Banks of the Future: Embedded Wealth
The FinTech revolution has significantly transformed the financial industry over the past decade. The first phase of this revolution focused on improving financial accessibility through the development of digital banking and mobile payment technologies. The second phase saw the emergence of alternative lending platforms, which disrupted traditional banks by offering more flexible and personalized loan products. Now, we are entering the third phase of the FinTech revolution: embedded finance. Embedded finance refers to the integration of financial services into everyday products and experiences, rather than requiring customers to seek out financial services through traditional channels. One subset of embedded finance is embedded wealth, which aims to make wealth management more accessible and convenient for customers.
What is Embedded Wealth?
To put in simple terms, it is the integration of wealth management capabilities into non-financial products or services. This could include things like allowing customers to set aside a portion of their online purchases for long-term saving or investment, or offering personalized investment recommendations based on a customer’s spending habits. By making wealth management more seamlessly integrated into customers’ daily lives, embedded wealth aims to make it easier and more intuitive for people to build and grow their wealth.
Why is Embedded Wealth gaining prominance?
With the proliferation of data and advanced analytics capabilities, financial institutions are now able to gain a much deeper understanding of their customers’ financial needs and preferences. This enables them to offer customized financial products and services that are tailored to each individual customer’s unique context. Embedded wealth is particularly well-suited to the context aware customer journey model, as it allows financial institutions to offer wealth management services in a way that is seamlessly integrated into customers’ everyday lives. This makes it easier for customers to build and grow their wealth in a way that aligns with their specific goals and habits.
Credit Suisse estimates that there are over $33 Trillion of investable assets globally which are not managed professionally. Embedded Wealth has the potential to open up this entire market, and even at conservative fees estimate of 0.03%, we’re looking at $100 Billion addressable market.
In addition, Financial Institutions are facing pressure from multiple sides in this day and age. Some of them are —
- Rising Costs:- FS firms have gone global, competition has intensified and CAC for new entrants have skyrocketed.
- Digital Propensity:- Millennials are entering into the wealth segments in this decade, and this TG is increasingly digital.
- Untapped segments:- Non-Traditional workforce such as Gig Workers, Creators, Social Media influencers and the likes present a massive opportunity.
Who can get the benefit out of Embedded Wealth?
There are several ways in which embedded wealth can benefit both customers and financial institutions. For customers, the convenience and accessibility of embedded wealth can encourage more people to engage in financial planning and saving. It can also make it easier for people to align their financial goals with their everyday habits and behaviors. For example, a customer who is interested in environmentally responsible investing may appreciate the option to automatically redirect a portion of their spending on eco-friendly products into a corresponding investment portfolio.
Embedded wealth can also benefit financial institutions by providing them with new opportunities to engage with customers and gather valuable data. By offering embedded wealth services, financial institutions can collect data on customers’ spending and saving habits, which can be used to offer more personalized and relevant financial products and advice. Additionally, embedding wealth management capabilities into non-financial products or services can help financial institutions reach new customer segments that may not have been interested in traditional wealth management offerings.
Embedded Wealth in action
One notable example is the integration of wealth management capabilities into popular budgeting and saving apps. These apps allow customers to easily set aside a portion of their income for long-term saving or investment, and often offer personalized investment recommendations based on the customer’s risk tolerance and financial goals.
Another example of embedded wealth is the integration of investment options into employer-sponsored retirement plans. Many employers now offer 401(k) plans that allow employees to easily save for retirement through automatic payroll deductions. By offering a range of investment options within these plans, employers can make it easier for employees to build and grow their wealth over time.
But…?
Despite the potential benefits of embedded wealth, there are also challenges to its adoption. One major challenge is regulatory compliance. Financial institutions offering embedded wealth services will need to ensure that they are complying with all relevant regulations, including those related to data privacy and investor protection. This can be a complex and time-consuming process and may require financial institutions to seek out specialized legal and compliance expertise.
Data privacy is another key challenge for embedded wealth. As financial institutions collect more data on customers’ spending and saving habits, it will be important to ensure that this data is handled responsibly and in accordance with relevant regulations. This may require financial institutions to implement robust data security measures and to be transparent about how they use customer data.
In spite of these challenges, the future of embedded wealth looks bright. As more and more people become accustomed to accessing financial services through non-traditional channels, we can expect to see an increasing number of innovative embedded wealth solutions emerge. It will be exciting to see how these developments shape the future of finance and help people build and grow their wealth in new and creative ways.
