When Brands Become Banks - The development of embedded finance as evidenced by the German e-commerce industry - Solarisbank
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When Brands Become Banks
The development of embedded finance
as evidenced by the German e-commerce industry
Content
3 Foreword
4 Executive summary
5 What is embedded finance?
The development and function of embedded finance
The origins of embedded finance
The current development
What is the impact of embedded finance?
Why is embedded finance relevant today?
10 Key dimensions of embedded finance
Identification/KYC
Account
From user account to bank account
Payments
Cards
The growing importance of virtual credit cards
Credit
Digital Assets
The potential of embedded finance
24 Industry development and potential
Embedded Finance at the industry level
27 Deep dive: e-commerce in Germany
E-commerce in Germany – an overview
The digitalization of retail in Germany
Embedded finance in e-commerce
The conversion potential in German e-commerce
The e-commerce matrix
Conversion potential based on trust indicators
Conversion potential based on the direct survey
Using an account
Using a credit card
Using a credit product
Conversion potential – conclusion
Market potential of embedded finance in Germany
41 What’s next?
Content 2
Foreword
Traditional banks are having a tough time. Years of These brands have recognized that by enriching
low interest rates have squeezed margins to a sliver their products with financial services they are able
and Basel IV has dampened their maneuverability – to benefit from higher customer stickiness, more
or so they say. But what if external factors are not touchpoints and additional revenue streams. Further,
the key driver in their decline. What if, in fact, their if these players can augment the wealth of user data
centuries-old business model needs to be rede- at their fingertips – data they already harness when
signed? What if the next account you open or the assessing spending behavior – they can offer their
next loan you take out won’t come from your bank, customers tailored financial solutions at a quality
but from your favorite e-commerce shop? And what that is indistinguishable from that of a personal
if I told you, that this has already been going on for financial advisor.
some years, with the biggest wave yet ahead of us?
Any company can become a fintech
Embedded finance: financial services
seamlessly synced with life In Germany alone, there are over 100 million checking
accounts. We expect that in the next years half of
The idea of embedded finance, also often referred financial services in Germany will be provided by
to as contextual banking, is to “embed“ financial non-bank brands and challenger banks. That would
services directly into the products of other non- be more than 50 million accounts up for grabs. This
bank providers. This way, the financial service is figure multiplies as you look beyond Germany to the
available precisely at the time and place it’s needed. wider European landscape.
Specialized providers are enabling this by integrating
services such as bank accounts, payment cards and With an opportunity of this magnitude, the ques-
lending services seamlessly into the offerings of the tion is not if, but when, brands will become the new
likes of Apple, Amazon, Samsung or Walmart. banks. We are only at the start of the journey for
embedded finance, but time is running out for big
brands if they want to win first-mover advantages.
Dr. Roland Folz
Chief Executive Officer, Solarisbank AG
Foreword 3
Executive summary
Embedded finance describes the integration of This study examines the conversion potential of
financial services into non-bank products and embedded finance on the basis of the e-commerce
business processes. As digitalization continues sector in Germany. By analyzing 21 leading e-
to advance, embedded finance is becoming in- commerce providers in Germany, it can be shown
creasingly relevant to the market. that that the interaction rate with the customer, as
well as the customer‘s satisfaction, allow an approxi-
Compared to other sectors, retail is particularly mation of the conversion potential of e-commerce
predisposed for the integration of financial services: customers adopting embedded financial services.
The rapidly growing sector is highly digitized and al- The 21 e-commerce providers chosen cover the
ready reaches around three quarters of the German central retail segments of fashion, electronics &
population today – with all signs pointing upwards. media, hobby & DIY, furniture & household as well
as groceries & toiletries.
Streamlining the user journey to match customer
needs; enforcing a continuous digitalization; Along these parameters, the method can be applied
establishing a network of partners to strengthen to all other providers in the e-commerce sector.
customer loyalty - for many companies with a B2C
focus, these developments have been well under- In addition, this procedure can be replicated to es-
way for years and offer the opportunity to make a timate the conversion potential in other industries,
move into financial services. simply by adapting the respective industry-specific
indicators.
In order to prove the conversion potential for the
e-commerce sector in Germany in terms of con-
crete values, a survey with a representative sample
was conducted to directly determine the usage of
the 21 e-commerce providers and the willingness to
obtain financial services from these brands.
The survey shows that a total of 61 percent of
respondents are willing to use financial services
provided by the brands analyzed. The results reveal
that the conversion potential for embedded finance
in Germany is already very high and, in view of the
particularly high approval rates among younger
respondents, is still growing. The analysis thus
directly confirms earlier studies from the USA for
the German market for the first time.
Executive summary 4
What is embedded finance?
„Banking is necessary,
banks are not.“
This is how Bill Gates summed up his view of
the development of the financial industry back
in 1994. 27 years later, financial services are
still generally handled by banks. More recently,
however, Gates‘ forecast seems to be material-
izing – banks have long since ceased to be the
sole providers of banking services. Fueled by
the massive wave of digitalization, embedded
finance - also known synonymously as contex-
tual finance and contextual banking – is spur-
ring on a shift to „banking without banks”.
What is embedded finance? 5
The development and function of embedded finance
Embedded Finance is the integration of financial The current development
services into products and business process-
es of non-banks. It describes the cross-industry
convergence of financial services in products from
–
companies not originally from the financial sector. In a digital world, offering
These include retailers, mobility providers and,
crucially, big technology companies. There is a
embedded finance has be-
simple economic rationale behind this: providers come much easier for a wide
who „embed“ financial services into their products
deepen the value creation in their original sphere
variety of companies. This
of business – and are able to penetrate new mar- opens up the possibility for
kets.
other sectors who may not
have originally considered
The origins of embedded finance
the option.
While integrated financial services are gaining –
momentum in many industries today due to deep-
er digitalization, it is by no means a new concept. Companies do not have to hand over the customer
The idea behind embedded finance dates back relationship to a bank, but can maintain direct cus-
nearly 100 years. In 1926, the Ford Credit Bank tomer contact throughout the entire value chain.
was the first „automotive bank“ to be founded in They integrate the financial service seamlessly into
Germany. Today, almost all major car manufactur- their customer journey, as opposed to ushering the
ers worldwide have banks as part of their corpo- user back and forth between different user inter-
rate structure: for most people, the car was and faces. The check-out process of an online store, for
is a purchase that requires financing. Against this example, is designed in such a way that customers
background, it is worthwhile for the Original Equip- do not have to leave the site. The payment process
ment Manufacturers (OEMs) to offer this financing is fully integrated, and processing takes place in the
themselves. background.
What is embedded finance? 6
The provision of financial services requires a li- What is the impact of
cense. So called “Banking-as-a-Service” providers embedded finance?
therefore serve as the basis for embedded finance.
Businesses partner with banks that contribute the
corresponding license. Today, a large number of
–
providers covering different product ranges have In principle, an embedded
established themselves in this segment. Along
with the banking license, they offer suitable solu-
finance offering is applicable
tions ranging from parts of the infrastructure to the to any business that sells a
entire technology and product platform. From the
perspective of the end customer, the brands always
service or product.
remain in the forefront, while the Banking-as-a- –
Service provider remains in the background.
A transaction is not complete until the product is
This can already be observed in the retail sector, paid for. If businesses succeed in keeping the finan-
for example. Many retailers now offer installment cial processing in their own hands and integrating it
loans or (zero-percent) financing themselves, en- seamlessly, there are opportunities to strengthen the
abled by a financial institution in the background. connection with the buyer beyond the mere payment
This type of interaction drives the disintermediation process. Businesses can boost the customer value,
of the banking sector in general and the customer‘s for example, by increasing the average shopping cart
respective principal bank in particular. As a result, value through zero-percent financing, or by offering
the distribution channels for financial products are a bonus program linked to the company‘s branded
transforming. credit card.
Simultaneously, the revenue streams of traditional For non-banks, embedded finance creates new
banks are coming under increasing pressure. This revenue opportunities at low marginal cost. This
trend is further reinforced by the introduction of applies not only to new customers, but equally to
the PSD2 directive. ‘PSD2’ as it is known in the existing customer relationships. Customer loyalty
industry, aims to level the playing field for market and repeated purchases are encouraged. At the
participants. The directive promotes the develop- same time, it is precisely these characteristics –
ment of innovative online payment options and loyalty and frequent contact with the provider – that
mobile payment channels, while improving security act as an incentive for customers to adopt integrat-
consumer protection. ed financial services to ease their customer journey.
What is embedded finance? 7
Why is embedded finance relevant today?
The evolution of banking has been a hot topic recently, this is changing at an increasing pace.
for years. Open banking, i.e. the open access to Neobanks are gaining ground in the retail mar-
customer and transaction data, is liberating the ket. A customer-centric approach is meeting the
financial industry and enabling the integration of changing demands of digitally savvy customers.
financial services into larger ecosystems. Banking- The favorable conditions offered by neobanks
as-a-Service is a component that translates this compared with many long-established institutions
opportunity into a concrete, customer-centric encourage customers to switch or set up second or
use case. third accounts. And last but not least, the providers
are betting on large and growing ecosystems: by
Open banking had been hailed for its disruptive integrating with a user-centric partner network,
potential for years, but with little evidence to neobanks can exploit platform effects and
show for it in the retail market. However, more strengthen their customer loyalty.
Top 500 global banks, payment providers and fintechs*
Share of market capitalization, in %
100
80
60
40
20
0
2010 2012 2014 2016 2018 2020
* Estimated value used for private fintechs
Fintechs Payment providers Banks
Source: The Economist
What is embedded finance? 8
For a long time, established financial institutions banks are at a distinct disadvantage, as their com-
were able to counter such developments with plex IT legacy cannot compete in the short term with
a key advantage: a massive trust advantage. In the capabilities of the technology-focused neobanks
hardly any other industries does trust carry more and technology providers pushing into the market.
importance than in the financial industry. The
public‘s trust in banks presents a significant hurdle This further opens the door for embedded finance
for new providers in the financial sector. However, offerings for many brands. After all, they possess
what was once a defensible moat has begun to the trust and loyalty that is required to convince their
be bridged: Trust in banks has waned; the conse- customers of their own financial services.
quences of the 2008/09 financial crisis in particular
have caused a sustained loss of confidence.
In addition, many customers are taking a different
approach to traditional financial services. The
former basis of trust for banks, namely personal
interaction offered through a vast branch net-
work, is no longer in demand. Instead, the focus
has shifted entirely to the service itself. For years,
banks have been closing branches in response to
cost pressure, falling demand and the offerings of
direct banks and neobanks. In doing so, they are
inadvertently entering into direct competition with
the online providers. In this arena, many established
Bank branches in Germany
40,276 39,799 38,336 38,225 37,292 36,005
33,914
31,949
29,670 28,384
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Deutsche Bundesbank
What is embedded finance? 9
Key dimensions of embedded finance
For businesses, offering financial services is an
attractive tool to develop their customer relation- Financial Services
ship. They can deepen customer relationships,
simplify transactions via the seamless integra-
tion of financial processing, and tap into new
lines of business. For this to succeed, regulatory Identification (KYC)
requirements must be met.
User account
Key dimensions of embedded finance 10Identification/KYC
A core component of the regulatory requirements for A significant further development is the video iden-
the processing of financial services (at least for the tification, which enables KYC procedures on mobile
German market) is the identification of the customer devices. This way, customers can identify themselves
through the so-called Know Your Customer principle from any location, as there is no need to go to the
(KYC). In this process, information about the user’s post office or branch. The downside is that the video
financial circumstances is collected according to the identification is not infinitely scalable, relying on call
type of financial service requested. The complex- center agents to perform the identification. This can
ity of this process increases as you move beyond result in longer wait times with rising identification re-
mere payments to direct debits, loans, insurance or quests which could lead to increasing bounce rates.
investments. This process plays a central part in the The customer themselves, on the other hand, can
customer relationship: it must meet the regulatory carry out the identification at any time and from any
requirements without compromising on a fast and location, as there is no need to go to the post office or
frictionless user experience, or else the customer bank and check the identification there.
may abandon the process.
Another option is the Bankident method: If the
Thus, the KYC process is a balancing act of customer already owns a verified bank account, they
simplicity and security can carry out a microtransaction from this reference
account, receive an SMS TAN, and use it to create
▪ Retailers and relevant brands in a sector want to a qualified electronic signature. This identification
make their offers as attractive as possible for process does not require any human interaction, and
customers. is therefore infinitely scalable and entirely indepen-
dent of opening hours, allowing for a seamless user
▪ At the same time, they need to comply with experience.
regulatory requirements and minimize the possi-
bility of fraud. A future possibility is sketched out by the idea of
KYC sharing, wherein financial service providers
This can be achieved via different approaches. share their customers‘ KYC data directly with each
other so that the customer does not have to identify
Some procedures rely on personal identification, themselves over and over again for each application.
for example at the post office or a branch –
a process that is not particularly attractive in To offer an embedded financial service, the chosen
terms of user experience. KYC approach will consequently play a central role.
The deepening digitalization of many areas of life
has increased customer expectations for ease of use
while also creating new opportunities for the friction-
less integration of this process into the transaction.
Key dimensions of embedded finance 11Account
The account is at the core of the financial world. In addition, there is the possibility of linking further
All payment, credit and even crypto services can be services like bonus or loyalty programs with cash-
processed via the account. The account is thus also back rewards directly to the account, further subsi-
the center of all embedded finance solutions – it is dizing the core business.
both the first step into the financial services offer-
ing, as well as the basis for the entire ecosystem
of further financial products. Businesses that have
guided their users through the KYC process to open
an account are in a strong position to layer further
financial services on top of it. This leads to a lock-in
effect, since switching to another provider would
necessitate opening an account again. At the same
time, the business strengthens their core offering by
reinforcing the connection to the user and broaden-
ing the basis for touchpoints. Credit
Card
Bank account
Digital assets
Payments
Key dimensions of embedded finance 12Use Case: o2 Banking From user account to bank account
In cooperation with a German financial institu- By offering financial services, businesses are
tion, the German Telefonica subsidiary o2 offers evolving what was previously just a user account
its customers the “o2 Banking” service, a current into a „fully comprehensive“ bank account. By
account with add-ons such as a debit or credit linking user and behavioral data with payment data,
card. The account can be controlled via the so- customers can be offered finely tailored (financial)
called “o2 Money app”, in which customers are services that match their personal requirements
able to manage and control their finances via and circumstances much more closely. This cre-
smartphone. Similarly, the Apple Pay and Google ates an offer for customers in which core and
Pay payment services can be integrated with financial products stand side by side. Since they al-
the banking account. Further, customers using ready have existing customer relationships through
o2 Banking can participate in an interest bonus their core products, these businesses have far
program. lower customer acquisition costs for their financial
service offerings compared to traditional banks.
Prime examples for this include the automotive
banks in Germany, such as Volkswagen Financial
Services, but also Google Pay and Uber.
Average customer acquisition costs
in US$
315 303 213 98 80 10 7
Telephone Banking / Real Estate Transport E-commerce Retail Travel
services Insurance
Source: Proof Technologies
Key dimensions of embedded finance 13For providers of financial services, it is thus essential Use Case: Uber
that the account is anchored as the basis for fur-
ther services. From the customer’s perspective, on Mobility service providers Lyft and Uber are
the other hand, the account is by and large a mere offering their own bank accounts to their drivers
commodity product. The potential for differentiation with the aim of connecting drivers with their
is low and competition boils down to cost efficiency billing system as quickly and easily as possible,
and brand strength. The integration of financial reducing the transaction costs for both parties.
services into the Starbucks app, for example, For more than a third of its drivers In Mexico,
allows customers to conveniently and quickly pay who previously did not have access to financial
for their coffee with one click. Starbucks, in turn, services, Uber is offering debit cards coupled
saves transaction costs, increases its customer with their respective Uber accounts.
loyalty and receives additional information about its
customers and their habits. Uber also uses instant payment methods for
about 70 percent of its payments. As long as
the funds remain on the credit card, which Uber
issues in the U.S. in partnership with Visa and
GoBank, the card is free to use. In addition,
both Uber and Lyft have a worldwide cashback
program that pays back about one percent for
every payment made with the credit card at
participating partners, next to further discounts
at selected partners.
Key dimensions of embedded finance 14Payments
With payment processes increasingly being integrat- directly by the respective application. This seamless
ed directly into digital user experiences, traditional integration of payment transactions into the user
financial service providers are losing touch points experience takes place without any interruptions and
with their end customers. For instance, consumers with a minimal number of clicks. Uber or Free Now
no longer need to have cash on hand or access their are good examples of early adopters of this in the
bank account when paying for a cab ride or a meal mobility sector.
delivery. Instead, the payment is initiated digitally
Most popular online payment services in Germany 2020
“Which online payment services have you used in the last 12 months?”, in %,
multiple answers possible
6 3
Apple Pay BillPay
14
Giropay
8 4
Paydirekt Skrill
22 13
Amazon Pay Google Pay
95 42
PayPal Klarna
Source: Statista Global Consumer Survey
Key dimensions of embedded finance 15Use Case: Samsung Pay Major US technology groups such as Apple and
Google also offer integrated financial services.
At the end of October 2020, the South Korean Apple launched its Apple Pay digital wallet back
electronics company Samsung launched its in 2014 - initially only in the USA. Google followed
Samsung Pay service in Germany. Samsung suit a short time later with Google Pay. Both apps
is supported by Solarisbank, which provides a function as wallets. Ultimately, payment cards –
virtual debit credit card as a payment method both purely virtual or traditional physical cards – are
and a free account for settlement. A „buy now, connected to them as a means of payment. How-
pay later“ option called “Splitpay” is also inte- ever, these do not necessarily have to be the cards
grated: For purchases over 100 euros, the cus- offered by the technology companies themselves.
tomer can choose to pay the amount in install- After initial registration, the consumer makes con-
ments, instead of paying the full purchase price tactless payments with his smartphone via Near
immediately. Payments with Samsung Pay can Field Communication (NFC).
be made via various devices such as cell phones
or the Galaxy Watch.
Online payment methods in Germany
“Which of the following payment methods have you already used when paying online?”, in %
PayPal 85
Invoice 77
Direct debit 57
Credit Card 53
Prepayment 45
Instant bank transfer 42
Amazon Pay 23
Financing / Installment Payment 16
Cash on delivery 15
paydirekt 12
giropay 10
Apple Pay / Google Pay 6
Source: ibi research
Key dimensions of embedded finance 16Cards
Another payment trend is the integration of Use Case: Lufthansa
(virtual) payment cards. These serve as a supple-
ment to the account and are an important means The German airline Lufthansa offers credit cards
of establishing and maintaining an ongoing con- to its customers through its „Miles and More“ bo-
nection with the brand. The customer carries the nus program that not only has a payment function
card with them at all times and interacts with the with the option to collect bonus points, but also
brand every time they make a payment. includes travel cancellation and travel interruption
insurance, comprehensive rental car insurance
Bonus programs for shoppers have already been and international travel health insurance as stand-
on the market for many years. Once these are ard in the Gold variant. Other packages, such as
linked to a payment card with loyalty programs insurance against loss of baggage or travel acci-
however, they become far easier to use from the dent insurance, can also be added as an option.
customer‘s point of view. There are many examples
of this on the German market alone. Lufthansa, for
example, offers a credit card linked to insurance
products through its frequent flyer program „Miles
and More”. Deutsche Bahn offers a similar model
with its BahnCard credit card. Contactless payment in retail
“Have you ever made a contactless payment at a
Directly coupled to the option of offering a bank retail store?”, in %
account as a central service hub is the possibility
Yes, by tapping a bank card
of extending the service suite via (virtual) debit
44
and credit cards at favorable conditions. 66
Yes, by tapping a credit card
The sports watch manufacturer Garmin has already
20
integrated a payment option in some of its models. 25
Likewise, digital payment via Swatch Pay is even
Yes, with the smartphone
possible with some semi-analog watches from
6
the manufacturer Swatch. In Germany, the major 11
customer loyalty program Payback has already
been on the market since 2016 with its Payback Yes, with a wearable
1
Pay service. 2
No, never
45
25 2019
Source: Visa 2020
Key dimensions of embedded finance 17The growing importance Use Case: Amazon
of virtual credit cards
Amazon, the world‘s largest online retailer,
uses its credit card to incentivize its users to
Specifically for online payments, more and more buy from its own online shop, rather than from
providers are offering virtual credit cards. Users competitors. When paying for purchases with
receive digital access via password and user name the company‘s own credit card, customers
as well as credit card number and validity – but receive points, which in turn can be used as
(typically) no physical card. While a KYC process is credit for purchases at Amazon.
required for the application, virtual credit cards can
function according to the prepaid principle, which Premium members of Amazon Prime receive
supposedly offers users greater anonymity when the credit card free of charge, so there is an
making online purchases. additional monetary incentive to extend mem-
bership status.
Key dimensions of embedded finance 18Use Case: Apple Card
The American tech company Apple has been
active in the field of embedded finance since
2014 with its Apple Pay payment system.
Initially, the company offered a wallet in which
the payment options of other providers could
be stored. The company‘s own Apple credit
card – the Apple Card – was then launched on
the US market in 2019. The Apple credit card
comes in a virtual format that allows contact-
less payment with the iPhone or the Apple
Watch as well as in the form of a physical credit
card that can be used wherever contactless
payment is not possible.
Apple‘s bonus program is designed to reward
customers more for payments with the digital
credit card than with the physical one.
According to Apple, the bonus is credited to
the customer immediately and can be used for
all purchases, even outside of Apple. The bo-
nus is highest however when the Apple credit
card is used for purchases at Apple or select
partner companies. In this case, the so-called
Daily Cash is 3 percent of the payment value.
The Apple Card works similarly to an ordinary
revolving credit card, which means that it
charges interest on the amounts that are not
repaid directly. The Apple Card has so far only
been on the market in the USA.
Key dimensions of embedded finance 19Credit
Integrated lending has a broad range of applica-
tions – if you consider the automotive banks that
have been active in Germany for almost 100 years,
it is something like the mother of embedded
finance. oday, almost all major automotive manu-
facturers offer integrated credit solutions through
their own banks. In the automotive sector, the
sheer size of the transactions is the primary driver
for this need.
Through a similar mechanism, Lending-as-a-
Service is also increasingly being used. For
the majority of consumers, the most expensive
purchase of their life is that of a property - the
number of properties financed at least in part by
a loan is close to 100 percent, and loan amounts
in recent years have risen significantly in the wake
of the property boom. The market is huge – and
the opportunity for integrated financial services
is vast. A further realm that has so far been of im-
portance primarily in the U.S., but increasingly in
Europe as well, is the integration of student loans.
In other segments, the motivation of users to
finance a purchase is sometimes different –
but therefore no less relevant for the integrated
offering.
So-called „buy now, pay later“ (BNPL) models
are currently experiencing a breakthrough in
many retail sectors. They enable customers to pay
for purchases, particularly larger ones, in several
small installments over an extended period of time.
This is where the distinction between payment and
credit becomes blurred. When a shopper opts for
a BNPL option instead of paying with their credit
card, they are (implicitly) taking out a loan.
Key dimensions of embedded finance 20Use Case: Shopify Shopify, for example, has not only been able to
reduce transaction costs for its customers by
In addition to enabling their customers to set integrating the financial processing of purchases
up their own online shop, Shopify also offers made via the platform, but has also been able to
the payment processing for the goods sold open up an additional source of revenue for the
in the shop. Sellers can offer their respective company itself.
customers various payment methods directly in
their online store, such as payment on account The transition from the original payment
or by credit card. Installment credits or BNPL process to credit occurs seamlessly.
options are also possible.
Such BNPL offers are best practice examples of
This integration of applications for the financial how non-financial e-commerce companies can
processing of purchases made via the platform embed financial services into their customer jour-
has enabled Shopify customers not only to ney. On the one hand, the customer gets greater
reduce transaction costs for their respective financial flexibility. On the other, the merchant can
customers, but also to open up an addition- boost their conversion rate, increase the average
al source of revenue for themselves. In 2019 value of the shopping cart, and generate addition-
alone, Shopify generated nearly $400 million al interest income.
in revenue from its payment capabilities. In the
third quarter of 2020, Shopify will reach a vol-
ume in payment transactions of around 14 bil-
lion US dollars. Shopify earns between 2.4 and
2.9 percent on each transaction, plus a base fee
of between $0.25 and $0.35 per transaction.
The business also extends additional credit
to qualified merchants on its platform with a
12-month term. The frictionless credit process
is handled entirely via the Shopify account.
Key dimensions of embedded finance 21Digital Assets
Digital assets such as cryptocurrencies are currently Use Case: Facebook
particularly suitable for scenarios in which many
users transfer small amounts among themselves. Facebook caused a public stir with the announce-
This is especially true for gaming, social media ment of its own cryptocurrency Libra. Since then,
and streaming platforms with many millions of the currency has adopted the new name Diem.
users. Going forward, they will benefit significantly The currency is accessible via the company‘s
from the advantages of blockchain technology and own wallet Novi. With the establishment of an
carry out free transactions in real time without banks own currency, Diem and Novi are on the path of
as additional intermediaries. For businesses, this a very deep integration of financial services. The
represents an opportunity to increase the rate of currency will not only be usable for Facebook‘s
interaction with their customers and learn valuable homegrown solutions, but will also be accepted by
data about their customers‘ preferences and pur- partner companies. The currency has been subject
chasing intentions. to criticism from politicians and regulators due
to exchange rate and liquidity risks, among other
This is one of the reasons Facebook has been factors. Facebook‘s ability to use Diem to further
developing its own digital currency, the so-called expand its already considerable market power and
Diem – originally launched as Libra. However, such prevent competition is also viewed critically.
digital currencies will also lend themselves for the
processing of larger transactions. For example, the
carmaker Tesla recently announced a $1.5 billion
investment in Bitcoin – coupled with the announce-
ment that it intends to accept Bitcoin as a means of
payment from its customers.
The same applies to the crypto-as-a-service
sector. Businesses such as Paypal, Robinhood and
Revolut are integrating the aforementioned services,
including crypto trading and crypto custody, directly
into their product offering. In the German market,
there are already regulatory frameworks in place
that require digital asset custodians to obtain a
respective license.
Key dimensions of embedded finance 22The potential of embedded finance
Venture capital investor Andreessen Horowitz Development of embedded finance,
estimates that software companies alone can at forecast
least double, and in some cases quintuple, their In billions of euros
revenues by integrating financial products into their
„software as a service“ applications. CAGR
2020 2025
in %
Lightyear Capital estimates that the embedded Wealth
0 2.6 -
finance market will grow from its current level Management
of around €22.5 billion to approximately €230 bil-
Consumer loans 1.4 15.7 62
lion globally by 2025. This corresponds to average
annual growth of almost 60 percent. The invest-
ment firm Bain Capital also estimates that the total Insurance 5 70.7 62
attainable revenue from embedded finance in the
U.S. alone will be around € 3.6 trillion by 2030. Payment services 16.1 140.8 54
Three trends in consumer behavior are driving this Soruce: Lightyear Capital
growth in embedded finance:
▪ A shift in purchasing behavior toward online The technology company Tribe Payments has
shopping, which has been accelerated by the determined the following in a survey of 125 fintech
corona pandemic. managers: Nearly a quarter of respondents expect
businesses outside the financial sector – particu-
▪ An increasing receptiveness to use financial larly large tech companies – to compete on equal
products even from businesses that are footing with banks through the use of embedded
not part of the traditional financial sector – finance. A further 28 percent even assume that
especially for simple services such as payment they will dominate the financial sector, but will have
processing. to cooperate with financial institutes in the process
due to high regulatory requirements. Almost three
▪ The growing willingness to share personal data out of four respondents consider machine learn-
with businesses. ing to be the most significant trend in this context,
followed by the Internet of Things and automation
processes, as these trends significantly facilitate
the use of financial technology in non-financial
companies and enable economies of scale..
Key dimensions of embedded finance 23Industry development and potential
Today, embedded financial services already appear in
many businesses across different industries.
Whether embedded finance is likely to be implement-
ed in any given industry cannot be roundly predicted.
Sectors differ in their structure; the way their custom-
er relationships have grown historically and regulatory
issues must also be considered. A precise analysis at
the company level therefore ought to be carried out on
a sector-specific basis. Nonetheless, there are also
indicators at the macro level of an industry that can
be used to approximate the conversion potential for
embedded finance.
Industry development and potential 24Embedded Finance METHODOLOGY:
at the industry level
The digitization (y-axis) of the industries is taken
The industry matrix shows a selection of industries from the economic index DIGITAL, which Kantar
arranged according to their level of digitalization and TNS conducts on behalf of the German Federal
the degree to which they use services from custom- Ministry of Economic Affairs. Specifically, the 2022
er experience (CX) consultancies. projections from the 2017 survey were incorporated
into the matrix, as these reflected future expecta-
The matrix thus covers two key indicators that favor tions. A comparison with other digitization indices
the integration of financial services: at the industry level confirms the results.
▪ The more deeply an industry is digitalized, the The value for CX consulting (x-axis) was formed
easier it is to seamlessly integrate financial using the Digital Experience Services study
services into operations. (Lünendonk, 2020). A survey of service providers in
the field of CX and the industries in which they are
▪ Customer centricity plays a role insofar as the active shows how focused various industries are
integration of payment processing and other on this topic area. The values plotted in the matrix
services should improve the customer experi- show the proportion of industries in which CX con-
ence - businesses and industries that place sultants and solution providers are “very strongly”
greater emphasis on CX have a greater incen- or “strongly” active.
tive to focus on embedded finance.
Based on the macro analysis: three stand out in
the overview of selected industries as having high
potential for embedded finance: Information and
communications technology (ICT), financial and
insurance service providers, and retail.
Industry development and potential 25CX-Consulting
90
Retail
Mechanical
Engineering
Other
manufacturing
industries
Automotive
Financial and insurance service provider
(insurance)
Energy and water utilities
Transport Chemicals ICT
and and pharmaceuticals
logistics
Healthcare
30 Digitalization
30 90
Sources: Lünendonk (2020), Kantar TNS Industry development and potential 26Deep dive: e-commerce in Germany
E-commerce in Germany –
an overview
According to the industry matrix, retail is most
predisposed for the integration of financial servic-
es. Not only does it show the highest value for CX
processes, it is also at the forefront of digitali-
zation. The industry is already highly digitalized,
which is reinforced by the continuously growing
share of e-commerce.
What‘s more, retailers are reaching a large num-
ber of users with this digital offering: the penetra-
tion rate of e-commerce in Germany was 75 per-
cent in 2020. It no longer represents a mere
niche, but a widely accepted form of shopping.
Deep dive: e-commerce in Germany 27The digitalization of retail in Germany Embedded finance in e-commerce
Retail is one of the industries that have digitized E-commerce is an industry with a very large poten-
in a fast and highly visible manner. From 2000 to tial for embedded finance – and not just in Germany.
2019, e-commerce sales in Germany increased This arises from a number of factors:
sixty-fold from 1.1 billion euros to 59.6 billion euros.
The COVID pandemic and the subsequent contain- ▪ E-commerce is by definition the digital arm of
ment measures have accelerated this trend: commerce - it is therefore already fully digitized,
In 2020, e-commerce turnover rose to more than and the path to the integration of financial servic-
77 billion euros in Germany. es is comparatively short.
▪ E-commerce is now experiencing widespread
penetration in all demographics. E-commerce
penetration is particularly high among young
consumers, who are also more open to embedded
finance offerings.
This means that e-commerce is a segment that
already has a high conversion potential today in
relative comparison with other industries, making it
suitable for an in-depth industry analysis.
B2C e-commerce revenue in Germany
In billions of euros
64.6 67.2 67.9 68.2
59.2 62.4
53.3
48.9
44.2
39.9
35.6
32.0
28.0
24.4
20.2
15.6
12.6
6.4 8.4 10.4
4.4
1.3 1.6 2.2 3.0
2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Forecast as of 2021
Sources: HDE, Statista
Deep dive: e-commerce in Germany 28Customer satisfaction (1 = very good; 5 = poor)
2,2
DocMorris
Amazon
Adidas dm
H&M MediaMarkt
Conrad Zalando Rossmann Lidl Mean value
Zooplus Otto
aboutyou
Tchibo
Fressnapf
Westwing* Real
Rewe
Obi
Hornbach
Ikea
3,0 Monthly returning visitors (retained audience)
0,2 2,0 20
Revenue ranges
> 5 Bn. € 500 M. – 1 Bn. € 100 – 250 M. €
1 – 5 Bn. € 250 – 500 M. € < 100 M. €
* Home and Living
Sources: EHI, ECC, Similarweb, Deutschland Test Deep dive: e-commerce in Germany 29The conversion potential
in German e-commerce
While the e-commerce segment as a whole offers The graphic E-Commerce Matrix - EF Potential
favorable conditions for integrating financial services, shows a selection of e-commerce providers relevant
the question remains which factors within the indus- in Germany from key retail segments: fashion, elec-
try influence such an offering. For the analysis of the tronics & media, hobby & DIY, furniture & household
industry, consumer trust in the brand is the key factor. as well as groceries & toiletries.
This includes a pronounced consumer loyalty and a
positive attachment to a provider. The matrix maps three dimensions of the business
evaluation:
In the analysis of German e-commerce, this brand
strength and loyalty is represented by two measura- ▪ The number of returning users,
ble indicators:
▪ the satisfaction of the users with the provider
▪ Customer satisfaction with a provider, and; form the two axes of the matrix and
▪ customer loyalty, measured by the number of ▪ the size of the company plot shows the e-
users returning monthly (retained audience). commerce revenue of the respective provider
in Germany.
Thus, the matrix shows the opportunities that the
respective businesses have in the area of embedded
finance: The position on the matrix reveals the con-
version potential. Consequently, when combined
with the sales volume in this segment, this lets one
approximate the potential market relevance.
Along these parameters, the method can be applied
to all other providers in the e-commerce industry.
In addition, the method can be replicated in other in-
dustries by adjusting the industry-specific indicators.
Deep dive: e-commerce in Germany 30To test the hypothesis, a second methodological METHODOLOGY:
approach is conducted in this analysis: a direct
survey of potential users. In a survey of a repre- Satisfaction with the analyzed online stores is
sentative sample, 2,000 participants were asked based on a publication by the Focus Money brand
to indicate for all the e-commerce providers „Deutschland Test“ from 2020. Together with the
analyzed whether they use them and if they would research institute ServiceValue, the experience with
use a selection of financial services from these online stores in Germany was surveyed as part of a
providers. representative survey of the population. Consumers
responded on a scale of 1 (best possible rating) to 6
(worst rating).
The e-commerce matrix
Data from the market research company Nielsen is
Amazon stands out among the group of busi- used for the frequency of contact. The specific key
nesses considered. The leading e-commerce figure used is the retained audience, which com-
provider in Germany records not only by far the pares the number of unique users in a month (data
highest number of monthly returning visitors used: as of 02/2021) with that of the previous month
(retained audience) - Amazon is also in the top for each of the online stores examined. The meas-
group in terms of customer satisfaction. In ad- ure of returning users controls for outliers arising
dition, Amazon is the business with the highest from one-time users, for example in the course of
e-commerce sales - and by a clear margin. Otto, marketing campaigns, and is focused on frequent
the second-largest of the online retailers in terms users who are more receptive to a deepening of the
of turnover, generates around a third of the sales. customer relationship.
The external source analysis was also validated
Conversion potential based on through primary data collection: A representative
trust indicators survey directly queried the frequency of use of all
21 online stores analyzed. The data used is based on
Among the businesses analyzed, Amazon is un- an online survey conducted by YouGov Deutschland
doubtedly in pole position in terms of establishing GmbH, in which 2,039 people participated between
embedded financial services – and is already active February 24, 2021 and February 26, 2021. The
in this area. results were weighted and are representative of the
German population aged 18 and over.
Otto trails behind by some distance: As the second
largest provider in terms of visitors and turnover, Revenue, the third dimension included in the matrix,
Otto shows a tendency toward strong customer is represented by the size of the respective compa-
satisfaction, resulting in a high conversion potential. ny presentation. The figures are taken directly from
And like Amazon, Otto already has its first offerings data provided by e-commerce providers for their
on the market. German stores..
The aforementioned brands from the groceries &
toiletries segment also show a relatively high conver-
sion potential.
Deep dive: e-commerce in Germany 31In the upper midfield, MediaMarkt and Zalando are provider and is almost 30 years younger than
also noteworthy cases. The two brands could hardly MediaMarkt. On the basis of the criteria examined,
be more different in their origin: The electronics however, both have very similar conversion potential
retailer MediaMarkt has evolved from a leading and lie above the average.
brick-and-mortar chain to a relevant player in the
online segment; the fashion retailer Zalando, on
the other hand, started out as a pure e-commerce
Deep dive: e-commerce in Germany 32Conversion potential based on the direct survey
The e-commerce matrix shows the relative potential analyzed. The different types of financial services
the different providers have in offering financial ser- considered were:
vices. The question of the absolute potential must be
derived by a further step. ▪ Current accounts
Together with the opinion research institute YouGov, ▪ Credit cards
a representative sample of the German population
was surveyed on their willingness to use a finan- ▪ And installment payments
cial service provided by the e-commerce providers
Survey
“Would you use one or more of the listed banking/ payment products from the online
stores of the following companies?”, in %
Yes,
7.6 15.3 28.2
current account
Yes,
6.5 10.9 23.8
credit card
Yes,
install-
3.2 5.9 14.6
ments
0% 15 % 30 %
Source: Own survey Lowest value Mean value Highest value
Deep dive: e-commerce in Germany 33Using an account Survey
“Would you use one or more of the listed banking/
payment products from the online stores of the
The basis for all financial services, the account,
following companies?”, in %
received the highest level of approval from
respondents: on average, more than 15 percent
of respondents say they would use a checking
Yes, current account
account from one of the brands. Amazon can
claim the highest approval rate: 28.2 percent –
meaning that significantly more than one in
four Germans is willing to use a checking
28.2 20.2 18.9
account offered by Amazon.
The e-commerce giant Amazon is also the north
Amazon Lidl dm
star in the company matrix, providing orientation
for the remaining e-commerce providers. In the
direct survey, Amazon thus confirms the poten- Source: Own survey
tial that was also attributed to the business on
the basis of the matrix.
This mechanism can also be observed in the
other businesses surveyed: The frequency
with which users and providers interact can
be translated into a high conversion potential.
A high level of customer satisfaction can rein-
force this.
The following places in the user survey are occu-
pied by Lidl and dm, two providers that were also
ranked in this order on the basis of the indicator
analysis – a pattern that is also largely matched
for the remainder of the list.
Deep dive: e-commerce in Germany 34Using a credit card Survey
“Would you use one or more of the listed banking/
For credit cards, the overall willingness was lower, payment products from the online stores of the
following companies?”, in %
albeit still relevant: on average, just under 11 percent
of respondents can imagine using a credit card from
the brands analyzed. The provider with the highest
Yes, credit card
adoption rate is again Amazon: At 23.8 percent, just
under one in four Germans could imagine this ser-
vice. Again, across providers, a correlation can be
seen between the intensity of customer touchpoints
23.8 15.0 13.3
and the willingness to consider a business‘s embed-
ded finance offer.
Amazon Mediamarkt Ikea
The fact that there are somewhat lower overall ap-
proval rates for the credit card than for the checking
account is surprising at first glance, since the prac- Source: Own survey
tice of offering branded credit cards from providers
outside of the banking sector is already widespread.
However, credit cards have not gained the impor-
tance in Germany that they have in other countries,
such as the USA.
Followed by Amazon is MediaMarkt. Based on the
matrix it would be fair to expect MediaMarkt to be
among the top group, but rather somewhat further
back. While the remainder of the distribution follows
the matrix distribution quite closely, there is a clear
outlier in third place: IKEA. This suggests that
IKEA is able to transfer its brand strength from
its brick-and-mortar presence very well – contrary
to what was to be expected on the basis of the
e-commerce matrix.
Deep dive: e-commerce in Germany 35Using a credit product Survey
“Would you use one or more of the listed banking/
There is lower overall demand among respondents payment products from the online stores of the
following companies?”, in %
for the providers’ offer for installment payments,
with just under 6 percent of respondents stating on
average that they would use such an option. The
Yes, installments
e-commerce provider with the highest approval
rate can interest 14.6 percent of respondents in
such an offer.
14.6 11.9 10.0
What is striking about the results for the ques-
tion on installment payments is not merely the
Otto Mediamarkt Ikea
overall lower willingness to use them, but also
the stark difference in the ranking of business-
es compared to the question on accounts and
credit cards. The highest approval rating for in- Source: Own survey
stallment payments goes to Otto - a provider that
already has an installment payment option prom-
inently featured in its offering. More importantly,
however, Otto offers goods from a very broad
range of segments, including those with a high
average shopping cart value. The same applies to
the other businesses with high adoption rates in
this area.
The mechanism behind the adoption rate of install-
ment products is thus different from that for the
other two services: demand is less clearly linked
to the respondents‘ interaction rate, but shows
a closer link to the potential shopping cart value.
This suggests a different motivation among users:
payment by installments becomes relevant as the
purchase requires a higher share of income –
making the option to pay in installments more
attractive. When this condition is fulfilled, the user
is also happy to use a credit offering that comes
from the product provider itself.
Deep dive: e-commerce in Germany 36Conversion potential – conclusion
Overall, the conversion potential for e-commerce The results of the direct survey of a representa-
providers in Germany is considerable: across the tive sample confirm the results of the conversion
various financial services, 61 percent of respond- matrix. Consequently, this methodology can be
ents could imagine using an integrated financial adapted for other businesses and industries in order
service. to derive their respective potential for embedded
finance, without having to conduct an extensive
More than a quarter of Germans could imagine using population survey for each case again.
a checking account from Amazon. The e-commerce
giant from the USA is thus clearly at the top of the
list of providers compared, but is by no means an
–
exception. The high conversion potential
in e-commerce overall shows
▪ A conversion potential of 61 percent across the
various providers and financial services shows a that advanced digitalization
significant acceptance rate already today.
and strong customer centricity
▪ The conversion potential is particularly high among enable significant potential
younger age groups, so an increasing demand over
time is to be expected.
for embedded finance.
–
▪ For accounts and credit cards, the conversion
potential is linked particularly to how frequently a The relative distribution of businesses within
user uses the online store. e-commerce indicates that contact intensity and
satisfaction are linked to conversion potential, but
▪ When installment payments are offered, on the other parameters are also relevant, depending on
other hand, the potential of a higher shopping cart the financial service.
value plays a greater role.
Deep dive: e-commerce in Germany 37At IKEA, for example, there is still a strong dis- The results for accounts and credit cards repli-
tinction between the brick-and-mortar business cate the results from prior analyses in the U.S.
and the online business; its e-commerce arm for the first time. In a consumer survey in the
has yet to match the standing it enjoys in brick- USA, analysts from Cornerstone Advisors queried
and-mortar retail. In the direct survey of willing- the willingness to take out an account with busi-
ness to use an embedded finance solution, how- nesses in other non-financial sectors.
ever, the brand ranks among the very top, given
its relatively high shopping cart values. This is Across all age groups, Amazon is the provider
an advantage that IKEA’s competitor Westwing, respondents would be most likely to leave their
who has already penetrated the online niche for account services to - between 46 percent (Mil-
the furniture segment, cannot yet claim for itself. lennials) and 9 percent (seniors) would be willing
to do so. There are also still significant approval
Thus, the ranking of providers when it comes to rates for the other providers queried. It is evident
the demand for installment payments reveals that all these digital businesses are predisposed
a mechanism comparable to that known from to offering embedded financial services, and in
the automotive industry: a high purchase val- fact many of them do so already.
ue, which makes financing more relevant, also
results in an openness to embedded offers from The different characteristics between the age
providers. groups can also be observed in Germany. The
general use of online stores and the frequency
of contact with them is higher among younger
respondents, and they are also more open to em-
bedded financial services.
Survey
“Would you use a current account from Amazon?”, in %
46
38
30
11 9
21–25 years 26–40 years 41–55 years 56–75 years 76+ years
Source: Conerstone Advisors
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