Embedded Wealth Management: The Next Big Disruptor?

Embedded finance is mainstream, and e-commerce dynamics have changed forever. What began with payments quickly extended into deposits, lending, insurance, and other financial services. Consumers clearly value the convenience of embedded finance, which reduces friction by integrating financial products into the customer journey, exactly where and when they're needed. But what about investments? This blog considers the case for embedded wealth management services.

Recent McKinsey research suggests the evolution of embedded finance has been enabled by fundamental changes in commerce, merchant and consumer behavior, and technology. As much as 33% of global card spending – 50% in the U.S. – now takes place online.[1] In addition, with “digital natives” coming of age, the pool of consumers and businesses open to receiving financial services via digital platforms has expanded. Furthermore, open banking innovation, supported by mandates in the EU and market-led adoption in the US, helped unlock latent demand by enabling third-party fintech players to access consumers’ banking data and even conduct transactions on their behalf.[2]

By 2021 embedded finance had grown into a $2.6 trillion industry in the US, with nearly 5% of financial transactions embedded into e-commerce and other software platforms. By 2026, forecasts show that embedded finance will likely exceed $7 trillion, representing 10% of transaction value.[3] The major catalysts for this exponential growth have been payments and lending offerings, but demand is now coming from new areas including deposits, insurance and more recently wealth management.

In principle, almost any financial product or service can be embedded into a customer experience on a non-financial platform. Typically, embedded finance involves offering a financial product that’s integral or highly relevant to the customer journey (such as Buy Now Pay Later (BNPL), credit, or insurance). Beyond offering a digital version of traditional services, embedded finance has transformative potential for how financial products are manufactured, marketed, and consumed.

The transformational nature of embedded financial services is manifest in a new value chain that revolves around the customer. Although it may be an uncomfortable truth for financial institutions, many consumers prefer to interact with a favorite brand rather than their bank. And many more want access to multiple services in one place. While payment marks the end of a customer journey, it’s safe to say that a smoother journey often pays off with more frequent return customers and additional spending.

The Case for Embedded Wealth Management Services

Although the benefits of integrating payment or credit into a customer journey may be obvious, the case for embedded wealth management is less clear. In practice the objectives and technology are similar – to effortlessly incorporate investment products or services into another platform, usually using application program interfaces (APIs). However, one of the major differentiators of embedded wealth management services is that the focus is on encouraging people to save and invest rather than spend more. While specific use cases vary, the universal drive is apparent among:

• Digital banks and challenger banks who have made great progress in the areas of checking and deposit accounts but seek to build lifetime customer relationships and loyalty. Few have the expertise to build wealth management services from scratch, but they can easily embed third-party investment and wealth management services to enrich their service portfolios.

• Health insurance providers who are playing a bigger role in almost all economies. Millions of people already pay regular insurance premiums and subscriptions online, so embedded investment is a natural extension of existing services.

• Financial health platforms that businesses use to help employees build knowledge on a range of financial matters throughout their career, with tools to help them make smarter decisions. Most have already added – or plan to add – savings accounts, so embedded investment is a natural next step.

• Super apps that aim to offer individuals a one-stop shop for all things digital. Most include peer-to-peer payments and other basic financial services. Once again, investment is a natural extension of what’s already offered.  

Data – The New Factor of Production

On the face of it, embedded wealth management is like other forms of embedded finance. However, it has even greater promise because effective investment and wealth management requires a high degree of customer personalization which requires data. Banks and other financial institutions have an abundance of meaningful data that can ultimately help their customers adopt a holistic approach to wealth management and retirement planning and choose services that meet their exact needs.

Embedded wealth management has the potential to open a much bigger market for investment management services by unbundling services from the distribution channel. Although this concept is not new, leveraging data allows services to be highly customized which helps the industry move away from the traditional product-led approach and move towards bespoke needs-based offerings. Furthermore, far too many people have only a limited understanding of pensions and retirement, and gaining a better understanding may feel like a daunting challenge.  Embedded wealth management empowers providers to be more proactive to remove barriers and help tackle this challenge.

Defusing the Global Pensions Timebomb

Pensions under-provision is a universal challenge and the global gap between retirement savings and retirement income needs is projected to reach $400 trillion in three decades.[4] People need to think more about retirement, understand what options are available, and participate sooner rather than later. Technology will play a pivotal role in encouraging people to think earlier about their retirement and to make plans based on their specific needs.

Embedding wealth management in new and existing channels will increase awareness and opportunities for consumers to take more control of their own pension provisions and monitor performance. For most people this has greater appeal rather than choosing a prescribed financial product. Today’s retirement products tend to be limited in scope, and few lend themselves to mass customization. By beginning with the customer and building from there, embedded wealth management can get closer to the needs of the customer throughout the customer’s lifetime financial journey. It’s a disruption whose time has come.

[1] McKinsey Global Payments Map 2022

[2] https://www.mckinsey.com/industries/financial-services/our-insights/embedded-finance-who-will-lead-the-next-payments-revolution

[3] https://www.bain.com/insights/embedded-finance/

[4] https://www.weforum.org/agenda/2019/12/solving-the-global-pension-crisis/