Andrew Ellis

Views on… is a new series from The Banker gathering thoughts and commentary on impactful issues shaping the future of financial services. Here, Liz Lumley talks to NatWest Boxed.

We are gathering Views on… embedded finance, which is widely regarded as having enormous potential for financial services and wider industry sectors. So far, we have sat down with John Salter, chief customer officer at ClearBankAlex Mifsud, co-founder and CEO of WeavrAndrea Ramoino, MD, Electric Money Business, UK & EEA Solaris and Christoffer Malmer, head of SEB Embedded.

In the final piece of this series, we meet Andrew Ellis, CEO of NatWest Boxed.

 

Q: What are the key differences between banking-as-a-service (BaaS) and embedded finance?

A: I don’t think there’s a standard industry definition. Over time we will land on one, but I suspect when people think about embedded finance, they think classically about credit being offered as part of a consumer journey. It’s quite helpful as the word ‘embedded’ suggests convenience and lack of friction, pointing to a very different way of interacting with financial services. BaaS is a term that speaks to a broader set of financial products provided in a very flexible and scalable way, typically delivered as a white-label solution. 

But you find people in the industry using both terms interchangeably. We have very much chosen BaaS to describe what we plan to do because we have a banking licence, we have accounts, we can offer payments, lending, all the things you expect with a bank, including the trust and the service we represent. Moreover, the ‘as-a-service’ element suggests a very modern way of partnering, with a clear relationship to the transformation enabled by the cloud in the computing world. 

Q: Which holds more potential for banks?

A: If you look at embedded finance, it’s double-digit growth potential, representing value pools of billions of pounds.

First, the world is digital and embedding services via technology enabled by modern architecture (including application programme interfaces [APIs]) is now possible. Second, the demand is there. Corporates want to own the relationships with their customers from end to end, and provide brilliant customer experience. 

As this area grows, we want to serve more customers as part of their day-to-day experiences, rather than expecting them to come to us. We believe the size of this market will just get bigger driven by the increase in payments, the shift away from credit cards, and the democratisation of brands that can offer financial services. 

Q: What type of financial services are consumers and businesses looking for?

A: Here’s a straightforward example. I have a relationship with a platform I love, whether it’s a school or team or something with great brand resonance. I have a current account with them, where I’m saving up money and I’m combining loyalty points for a season ticket, Christmas presents or whatever — it’s a kind of mini savings account. 

There’s also something in the whole ecosystem of payments, refunds and loyalty. If you’re looking at airlines, when they offer vouchers for cancelled flights — you can put it in a wallet, put it in an account, and use that elsewhere and earn points. The closed loop feels like something that is interesting.

I’ve heard as well in conversations with businesses a desire to offer credit to their customers via a proposition that is led by their brand, not a standalone buy now, pay later brand that gets in between the customer and the business. 

Q: Will demand for embedded finance decrease as the global economy recovers?

A: The key drivers are fundamental and structural. Financial services are key to consumer transactions and that is not going away.  The companies that can leverage the new opportunities that embedded financial services offers will have happier customers who spend more with them. 

These large businesses focus on servicing their customers and making sure that the journeys are fantastic. They’re all trying to create loyalty and usage — so that’s not going anywhere. It’s a competition between e-commerce and large retailers and a limited customer/consumer wallet.

Large retailers typically have small margins. But there’s margin in financial services products, which they’re currently paying to other people. It can transform a retailer’s economics if it can effectively provide the financial services itself and take some of that revenue. There’s just a very strong commercial element. They’re looking for different ways of making money. Having said that, the days of retailers owning banks are over, in my view. The fixed cost of running banking operations and remaining compliant is just too high. 

Banking was previously provided in a very clunky way, with limited scalability and flexibility. But BaaS? You can plug it in and out, you pay per use. It offers retailers less risk — it’s not a big tech build. They can provide these financial services without large expenditure. It really opens the space up. I think that’s important.

Q: What have been the barriers to embedded finance so far?

A: It’s an interesting one. This is where I’m quite excited, because Boxed is set up to play really well. If you are providing a credible banking service to a large firm, you need multiple things to come together. 

You need a flexible and cost-effective cloud-based technology set, which most banks don’t have. When you try and unpick the architecture behind the financial product, it’s dispersed, it’s wide, it’s ‘spaghetti engineering’. It’s getting better obviously, but I’m just making that point. You’ve got to have really good modern technology. 

You need a flexible and cost-effective cloud-based technology set, which most banks don’t have

It’s really important when you go to a client, they need to be able to take your proposition and plug it in. They need to get really good APIs and software development kits. That plug-in ability is not something that traditional banks have been able to do, as opposed to someone like Stripe who grew up doing that. 

You also have to make sure that you can provide whatever customer service is required at the level that the corporates want it — whether it’s picking up the phone or onboarding the customer at a brilliantly high-quality level.

If you think about the way banks are organised, it’s not an end-to-end thing. It’s your ops team, which sits over here run by some person, then your product team sits over there run by another person. To align around providing everything end to end, with all the agility and high service levels required, is extremely hard. 

That’s why we were able to, effectively, ring-fence an end-to-end solution. That’s a great advantage. But then if you are a small fintech, perhaps you don’t have the resources, the balance sheet, or the trust the access to corporates. There’s probably a trust/maturity level and scale needed, which makes it hard for them to penetrate this market. 

Q: How do we make sure that consumers and small businesses are protected?

A: As a regulated player in a regulated industry, I must make sure if I plug into a corporate that the consumer journey aligns with the principles and regulations in place. I need to make sure that with a new consumer duty regime coming, when I plug into a large retailer, that they are aligned properly when we when we do onboarding — for example, know-your-customer, and AML (anti-money laundering) and transaction-monitoring AML policies are followed.

I’m pretty confident. That’s one of the reasons why I think we’ve got great credibility in this space.

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