J.P. Morgan: Embedded Finance Visions Should Start With the ‘Why’

“If you’re looking toward an embedded finance solution,” Brady Warner, head of embedded finance solutions at J.P. Morgan Commercial Banking, told Karen Webster, “you need to really ground your strategy, and make sure you’ve got a good sense of what you want to achieve and how it works for your broader business.”

The concept, and the process, of integrating financial services into non-financial applications or experiences promises new revenue streams for forward thinking FinTechs and software providers — and marketplaces too. 

But only if some fundamental questions are asked and answered.

“Integrated experiences have been something that we’ve seen throughout the technology world for a long time,” he told Webster, “but this is relatively new, through the past five years, for financial services and particularly for banks.”

And by extension, he noted, corporate clients of financial institutions (FIs) have the power to transform entire verticals with embedded finance — spanning business software, online eCommerce firms, service providers, bill payers and even hardware.

There’s a significant “blue ocean” opportunity, Warner said, as new payment flows transform business-to-business (B2B) payments, enable earned wage access and boost financial inclusion.

In doing so, new relationships can be forged between software providers and their enterprise customers, and new ways to monetize those relationships, adding new revenue streams. 

Start With the ‘Why’

Before tackling any embedded payments journey, he said, “It’s really important to understand the ‘why’ of embedded finance,” he told Webster, “and what’s powering it.” 

Companies must think about why they want to bring finance into the mix, how they can solve customer problems with those offerings and exactly where those financial products and services can be integrated into existing client journeys.

“The most successful clients have come to us with a thought process of what they’re trying to do … and what kind of solution they want to establish … until you’ve addressed the ‘why,’ you might struggle.” Adding embedded finance for table stakes, or just because competitors are doing so, doesn’t guarantee an embrace by customers, he cautioned.

Levels of Ownership

As financial institutions’ clients tackle embedded finance, doing so entails a careful rethinking of an end-to-end payments strategy, Warner said, and how much “ownership” of the payments they want to take on.

There’s a large spectrum of insourcing/outsourcing possibilities, he said, noting that a firm might decide to “own” the customer experience but outsource everything else.  

They can in-source their embedded finance efforts, which involves taking on risk decisioning and control of payment inflows and outflows, thus owning the entire revenue stream. But that means accepting significant overhead costs and the burden of regulatory compliance.

In that scenario, regulation is hardly a static consideration, and is always changing. As he told Webster, “You’re hiring an underwriting team, thinking about a compliance department — all of those expenses can increase, and you’d really want to think about balancing that with the benefits you’re expecting.”

Then there’s the outsourcing approach, where clients can offload those risk and technological considerations to their financial services providers — JPMorgan among them — which speeds the time to market and cuts down significantly on investment costs amid operational complexity.

Fraud, of course, is an ever-present concern.

“You’re opening more ‘front doors,’” he told Webster, “and you’ll need to think about the volumes of fraud and what the cybersecurity concerns might be.”

Warner noted that the levels and degrees of ownership can change, depending on the core business model, and as the firm itself grows into new markets.

The Four Key Drivers

Any successful embedded finance strategy, he said, has four key drivers:

  1. Convenience, where customers want integrated experiences, delivered in real time.
  2. Data, which can be used to automate workflows and payment flows and personalize offerings.
  3. Speed, because everyone’s operating in a choppy macro environment, and getting paid faster means cash flow is improved.
  4. And with a nod to scale, he said, “Our clients, especially SMBs [small to midsized businesses], are really looking for ways to access the same scale benefits of a large corporation, whether that’s vendor costs or whether that’s technology, talent or even the distribution channels that some of them have.”

Finding the Right Partner

Partnering with financial services providers, he said, can power the various mixing and matching of insourcing/outsourcing embedded finance efforts — while reconfiguring their solutions as these client firms grow into new markets. Financial institutions, including, JPMorgan, he said, can prove especially useful in helping client firms manage the fraud risks, validation services and cybersecurity questions.  

Fraud may always be a component in finance and with embedded payments — and is a challenge at all stages from authorization all the way to payouts. And embedded finance providers, he said, have to find a healthy balance between how much fraud they might risk, versus the client experience itself. 

JPMorgan’s three-pronged approach on risk, he said, validates each customer across a client’s platform, matches names with those accounts, and then deploys tokenization in an effort to safeguard financial information.

The partnership approach, he added, also allows financial institutions to “marry” the financial data with clients’ business data, and help chief product officers work with CFOs to make sure that the embedded finance journey is made as efficient as possible. That collaboration helps speed the reintroduction of lending products and anticipate new use cases with artificial intelligence (AI), with an eye on the Internet of Things, augmented/virtual reality and even connected cars.

As he told Webster, “Thinking through your differentiation factor, as you come to your financial partner, helps us make sure that [clients] are building for the right purposes and achieving the ultimate objectives … all of which makes sure that their solution stands out in the marketplace.”