A consumer bank might think of embedded finance as a means to insert its licensed activities into someone else’s consumer-facing business.
The bank knows that in the digital world, people don’t want to ‘go to the bank’. The customer, if it’s a person, wants to purchase something, or if they’re a small business, they want to be able to sell their wares.
If a bank buries its product inside someone else’s platform, it can not only sell its services to the platform’s users, but access customers cheaply because there’s no branch to build and staff.
As a bonus, the bank gets to tell the regulator that they are helping with financial inclusion, and win a pat on the back from the bureaucrats.
Challenges to going embedded
Yet in Asia, especially in emerging markets where financial inclusion is a real problem, few banks are actively deploying embedded models. At least three reasons come to mind.
First, the underserved are, by definition, lower-income people or tiny businesses. They are just as expensive to onboard as a more lucrative customer, but more expensive to serve, because they lack the paperwork and bona fides to satisfy a bank’s credit risk department.
Second, the platforms that banks want to cozy up to are technology companies, and they are way ahead of banks when it comes to digital-anything.
Third, even if a bank decides to go after the underserved, and it has its own tech in order, it has no experience selling financial software. Banks sell financial products, but in this new model, they are selling software-as-a-service, and that’s a different story.
Banking as a service
Standard Chartered Bank thinks it’s cracked this. It’s taken the conventional embedded-banking idea and added two layers.
The first layer is Standard Chartered nexus, its ‘banking as a service’ product to enable a partner to build all the necessary components of a digital bank.
Nexus is now four years old. Its mission is to find partners that want licensed financial services embedded in what they offer their customers. It has been live so far just in Indonesia, although it is going to launch soon in Malaysia.
During the Covid pandemic, Standard Chartered announced it had developed a relationship with Bukalapak, one of Indonesia’s biggest e-commerce platforms. Nexus is leveraging Standard Chartered’s local banking license to offer ‘banking in a box’ capabilities to Bukalapak.
Nexus in action: Bukalapak
Aisya Tusin is head of nexus in Indonesia. Her job is to run the relationship with Bukalapak and find new partners to work with.
“Bukalapak is our first partner,” she said, noting the platform serves 150 million consumers and 20 million businesses.
Nexus sits alongside Standard Chartered’s brick-and-mortar retail bank in Indonesia. That bank has branches in the country’s six largest cities. It caters to affluent people; the economics of the branch business mean it could never serve the people using Bukalapak.
Nexus, utilizing the same license, is able to extend banking services to a vast population of lower income users and mom-and-pop businesses. These customers purchase micro-level products. But the unit economics of the digital nexus mean cost of acquisition is one percent that of the branch business, Tusin says.
Nexus’s first products for Bukalapak users are savings and buy-now pay-later lending. It is using data analytics to build a credit-scoring model and work out the best way to manage risks and the costs of underwriting and collection.
Growing margins
Because nexus is embedded in Bukalapak, its cost to serve is lower than even a fully digital banking rival. It has no marketing costs, for example. But because it can access the data of a vast platform’s userbase, it can develop lending or payment models that are more profitable.
Tusin predicts that the nexus business will become bigger than the branch-based retail business within three to five years. “The traditional consumer bank is limited to six cities, but nexus is nationwide,” she said.
She says nexus has been live for four months now, and in that time has tripled the bank’s total number of customers, to about 150,000 consumers and businesses. “We already touch 20 percent of Bukalapak’s customer base,” she says, either through BNPL, payments, or savings.
Next up is to build a payment QR that Bukalapak’s merchants can use offline, which would expand nexus into more of an open-loop payments provider rather than limiting it to just people on the partner platform. Nexus doesn’t operate a payments gateway, but it helps orchestrate payments and connect users to the local market’s payments rails. More lending features are also on the whiteboard.
Spinning off audax
The second part to Standard Chartered’s approach was to commercialize the tech stack it built to support the nexus business. It spun this vendor out in August as audax.
Kelvin Tan, Singapore-based CEO of audax, says the vendor is majority owned by the bank (it came out of SC Ventures, the bank’s internal venture and entrepreneur division). Despite this affiliation, audax’s target customers are other banks.
Tan says two trends support the audax business. First, demand. “Banks everywhere are looking at scaled digital banking models.”
Second, they lack the tools: “Banks have delayed their tech modernization,” Tan said. “They need a fast and easy deployment if they want to do embedded banking.”
When audax launched he assumed the clientele would be second- and third-tier banks, but Tan says he’s also in talks with “tier-1 banks” because the vendor has been able to deliver a digital banking service in Indonesia and is about to go live in Malaysia. “We’ve managed to deliver an entire banking stack in two markets,” he said.
Audax is now seeking outside capital from strategic investors – financial institutions or big fintechs – that can provide it with the tech it lacks, or with entrée to new markets or customer segments. It’s not looking for standalone venture capital.
Tan declined to discuss possible funding amounts or valuations. He described the raise as Series A or early Series B, and hopes to close it within the first half of 2024.
