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Embedded finance: The next big disruption

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Dani Fava,  Head of Strategic Development at Envestnet, explores why she believes embedded finance is about to shake up the wealth and investment management industry. Fava is speaking at the upcoming Inside ETFs event in September, find out more about how to get involved >>

Dan Schulman, CEO of PayPal, recently said he sees a future where their technology offers the “one-stop shop for all things shopping and finance.” I believe he’s right. I also believe a pistol just fired to start this race – the race of the super apps.

A “super app” is one location where consumers can manage every facet of their life. Consumers can handle all their shopping, social interaction, and financial affairs within one experience. This is already a reality in China, à la WeChat. Here in the US we are in the first inning, and leading off is Embedded Finance.

So, what is embedded finance? It’s the ability to interact with financial services (saving, investing, lending, insurance, etc.) in places that are not native financial services apps. This is the first step toward creating the super app.

There are a few reasons why I believe super apps will become real and embedded finance is the next big disruption:

  1. Finance is disconnected. We shouldn’t have to put our money in to one place to save, then another to invest, and yet another to get a loan, and then a completely disconnected place to make a purchase. It’s beyond inefficient – it’s nonsensical.
  2. Wealth inequality has taken center stage. Consumer companies like Walmart and Nike have invested in WealthTech – they want to build an equitable future. However, it’s not all philanthropic. They also want to build a future where their target customers can afford their products.
  3. Traditional investing and banking models have been shaken. With an abundance of challengers storming the incumbents, consumers have started to put their trust – and money – in different places. Banks are focused on expanding and embedding more finance – digitally – and challengers will keep the pressure on.
  4. There are BILLIONS of dollars, doing nothing. For one example, 34% of the working American population are participating in the gig economy. These people are getting paid in-app or via some digitally connected service, like PayPal. Today, there’s no easy way to put that money to work.

What will Embedded Finance look like?

Imagine being able to save for your goals right where you shop. Think about how you currently shop for a house or car, an appliance or renovation. Sure, financing options are offered at many purchase destinations, but what about saving and investing? That’s pretty efficient. Picture being able to invest your money right where you receive it – maybe that’s PayPal, or Uber, or Instacart. You will soon automatically parse your payments directly into investment portfolios and savings accounts. Envision returning an item to Amazon and seeing a question, “Do you want your refund credited back to your credit card, or do you want it deposited into your investment account?” Opportunities like that make an impact and experiences like this are coming – soon.

Okay, so we’ll have super apps and embedded finance everywhere. But, why is this important?

First, embedded finance will become a new category of Financial Services. Additiv.com estimates that this category will be worth $3.6 Trillion dollars by 2030 in the U.S. alone.  This is money that won’t be going into banks and traditional brokerages – at least not from the same entry point. These are accounts that currently don’t have a central view or dashboard. These are customers that might not have financial advisors, yet.

Investing and saving will happen differently. It will be purpose driven, and it will be enabled by a whole new demographic – consumer companies. Companies that know how to engage users, how to speak their language, and how to make experiences seamless and fun. These consumer companies will be changing the literal language of finance.

Tracks are being laid, and the destination for future investors isn’t the same.

Think about investing in a climate change portfolio through Amazon or Uber, and then trying to make a transition to self-directed investing through a retail brokerage firm. It doesn’t fit. And that’s why this is a big deal – tracks are being laid, and the destination for future investors isn’t the same.

This changes the acquisition game for financial advisors, too. How will financial advisors find these customers who are building wealth disparately through consumer apps? And when they find them, how will they advise them?

We need WealthTech companies like Envestnet to power this new movement in financial services. A consumer will be able to enter the finance ecosystem from any app. Increasing the number of entry points into the ecosystem also accelerates the need to have a central portal that can connect this consumer’s newfound financial life.  We can provide professional grade access and tools through these consumer apps so customers are empowered with more than just gamified self-directed trading, but being lead towards financial wellness. And we can connect the pieces. We will cultivate tomorrow’s advisor clients and will empower advisors to serve this new cohort. This is crucial to our business – it is imperative for our sustained growth.

Embedded Finance is the next big disruption. Are you ready?

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