Nadeem Shaikh, the co-founder of Anthemis and now CEO of Neem exponential puts it simply: “Embedded Finance in emerging markets is the next big thingNadeem Shaikh, the co-founder of Anthemis and now CEO of Neem exponential puts it simply: “Embedded Finance in emerging markets is the next big thing. We estimate the total value is $167 billion dollars in Pakistan alone. Pakistan has been growing rapidly but it is still underdeveloped, and it is the last frontier that has not been invested in.” He argues that now is the right time for that investment in Pakistan: “The venture capital tech sector had the largest amount of investment in the world last year. Already this quarter it is double the pace that we had last year.” All across the fintech sector: in government, in ecommerce and in logistics this opportunity applies, and it is being seen in financial wellness and in open banking architecture because Pakistan has a huge market in the underbanked.
Data powered personalization allows financial services players to create services and products which are tailor made for the needs of the customers, including businesses in the form of embedded finance. A recent survey of marketeers on the way this technology is used showed that “Delivering a better experience to customers is a top goal for a data-driven personalization strategy to achieve for nearly two-thirds (64%) of marketing professionals surveyed. Increasing visitor engagement and increasing conversion rates are also primary objectives according to 44% and 43% of those surveyed, respectively.” With specific needs being met, resources can be better utilised to provide more seamless service, without superfluous products being offered. As well as creating conditions for better financial decisions to be made, personalisation of services allows for niche markets to be catered for.
Traditionally people have been provided with services like a bank account, and a savings account or a credit card as a way of meeting consumer needs. It was a static relationship. I am running a business. I have a farm. I am growing something. I need to get a loan to provide me with inputs: fertilizer, working capital etc. I go to the bank at a point of service and say, “Hey financial institution, could you please give me a loan”. They say: “okay: give me all your data and all the details: how many cows and so on. Then perhaps, maybe, we can even give you some kind of product and that will be a generic product – 150,000 rupees loan. That is the old way of doing banking.”
Open banking breaks down this static relationship through embedded finance: a key part of the open banking revolution. As Shaikh puts it “this is banking provided at the point of experience. I’m a farmer. I am already working with you as the financial product provider. You already know how much yield crop I can get with the fertilizer I need and you can provide with the right working capital in real time.” This is the key difference: “the embedded digital financial product will get a loan to you to get that fertilizer when you need it. You don’t have to give me any additional data because I already know who you are and what you do. That becomes the point of experience. I can embed payment products, lending products, savings products, insurance: I can give you rainfall insurance. I can give you heat wave insurance, as opposed to give you what a bank would do which would be to give you a generic life insurance or look at your application once the weather was hot. I do not need life insurance as a farmer or as a micro SME or as an individual. I might need a pay roll advance before the weather is hot because you already know my payroll, so you give me a couple days in the hand because you have seen the cycle before.” This means that the customer does not need to come each time there is a problem and begin the process from the beginning.
Personalisation of credit products through embedding them in the point of experience, utilizes multiple sources of historical data, potentially including non-traditional sources such as regular rental payments, in order increase access to credit. It understands the business circles of clients better. The advantages for established consumers of financial service products are clear. On one level it will be as simple as ensuring that your letter box and your in-box are not filled everyday with products you do not want or need. But at a deeper level it will also help to reduce and perhaps even eliminate the mis-selling of products that has been a feature of a series of financial scandals and significant compensation schemes in recent years in the west, and in emerging markets like Pakistan will allow the underbanked to access a greater range of the products and services they need, when they need them.
As the world emerges from the covid-19 pandemic, wider access to credit will assist in the growth and rebuilding of economies. Nadeem is highly optimistic about the implications of Open Banking: “The real-time sharing of relevant data allows people who were previously excluded from the financial world to be included in the credit system, as well as bridging the gap between lenders and businesses and if traditional banks in Pakistan will not lend, there are plenty of people coming into that market that will.”
The increased openness and decentralization of finance provides more power to the consumer, as with consent-driven data sharing the customer is fully in control of their funds and financial information. In an open data world, businesses and consumes allow access to their data in order to improve the end user experience and receive personalized offers and services in industries that eventually could include retail, health, or utilities. In Pakistan the investment is coming, demand is there and this decentralisation is building trust relations with particular communities, for example the farming community and the micro-SME community.
This is not immediately dealing with those who are outside the banking system looking in, but it might help get people into the system over time. It is about increasing the access to services of those who are underbanked. “Lots of people may have a bank account but they don’t have access to cheap payments so the way they make payments is expensive, they do not have access to products embedded in the point of experience.” The embedding of products in this has immense implications. It could be immensely empowering way beyond the usual markets and beneficiaries of financial services.