I was recently stuck in a deep rabbit hole of Embedded Finance.
You might be wondering, “What on earth is Embedded Finance?”
And also, you might be asking, “Where the hell have I been?”
Sorry, I haven’t written to you for a while. 🥹
My hands were tied with a lot of projects lately.
Like a clown in an ’80s-themed circus, I was juggling several projects left and right, coming from my Masters in CompSci and work.
Currently, I’m in Asset Management, and we are establishing new processes and frameworks for the brand-new Analytics unit.
Building projects, learning Portfolio Management, while also establishing a new department can be overwhelming at times; but balancing all of them is genuinely fun, just like solving puzzle games.
And I hope you love challenging puzzles as much as I do. Because puzzles exist not just to weigh us down and make us feel stupid, but they exist to remind us that problems can be solved. 💯
Anyway, Embedded Finance is something I was really into for the past few days.
To put it simply, it is the integration of financial services into non-financial companies.
Think of your favorite caffeine dealer, Starbucks, with their mobile app and digital wallet.
As you load your hard-earned cash into the app to buy a Grande Latte, the coffee company stores your cash in their database, turning it into deposits.
Essentially, the company acts like a digital bank without actually being a bank.
In fact, as of 2023, Starbucks (or StarBank, pun intended) is holding around USD1.8B of customer cash as deposits, and they can use the excess cash for short-term investments and other fancy stuff.
If they were categorized as a bank, they would be bigger than 90% of banks in the US. 🤯
This got me thinking, how can we help other companies become like StarBanks? 🤔
I think there’s a huge opportunity in embedding financial services into companies that are either cash-rich, could collect cash (e.g. marketplaces, delivery services, etc.), or those that just have negative working capital cycles (meaning they collect money faster than they pay bills).
These types of companies, given the right tools, could potentially act like pseudo-banks and extend financial services to their verticals: customers, suppliers, and even employees. 🤲
Private companies could also utilize in-house company data and existing relationships for easier KYCs and the creation of better risk models.
Imagine if we could aggregate the treasure troves of private company data and crunch them in powerful regression models, we could theoretically provide alternative risk scores.
Meanwhile, using our risk scores, we could also help cash-rich companies extend financial services (e.g. loans), at greatly lower rates, to their verticals.
It’s a win-win scenario. 🥳
Small businesses and the unbanked could have access to financial services, while companies could utilize excess cash in their balance sheets for other sources of income. (just like StarBanks!)
Currently, around half of Filipino adults do not have bank accounts while small businesses, even with sound business models and unit economics, have a hard time accessing good credit as traditional financial institutions have limited visibility on them.
But if we can embed financial services into private companies, maybe we could help improve Financial Inclusion throughout the Philippines and even other countries.
What do you think? Does this sound crazy or does this sound like a fun puzzle waiting to be solved? 😆
Let me know if you have questions or if you’re interested in working on something cool!
I’ll try to write more if Father Time allows.
Many, many, many Thanks!
