Why a slow uptake of Embedded Wealth is an FI problem, not a tech problem

If the confrontational posture of the title to this blog has you reading this opening sentence, then it can lay claim to having performed its job. However, it’s worth quickly explaining that it was only intended as a playful device to draw you towards a current sticking point within the broader wealth management industry: That financial institutions (FIs) need to up their game for embedded wealth to become a widespread feature within the investments landscape.  

Let’s take a step back in order to provide context. Embedded finance, where a non-FI integrates financial services into their existing product ecosystem or where an FI embeds a service belonging to another – usually via an API and in partnership with a financial infrastructure provider – has seen a big uptake.

How big? Well, in the US, financial services embedded into e-commerce and other platforms accounted for $2.6TN (nearly 5%) of all financial transactions in 2021. According to research commissioned by Bain & Company and Bain Capital, this figure will rise to $7TN by 2026. That big.

Boasting similarly vast potential but, as yet, slower out of the traps has been embedded wealth. Via an embedded wealth management platform, non-traditional players are able to introduce new revenue streams through desirable and sticky products while traditional FIs can transform delivery, boost volumes, and enhance profitability.

Providing all this at a fraction of the cost and time it would take to develop such propositions in-house, the many benefits of embedded wealth are shared by incumbents, disrupters, and end-users alike.

So, why has the uptake been slower compared with embedded finance more generally?

Lack of knowledge

This is understandable. With embedded payments and loans having basked in the limelight for so long, embedded wealth – despite its extraordinary, industry-transforming potential – is still fighting for its place on the podium. Consequently, awareness of it is nowhere near as widespread.

Although history dictates that solutions as ground-breaking as embedded wealth will eventually enjoy extensive adoption, how fast or how slow this takes will depend on FIs and wealth managers themselves.

As it stands, not only is there a lack of understanding around the tech that powers embedded wealth, many potential beneficiaries of its potential don’t even employ CTOs. Instead, decisions around technology are delegated to Heads of IT who are typically yet to view embedded wealth as a strategic enabler.

Where this is the case and embedded wealth is seen as merely a cost rather than as a growth facilitator that allows for the development of new, customer-delighting, AUM-swelling propositions, the opportunity to become early adopters and market leaders is lost. Consequently, uptake is hobbled due to lack of awareness.

Haste

At the other end of the embedded wealth adoption spectrum we find some of the bigger players who, having been very much aware of the technology for some time, jumped into it with a little too much haste.

In these cases, full platform deployments have been commissioned that consist of a range of high-end functionality, including hybrid advisory, robo-investing, and stock trading applications. Though the intent is admirable, where such services are implemented without taking the time to review true market need, outcomes have, on occasion, proven not to match expectations.

Though embedded wealth is a transformative proposition it requires strategic handling. Projects must be built on a foundation of thorough market research, compartmentalised into phases, and tested with pilot groups before wholesale, go-to-market launches. The beauty, of course, is that with the right partner, this is a process that can be completed in a matter of months.

Ultimately, the possibilities promised by embedded wealth are mighty but the opportunity to get it right first time is rarely offered more than once. Excessive haste therefore risks creating more problems than it can solve.

It’s been sold to the wrong firms

With platform providers requiring significant expenditure to bring an embedded wealth proposition to market, there’s a risk that some might feel the pressure to close as many sales as possible to secure market sustainability.

If embedded wealth is offered to customers unable to leverage its full potential, the technology’s reputation could be damaged, and a transformative proposition risks a more delayed uptake for the simple reason that it started life in the wrong hands.

Clearly, this is not an FI problem, nor is it a technology problem. Instead, providers of embedded wealth solutions must invest resources into educating the market on the proposition’s power and potential.

When those most able to maximise the promise of embedded wealth are empowered with it, the ripple effect across the entire industry will bring great disruption.

Question Time

It’s important to reiterate that embedded wealth does represent the future of wealth management – especially among the emerging and mass affluent. Once integrated, the customer experiences it can enable and revenue streams it can generate are too compelling for it to remain a fringe technology.

Nevertheless, the speed with which it begins to consume market share depends on those most able to bring it into the mainstream – FIs and wealth managers. Both parties must ask themselves which they consider to be of most importance; healthy AUM and the ability to provide exceptional customer experiences, or positioning themselves as technology proprietors?

Where it’s the former (and in almost all cases it will be), lengthy, high-cost, internal platform development becomes more an obstacle than an opportunity.

Instead, a new breed of flexible, limitlessly scalable, cloud-native platforms are today allowing FIs and wealth managers to stay current with market trends using simple API-powered integrations. These integrations make possible the rapid creation of advisory and trading propositions, wealth management services, and greenfield applications.

Meanwhile, hyper-automated business logic across entire investment lifecycles means operations run seamlessly in the background, freeing FIs and wealth managers to provide deeper, more personalised service to customers while slashing overall unit cost.

Embedded wealth is coming. The speed of its spread and who the main winners will be depends less on which FIs and wealth managers integrate it but rather, how.