Embedded finance is one of the fastest-growing areas of financial services and e-commerce globally, yet it is still a nascent concept. In this episode of Talking Banking Matters, McKinsey payments sector leader Roshan Varadarajan speaks with Pedro Silva, CEO and co-founder of the embedded-finance platform company Alviere about this growing field. The following edited transcript shares highlights from the conversation. For more discussion of the banking issues that matter, follow Talking Banking Matters on your preferred podcast platform.
Roshan Varadarajan, McKinsey: Pedro, let’s start by rewinding the clock a little bit. Alviere began in a different form as Mezu, which had the mission of building a consumer-facing peer-to-peer payment app. But now Alviere is an embedded-finance platform. Can you talk about the journey of that evolution?
Pedro Silva, Alviere: The vision for Mezu was to fill a gap in the market where every single P2P app lacked a feature that allowed people to remain private when interacting—for example, buying food at a farmers’ market or tipping someone, where I don’t want them to have my email or any other personal information.
The app was actually very smart. It had a proximity feature based on geolocation that identified the two users that were close to each other. And they were able to exchange money without having to exchange any contact information.
During that time back in 2017, there weren’t many companies such as Alviere that would enable a fast time to market, and we struggled a lot. It took until mid-2018 to find a bank that would enable us to build a compliance program and hire people. We realized this was going to be harder than we thought, and we wanted to be independent.
So we started the process of licensing ourselves—money transmission licenses across the United States—with the goal of ultimately being independent to operate. We didn’t build an app, we built a platform, and the platform was serving only that app at that point.
But it was fully featured; it did everything that had to be done on the banking side. It took care of KYC [know your customer], and it had the ability to issue cards—essentially everything you would expect in a fully featured money app. Building it as a platform had to do with my background in technology and how you build things that can actually scale.
Then we had enterprises coming to us and saying, “Can we use this? Can you outsource this? Can you white-label what you’ve done?” So we gave in and said, “OK, what we have is really big. We’ve built the infrastructure, and we’ve built the platform, and we have customers that want to use it. So let’s shift to a more B2B strategy.”
Roshan Varadarajan: So now you’ve taken the decision to focus Alviere on relatively large enterprises, meaning that you’re helping established brands extend themselves to offer financial services. What is the vision behind the platform as it exists today and how it creates value for different customer types?
Pedro Silva: We aim to be a one-stop shop for large enterprises to provide financial services to their clients. We focus on nonfinancial institutions. They don’t want to hire new compliance teams and develop new competencies inside their companies. They will only do that if it makes sense for the core business. The Starbucks app is a great example. They didn’t start by wanting to provide a financial product. They wanted to guarantee future sales, and they saw that there was a financial product that could help them with that.
Thinking about these large enterprises shapes your model. They want one single contract, and they expect you to do it all for them. We understood that we would have to help them out, and we had to make it easy. That’s how we chose the model. You need to guide them through the entire process. It’s not about “Here’s an API key. We’ve got our tech team over there. Go ahead and integrate with it.” No, you need to actually have professional services and project managers that will manage that PMO [project management office] process, and solution architects and business analysts that will help them and guide them through that process.
Once they understand the concept, then it’s about ‘OK, how easily can I do this? Is it going to take me three years, five years? What do I need to do?’ That’s where we come along and say, ‘You will have to do something to integrate it into your platform, but we will provide the entire service for you.’
Roshan Varadarajan: The term “embedded finance” has taken on a range of meanings that can include card platforms, deposits, and lending. Where do you see the most opportunity from the perspective of customer demand and the economics of it for Alviere? And how does that inform the products within embedded finance that you focus on?
Pedro Silva: We see different demand in different markets, different verticals, and even different company types. If it’s a company in the consumer market, for example, and in retail, and they are interested in increasing foot traffic, you see a lot of demand for products like remittances and—one of the products we launched—a digital wallet you can load with funds for future purchases. Now you have a balance, and when you get to the counter, you can pay with a QR code. For the merchant, the payment was free, you already paid for it in advance, but you guaranteed future sales and, of course, extra benefits such as earning a yield on those balances.
We believe there’s an emerging model that adds to that. If you find an efficient way of loading funds into that wallet, then you eliminate network fees, so wallets are fully featured with a unique routing number and account number. That means you can wire funds in, for example, and that costs nothing to the merchant. And there are obviously ways to incentivize that behavior.
In airlines, for example, it’s a lot more about cards. There’s a big movement in airlines and hotels right now. They all have cobranded credit cards. The problem is, the rejection rates, depending on the brand and the audience, are pretty high. And there’s a large portion of businesses that are missing out on loyalty. The solution now trending is there could be a cobranded debit card, which works in a different way, of course, but where you can still earn points and other types of benefits by spending money. Obviously, the business model is very different. Interchange on credit cards is different, and there is the whole credit and APR [annual percentage rate] monetization on those other products on the credit side. But it’s still a product that makes a ton of sense.
On the B2B side, we see a lot of payment optimization, which has to do with optimization of banking services wallets. For example, if you were a marketplace, as opposed to doing all those transactions and then passing it on to your sellers, you could provide them a balance within your app. And now you can start monetizing. First, that payment didn’t cost you anything to load to that wallet, and second, now you can put a debit card on top of that and start earning on interchange. Or you can charge for an international transaction.
Different industries are looking for different products, and that’s why we think we’re in a great position. We have a very diversified portfolio of products. We don’t sell the same things to different clients. We focus on solutions rather than the platform.
Roshan Varadarajan: The buying factors for an embedded-finance offering can be somewhat opaque. On the one hand, there’s the technology, the ease of integration, and the actual user experience. But depending on the product, there can be risk engines involved. There’s the whole compliance and regulatory side of it. As more and more of these offerings crop up, how does Alviere differentiate itself?
Pedro Silva: On the buying factor side, large enterprises will buy if it feeds their core business. This means they have their own core business, and adding a financial product is going to generate more revenue, reduce costs, create more loyalty, or help with acquiring and retaining customers. In these large, established enterprises, the services need to enhance the core business.
The second decision factor is that there can’t be any regulatory liability. With these large brands, there’s obviously a reputational risk involved in selecting these services. They need to be absolutely sure that what they’re doing is not going to put their brand at risk.
The third factor is the technology needs to be modern, easy to integrate, with a low lift, and fully featured with a road map that will support the enterprise in the future on growth, with the ability to scale to millions of transactions.
The fourth one is they want it easy. Clients would like to see one contract with one company: “I sign the contract. You guys take care of everything.” That means, if there’s any compliance-related matter, an AML [anti-money-laundering] alert, Consumer Finance Protection Bureau complaint, whatever it is, they don’t want to deal with it.
The licensing piece is essential, of course. We believe that each player in the value chain needs to be accountable for, ultimately, consumer businesses’ funds. That is where Alviere is very different. We are not compliant because a bank asks us to be, we are compliant because we’re licensed. We’re constantly examined and audited.
Embedded finance: How banks and customer platforms are converging
Roshan Varadarajan: And what does that look like three to five years down the line? Is this a story of taking a great product and service and bringing it to more and more large customers? Or is it a story of adding more and more products? What are the growth levers you think about?
Pedro Silva: From the future-vision perspective, one thing that is very clear for us is that although there are many companies using similar platforms, they are mainly fintechs and start-ups. And some of them will do great. But there’s a big opportunity right now in the large-enterprise space and even the SMB [small and medium-size business] space that is just beginning. Every brand somehow wants to do something. They’ve heard about it. That market has a lot of room to grow, and we believe we can help that market and those companies get to market with financial products. In terms of products, one thing that has happened with every one of our customers is they start with one solution, and then nine months later, they’re signing a new contract with us for a different product, and then a different product. It’s an evolution.
In terms of different financial products, the way we see it is definitely going into the lending and credit space. We see a lot of interest there. That is not typically where companies start, although it depends on the verticals. You have to provide everything a customer would need. We wouldn’t want that customer to go to another provider to start doing that type of activity when they can’t be part of one single platform and one ecosystem.
The second part of this future vision is internationalization. We think other economies have a lot of potential. We have a European presence. We also have our eyes on Latin America. We’re looking at Mexico, where we’re already operating in partnerships but not as a licensed entity, and Colombia and Brazil. Those are the three we see as very interesting, Brazil being obviously a huge economy.
Roshan Varadarajan: Online marketplaces such as rideshare, travel, hospitality apps, and also maker marketplaces seem like obvious customers for a whole range of these solutions, whether it’s on the cobranded side, financing, payouts, how they think about money movement, and custody of funds. But those marketplaces are still relatively new to financial services. What is the principal challenge here? Why aren’t we further along with marketplaces and their maturity of financial services offerings?
Pedro Silva: First off, yes, they are fairly nascent, and that is actually a good thing, because they’re still lean, and they have a lot of resources, and they’re very technology focused. I think one of the biggest challenges companies have had—and we see this a lot in our prospects—is you have a strategy in the company, and you want to go into embedded finance, but it’s overly complex. You go to your CFO, and they say, “Great, I’m going to investigate.” Then you’re in for a three-year ride. And because of the complexity, of course, they will start saying, “Let’s build the product here.” It takes a lot of time to decide how to set up the product. You’re going to have to hire all these people. The whole thing just becomes too complicated.
And those marketplaces will focus mainly on the capturing of the payments from the end users, the buyers of the platform. That is pretty simple. You just put your card processor on top of it. You pay the cost, whatever it is, and you try with your volume and your economies of scale; you go to your bank and get better pricing. That’s how you increase your margin.
Then you try to find a good way to pay out via traditional banking systems. As we talk to marketplaces, when they grasp the concept that you can actually have sort of a master bank account with virtual ledgers for each one, then it’s almost like you will never be a bank, but you need to start thinking like a bank. Meaning, it’s a wallet. It looks and feels like a fully featured bank account, but technically and regulatory-wise, it’s not a bank account.
We have a lot of prospects in the pure B2B2C marketplace and in the travel industry as well. There’s a huge opportunity there. Once they understand the concept, then it’s about “OK, how easily can I do this? Is it going to take me three years, five years? What do I need to do?” That’s where we come along and say, “You will have to do something to integrate it into your platform, but we will provide the entire service for you.”
Roshan Varadarajan: What’s your guidance for banks on how they stay relevant and participate in embedded finance over the next few years?
Pedro Silva: I would split banks into three categories. One is obviously the large banks, and there’s already a need from their large corporate clients to have easier access to some of the products that are not in traditional banking, like a credit card would be. Some of them are slow-moving, but some are starting to see the opportunity and want to provide those services to their clients.
Then there are the banks with between $6 billion and $100 billion in assets. Those banks are looking at companies like us because they want to do this. They want to provide embedded-finance products to their clients, but they don’t have the technology. These midsize banks are interested in modernizing their technology. Then there are the other banks. One is the 20 to 25 banks in the United States that decided, “I want to support fintechs, embedded finance, and banking as a service because that way, I have a channel to go to market and get deposits and payments that I would otherwise not have the ability to get.” There’s probably space for 50, 60, 70 banks to be doing that right now in the market, and there’s good business for all of them. But they’re going to have to change the way they are looking at fintech, particularly nested banking relationships such as embedded finance.
Roshan Varadarajan: Between regulatory change, challenging capital markets, and other evolutions typical of new and disruptive technologies emerging, running a fintech can be turbulent. If we were to put ourselves in a day in the life at Alviere, what would we hear?
Pedro Silva: A day in the life, in the current environment of fintech, is a very interesting one, because everything we were talking about is happening with banks. Banks are really afraid these days. They are scrutinizing companies like us a lot more and abandoning some of the use cases they don’t understand. Diversification in banks is essential. Some banks just won’t do some industries, for example, or they don’t really understand how to do, say, remittances.
A very active role I play is the management of banking partnerships and with other types of partners. No one does everything in this industry. That’s a big piece of what makes sense from a business standpoint and from a market standpoint. I still think there’s a lot of innovation to bring to the market in this role that traditionally, for hundreds of years, was only accessible to banks. There’s an awareness in the mission that we have to change the industry. It’s about larger participation in fund flows and in the revenue that comes from operating financial services.
