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Embedded finance within Wealth Management

Avi Shua, Group CIO for Pershing, Pershing X, Investment, and Wealth Management, BNY Mellon And Anish Shah, Managing Director, Head of Tech Product and Digital, BNY Mellon

Avi Shua, Group CIO for Pershing, Pershing X, Investment, and Wealth Management, BNY Mellon

The conversation around Embedded Finance has picked up in the last couple of years. Retail consumer finance use cases have proliferated with the emergence of Buy Now Pay Later (BNPL) and point-of-sale insurance solutions. At its core, embedded finance is a technology enabled version of private label finance. Private label finance has been around for decades in the credit card business, where brand partners (e.g., retail and travel establishments) have partnered with issuing banks and payment networks to provide credit solutions to end consumers.

Consumer demand for integrated experiences and developments in technology are now facilitating this at a modular level. Instead of white labelling the entire model, companies (i.e. buyers of embedded finance) can now pick and choose which portions of the value chain they want to utilize through third-party providers(i.e. sellers of embedded finance). How embedded finance can help complement individual firms’ strategy (buyers or sellers) is a function of their unique starting point and existing capabilities. The ecosystem will collectively need to solve for three primary components in the value chain:

-First, acquiring clients that a bank or retail establishment is looking to serve and will build embedded banking or wealth management solutions. Incumbents (financial or non-financial) with established sales and distribution channels are well positioned to own this capability.   

-Second is processing client interest in the solutions being offered, including accepting new account applications, und

Anish Shah, Managing Director, Head of Tech Product and Digital, BNY Mellon

erwriting a loan, or setting up a new deposit account. This could include managing the infrastructure, workflow and operational capabilities to support the financial solutions being offered.

-And third, fulfilment of these solutions through providing balance sheet access to accept deposits or issue credit, and capital markets connectivity (e.g., for trade execution, clearing, custody), etc. 

Putting aside regulatory considerations, firms have choices to make around which of these roles they can play and where they want to bring in strategic partners. For instance, a wealth manager looking to deepen their relationship with an existing client base through issuance of loans could focus on client acquisition and leverage their own balance sheet for credit extension. The processing of the loans could be done in partnership with a technology firm focused on automation and workflow orchestration of lending solutions. Leveraging partnerships such as these can allow firms to scale up to serve a broader set of client needs.

Competitive considerations

The rise of embedded finance has meant that the competitive set for traditional players has broadened. Companies that have traditionally not been in finance are now competing with incumbent banks and wealth managers.

“Looking towards the affluent and HNW segments, there is applicability with embedded lending and financial planning. For instance, liquidity needs can be addressed through securities-based loans or through liquidating a portion of the portfolio.”

Traditional financial services firms in turn have responded by doubling down on client experience. Banks and Wealth Managers are well positioned to transition from a traditionally product led approach to one where they leverage their deep data sets to understand client behaviour and pain points. This has enabled firms to offer relevant services directly within the client journey in a context aware manner, increasing client experience and adoption.

Looking towards the affluent and HNW segments, there is applicability with embedded lending and financial planning. For instance, liquidity needs can be addressed through securities-based loans or through liquidating a portion of the portfolio. A client's unique situation will help guide what the right choice could be. Bite sized digital planning tools can be utilized within client journeys to guide clients with these day-to-day decisions. 

For incumbents, there is an opportunity to deepen relationships by expanding the set of services they bring to clients. For instance, an investment management-focused wealth manager can partner with embedded banking providers to offer basic payments, transactions, and depository features to their clients. Over time, embedded finance levels the playing field on access to product across financial institutions and non-financial institutions. In some ways, wealth management providers in the HNW space are already operating in that reality.

Firms will need to continue to differentiate themselves through truly understanding client needs and delivering superior advice and client experiences.

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