Banks, outsiders are cracking the code for finance

Anyone can be a banker these days, you just need the right code. Global brands from Mercedes and Amazon to IKEA and Walmart are cutting out the traditional financial middleman and plugging in software from tech startups to offer customers everything from banking and credit to insurance.

For established financial institutions, the warning signs are flashing.

So-called embedded finance - a fancy term for companies integrating software to offer financial services - means Amazon can let customers "buy now pay later" when they check out and Mercedes drivers can get their cars to pay for their fuel.

To be sure, banks are still behind most of the transactions but investors and analysts say the risk for traditional lenders is that they will get pushed further away from the front end of the finance chain.

And that means they'll be further away from the mountains of data others are hoovering up about the preferences and behaviours of their customers - data that could be crucial in giving them an edge over banks in financial services.

"Embedded financial services takes the cross-sell concept to new heights. It's predicated on a deep software-based ongoing data relationship with the consumer and business," said Matt Harris, a partner at investor Bain Capital Ventures.

"That is why this revolution is so important," he said. "It means that all the good risk is going to go to these embedded companies that know so much about their customers and what is left over will go to banks and insurance companies."

For now, many areas of embedded finance are barely denting the dominance of banks and even though some upstarts have licences to offer regulated services such as lending, they lack the scale and deep funding pools of the biggest banks.

But if financial technology firms, or fintechs, can match their success in grabbing a chunk of digital payments from banks - and boosting their valuations in the process - lenders may have to respond, analysts say.

Stripe, for example, the payments platform behind many sites with clients including Amazon and Alphabet's Google, was valued at $95 billion in March.

Accenture estimated in 2019 that new entrants to the payments market had amassed 8% of revenues globally - and that share has risen over the past year as the pandemic boosted digital payments and hit traditional payments, Alan McIntyre, senior banking industry director at Accenture, said.

Now the focus is turning to lending, as well as complete off-the-shelf digital lenders with a variety of products businesses can pick and choose to embed in their processes.

"The vast majority of consumer centric companies will be able to launch financial products that will allow them to significantly improve their customer experience," said Luca Bocchio, partner at venture capital firm Accel.

"That is why we feel excited about this space."

So far this year, investors have poured $4.25 billion into embedded finance startups, almost three times the amount in 2020, data provided to Reuters by PitchBook shows. Leading the way is Swedish buy now pay later (BNPL) firm Klarna which raised $1.9 billion.