technology tools, and personalisation, can demonstrate their value and build durable client relationships over market cycles.
5 tips to ensure CSR efforts come across as genuine
By Mick Clark, Managing Director, WePack Ltd
Corporate social responsibility – or CSR – is playing an increasingly pivotal role in the long-term success of modern-day companies.
The harsh reality is that only a paltry 46 percent of people trust the brands they buy from. And with more competition than ever in all walks of business, a positive brand reputation needs to be earned or customers will simply take their money elsewhere.
That’s why I share my insights on the importance of CSR in modern business and introduce an effective plan to avoid coming off as disingenuous to your employees and customer base.
The value of CSR
The needs of modern employees and consumers are changing. There is a higher emphasis placed on the ethics and morals of companies and their handling of hot button topics like the environment or social issues.
59 percent of UK workers believe their business should be investing in charitable initiatives. 67 percent of people aged 18-19 feel this way, showing a generational shift in favour of companies that support ethical, social, or environmental causes.
At WePack, we recognise the importance of this and make sure to regularly donate to a variety of charities including RRT (Rapid Relief Team), and donated £6,000 to the charity’s social causes last year.
An example of good CSR can be found in search engine giant, Google. It has had notable success with its CSR initiatives. Its flagship CSR campaign, Google Green, is a companywide commitment to using clean sources of energy, cutting down on its use of fossil fuels and drastically increasing energy efficiency as a direct response to the climate crisis.
It has been so successful that its data centres now require 50 percent less power to run than the average data centre and it’s poured over $1 billion into jumpstarting renewable energy projects.
Customer attitudes are fundamentally changing, and people are far more concerned about the values that their money could be indirectly supporting. In fact, 71 percent of customers prefer buying from businesses that align directly with their values.
In the modern-day, demonstrating high levels of CSR boosts brand perception. Businesses that make it a priority are more attractive – from an investment standpoint – to both customers and potential stakeholders.
For example, more than a third of consumers are also willing to pay more for a product or service if the business prioritises sustainability specifically – so it pays to be responsible.
Businesses with purpose-driven and ethical goals and proven commitments to CSR help retain employees. Millennials will make up 75 percent of the workforce by 2025, and it’s that cohort that is increasingly demanding socially responsible employers.
Those that fail to meet the needs will ultimately see their customers take their purchasing power elsewhere.
Addressing the challenges
As obvious as it may sound for a business to take on as much CSR as possible, many organisations face limitations.
Pressure from investors can disrupt the growth of CSR initiatives. Sometimes, the direction that stakeholders want to take the company doesn’t fully align with plans to target social or environmental issues.
Companies face becoming fixated on linking profitability with CSR programmes. It can be tough to present a genuine CSR programme without it coming across as a marketing ploy – presenting an extra hurdle for businesses to overcome.
Despite the challenges businesses face that are out of their control, many firms unwittingly make their own mistakes that cost them dearly.
For example, businesses can struggle to bolster their CSR programmes if they don’t consult their customers and staff first. A simple survey helps companies decide what issues to put as a priority and target to satisfy their customer base and employees.
Any attempt to create an effective CSR programme needs top-down support. Many businesses wrongly treat CSR as a separate entity, rather than fostering a companywide culture. This can lead any attempt to push back on global issues to appear disingenuous to those looking in.
Shifting the CSR approach
Because of the global shift in public needs and opinions in recent years, businesses need to better demonstrate their efforts to avoid having their campaigns labelled as a box-ticking exercise.
It’s no secret that consumers are doing more research and are becoming more switched on to spotting lacklustre approaches to CSR. Also, everyone can have their say online – it’s much easier to get exposed if your CSR campaign is nothing but an empty publicity stunt.
For example, Volkswagen’s reputation was left in tatters after its ‘greenwashing’ scandal promoted a newer, cleaner diesel vehicle that wasn’t any better for the environment than previous models. The company took it further by fitting a device that helped it cheat emissions tests – resulting in a $125 million fine.
For this reason, CSR campaigns need tangible results to be credible and trustworthy.
Sharing top tips
When it comes to structuring a strong CSR campaign, it’s critical to demonstrate several things to prove your strategy is effective in helping the chosen cause.
Firstly, evidence the fact that your efforts are helping wider communities. Whether it’s through statistics or showing proof of investment in social causes, tangible evidence goes a long way when legitimising your CSR campaign.
Secondly, balance your rhetoric. Effective communications are vital to the success of a campaign. However, it can damage a company’s image when done poorly. Businesses should speak about their chosen issues in their dialogue rather than spending too much time talking about the solutions the company has implemented. This stops them from becoming too self-promotional or sounding braggy.
To further avoid this, make sure you can directly tie your CSR campaign to corporate values and beliefs. As well as helping to strengthen your comms, it will also guarantee that company values are more than just surface-level – helping to facilitate tangible, long-term change.
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